The report highlighted that while Indian markets are trading above their long-term average on this valuation indicator, they remain fairly valued when seen in the context of earnings momentum, bond yield trends and projected economic growth.
It stated, “In terms of Mcap to GDP, India Stands Less Expensive than the US Market”.
The report noted that India’s total market capitalisation to GDP is currently trading at 137 per cent. This level is above the long-term average, which has been recalibrated after the government released the revised FY25 GDP estimate of Rs 324 trillion on February 1, 2025.
However, when the projected nominal GDP for FY26 is taken into account, the Mcap-to-GDP ratio moderates to around 125 per cent, which the report describes as fairly valued.
As per the Union Budget 2025-26, the FY26 GDP assumption has been pegged at Rs 356.97 trillion.
The report also pointed to developments in the bond market to support its assessment. It added Indian bond yields have corrected by 26 basis points since November 2024, which marked the start of the US Federal Reserve’s rate cut cycle. The correction in bond yields is attributed to multiple factors, including expectations of a consumption boost, fiscal consolidation outlined in the Union Budget, and the possibility of rate cuts by the Reserve Bank of India.
Following the recent correction in equity markets, the Bond to Equity Earnings Yield Ratio (BEER) is now trading slightly above its long-term average, indicating relatively balanced valuations between bonds and equities.
From a historical perspective, the report draws parallels with earlier cycles. It highlights that a similar phase of strong upward earnings momentum was witnessed in FY10, immediately after the global financial crisis.
During that period, the Market Cap-to-GDP ratio had risen to the range of 95-98 per cent. The report said that with positive earnings momentum in the current cycle as well, higher Mcap-to-GDP ratio levels could be seen in the upcoming quarters.
So the report outlined that despite being above long-term averages, Indian equity valuations remain reasonable when adjusted for growth expectations and earnings strength, and compare favourably with the US market on the Mcap-to-GDP metric.
