Financial crisis of 2008 in US was mainly caused by borrowers who borrowed heavily to buy big houses they could not afford and started defaulting on their loans. To contain the crisis, US Fed (and later other central banks) lowered interest rates so borrowers who were paying 8% interest on their loans could refinance their loans at 5%. But this saving came from the pockets of savers who’s return on fixed deposits dropped from 5% to 2%. Effectively Federal Reserve transferred billions of dollars of wealth from savers to borrowers by lowering the interest rates and keeping them low for a decade. Such a move was justified by Fed to save savers and borrowers from risk of defaults and world economy from another Great Depression.
At a high level, our Indian government appears to be on a similar inter-generational wealth transfer program by transferring wealth from older people to younger people by lowering interest rates. Govt has linked interest rates on small saving schemes with govt bond yields so interest rates on everything from PPF, EPF, POS, bank FDs etc have been dropping for last 2-3 years.
Older people who mainly hold their wealth in FDs and other safe assets have seen their income drop and either have to take risk (of investing in stocks and other risk assets that they are not familiar with) or lower their expectations, expenses and lifestyle. Younger people who mostly spends every rupee they can get their hand on are able to borrow money at lower rates to buy houses (and other consumer items) which kick-starts the economy generating jobs something that government wants.
With the recent uptick in government bond yields, interest rates on small saving schemes will be reset higher with a lag. but interest rates will remain low as long as inflation remains low and RBI will be under no pressure to raise rates. As long as interest rates are dropping, PEs will expand and remain elevated. Interest rates on some developed economies are in negative territory so there is really no limit to how low interest rates can go. In these countries, inflation rate is still positive which means real interest rates are negative as well which promotes consumption and asset bubbles.
Constant flow of money coming into stock markets from maturing FDs is keeping the market from falling a lot. 2017 has broken all records of volatility. the reason everyone thinks market is expensive is because there hasn’t been a major correction since demonetization more than a year ago. That’s why a correction is considered healthy as it flushes out effect of momentum and defines the short term fair value.