Indian Equity Markets: Fairly Valued Amidst Global Comparisons

A report by Axis Direct reveals that Indian equity markets, though above long-term averages, present reasonable valuations compared to U.S. markets. With a Market Capitalisation to GDP ratio of 137%, India stands less expensive when factoring in earnings momentum, bond yield trends, and future economic growth projections.

According to a report by Axis Direct, India's domestic equity markets are cheaper than those in the United States when evaluated using the market capitalisation to GDP (Mcap-to-GDP) metric. The report suggests that despite Indian markets trading above the long-term average on this metric, they maintain a fair valuation in consideration of earnings momentum, bond yields, and the country's economic growth projections.

The report states, "In terms of Mcap to GDP, India Stands Less Expensive than the US Market." As per the analysis, India's total market capitalisation to GDP currently stands at 137%, exceeding the long-term average. This readjustment follows the government's revised GDP estimate for FY25, which is pegged at Rs 324 trillion.

Taking into account the projected nominal GDP for FY26, the Mcap-to-GDP ratio is expected to moderate to approximately 125%, which is described as fairly valued by the report. The Union Budget for 2025-26 assumes the FY26 GDP at Rs 356.97 trillion.

The report also notes developments in the bond market, reinforcing its assessment. Indian bond yields have decreased by 26 basis points since November 2024, coinciding with the onset of rate cuts by the US Federal Reserve. Factors such as anticipated consumption growth, fiscal consolidation plans from the Union Budget, and potential rate cuts from the Reserve Bank of India have driven this bond yield correction.

In light of recent equity market corrections, the Bond to Equity Earnings Yield Ratio (BEER) is now slightly above its long-term average, reflecting relatively balanced valuations between bonds and equities. The report draws parallels to the post-global financial crisis period in FY10 when a similar strong upward earnings momentum was observed.

Back then, the Market Cap-to-GDP ratio rose to between 95% and 98%. Current earnings momentum could lead to higher Mcap-to-GDP ratios in upcoming quarters. The report concludes that despite being above historical averages, Indian equity valuations are reasonable when adjusted for growth expectations and earnings strength, and compare favorably with the US market on the Mcap-to-GDP metric.