Stock Markets are Overvalued


Stock Markets are Overvalued

Last week, the Reserve Bank of India (RBI) came out with its latest Financial Stability Report (FSR). The FSR is published biannually and includes contributions from all the financial sector regulators. It is the main document to understand the current status of risks to the stability of the Indian financial system.

Udit Mishra  (Deputy Associate Editor, The Indian Express) explains whether Indian stocks are over valued in the light of the FSR report.


Three observations

  1. High stock values despite economy decelerating: In the last FSR, one of the key observations that caught everyone’s attention was the growing disconnect between India’s stock markets and the real economy. “Lifted by the bull run in equity markets across the globe, the Indian equity market surged on strong rallies with intermittent corrections,” stated the December FSR.

Strong investor interest had driven up price-earnings (P/E) ratios sky-high. As of December 13, the one-year forward P/E ratio for India was 35.1 per cent above its 10-year average, and one of the highest in the world.

“This reflects some disconnect between the real economy and equity markets,” stated the RBI report.

Mishra agrees. “This was true: on the one hand, the domestic economy’s GDP growth had consistently decelerated since the start of the 2017-18 financial year and yet, on the other, the stock market was notching up historic highs.”

  1. Have stocks come off their all-time highs: Over the past few weeks and months, much like several global stock markets, Indian stock markets have come off their all-time highs.

“Domestic equity indices had made significant gains during 2020 and 2021, outperforming peers on the back of better growth prospects. Developments in 2022 have, however, unsettled market sentiments and increased risk aversion, with the war triggering a broad-based sell-off. In line with corrections underway in stock markets in major economies, sentiments in Indian equity markets have turned bearish and have registered negative returns, with the BSE Sensex decreasing by 11.6 per cent and Nifty 50 declining by 11.5 per cent between end-December and June 16, 2022,” states the latest FSR.

So, writes Mishra “the question is: Has the recent ‘correction’ resolved the issue of India’s equity markets being overvalued and disconnected from the ground realities?”


  1. Markets have been propped up by domestic investors: The third reason to look at this issue is driven by the remarkable change in the investor profile of the Indian stock markets since the start of the pandemic.

The fact is, over the past few months, the Indian stock markets have been propped up by domestic investors even as foreign investors have increasingly deserted the Indian markets. The latest FSR supports this.

Conclusion: So, the question is have the Indian markets corrected enough? Or are they still overvalued? There are financial explanations, but, concludes Mishra  “no sure-shot way to answer when it comes to stock market valuation.”

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