Is the Indian Stock Market on Sale—Or Still Overpriced?

Over the last few months, the Indian stock market has felt like a roller coaster. After soaring to record highs in September 2024, the main indices—Nifty 50, Nifty Midcap 100, and Nifty Small Cap 100—have tumbled by 12% to 16%. Rising US bond yields, foreign investor sell-offs, and weaker corporate earnings have all played a part.

Naturally, many people are asking: “Is now a good time to buy?” On the surface, a drop in prices might seem like a great deal. But are these levels really cheap—or just cheaper than they used to be?

To help answer this question, investors often look at price-to-earnings (PE) and price-to-book (PB) ratios. The Nifty 50’s PE and PB numbers are back near their long-term averages, hinting at fairer prices. However, those ratios are based on past results, so they don’t reflect the potential impact of the budget or other future developments.

Looking at forward PE (which factors in expected earnings) tells a slightly different story. Nifty 50 is trading around 20 times its projected earnings—more expensive than its 17.2-times historical average but still below 21.7 times, which is one standard deviation above that average. Midcap and small-cap indices are even pricier relative to their usual levels.

One bright spot is the bond yield premium (the gap between 10-year government bond yields and stock market earnings). It’s at 173 basis points, which is below its 10-year average of 223. This could mean shares still look attractive to investors who focus on yield.

Bottom line? The market isn’t exactly cheap, but it’s definitely less frothy than before. If you’re planning on investing, stay focused on strong companies with solid fundamentals—and be prepared for a few twists and turns along the way.