Indian shares may look pricey, but a key metric shows they’re still cheaper than U.S. stocks.
Understanding the Mcap‑to‑GDP ratio
The market‑capitalisation‑to‑GDP ratio compares the total value of all listed companies to the country’s economic output. A lower percentage means the market is relatively cheap.
Where India stands today
- Current Mcap‑to‑GDP: about 137% of GDP.
- Long‑term Indian average (after FY25 revision): around 125%.
- US market sits higher, making Indian equities look less expensive.
Even though the number is above the historic average, when we factor in the expected FY26 GDP of Rs 356.97 trillion, the ratio drops to roughly 125%, which analysts call “fairly valued.”
Bond market signals
Indian government‑bond yields have fallen about 26 basis points since November 2024, helped by:
- Expectations of stronger consumer spending.
- Fiscal tightening promised in the Union Budget.
- Possibility of rate cuts by the Reserve Bank of India.
This has pushed the Bond‑to‑Equity Earnings Yield Ratio (BEER) just above its long‑term norm, suggesting a balanced view between stocks and bonds.
Historical context
A similar earnings‑driven rally happened after the 2008 global financial crisis in FY10. Back then, the Mcap‑to‑GDP ratio rose to 95‑98% while earnings were strong. With today’s earnings momentum, a higher ratio could appear in the next few quarters.
Bottom line for investors
Even though Indian equities sit above their long‑term average, they remain reasonably priced when growth expectations and earnings strength are considered, and they compare favorably with U.S. markets.
Remember, this is perspective, not a prediction. Do your own research before making any investment decisions.