Is India's Stock Market a Bubble About to Burst?

The Indian stock market, as represented by the BSE SENSEX, has been on a rollercoaster ride in recent months. With a significant decline of 4941 points or 6.32% since the beginning of 2025, investors are left wondering if the market is in a bubble that is about to burst. Let's dive into the data and see what the indicators are telling us.

First, let's look at the historical context. The BSE SENSEX reached an all-time high of 85978.25 in September 2024. This peak was followed by a sharp decline, which is a classic sign of a market correction. The expected trade value of the SENSEX index by the end of this quarter is 72634.47 points, and it is estimated to trade at 70972.87 points in 12 months. This forecast indicates a continued downward trend, which could be a result of the market correcting from an overvalued state.

Another key indicator is the valuation of the Indian stock market compared to its historical levels and its APAC peers. The Indian equity market saw the most upward revisions in EPS growth over the past year, with Technology and Health Care trading close to their historical high P/E levels. This suggests that these sectors may be overvalued, increasing the risk of a market correction.

The ratio of total market cap over GDP for India is currently 112.12%, which is considered "Modestly Overvalued" according to the historical valuation zones. This ratio has been as high as 139.36% in the recent 10 years and as low as 58.03%. The current ratio suggests that the market may be overvalued compared to its historical average.

Furthermore, the modified version of the ratio, which includes the total assets of the central bank, is currently 100.22%, also considered "Modestly Overvalued." This modified ratio has been as high as 123.25% and as low as 51.53% in the recent 10 years. This indicates that even after adjusting for the central bank's assets, the market may still be overvalued.

In conclusion, the significant decline in the SENSEX index, the high valuation compared to historical levels and APAC peers, and the overvalued ratios of total market cap over GDP and the modified version suggest that the Indian stock market might be in a bubble. However, it's important to note that the market's strong fundamentals and growth outlook provide a basis for continued investment interest. Investors should be aware of the potential risks associated with high valuations and consider diversifying their portfolios to mitigate these risks.