India’s $5.5 Trillion Stock Market: Are We in a Dangerous Bubble?

India’s stock market, now worth an eye-popping $5.5 trillion, is drawing attention as signs of overvaluation grow more apparent. Analysts and financial experts have long cautioned that unchecked enthusiasm is driving stock prices to unsustainable highs. Traditional financial indicators, like the price-to-earnings ratio, revenue, and profitability metrics, are all flashing warning signs that the market may be headed for a correction.

Despite these warnings, investors remain optimistic, seemingly ignoring expert advice. A recent example is the IPO of a Delhi-based bike dealer, which saw bids tootling an astonishing Rs 4,800 crore—nearly 400 times the modest Rs 12 crore issue.

There are many ways to gauge whether a market is overvalued, but one simple method is to observe retail investor behaviour. In the past, stock tips from casual sources like colleagues or vendors were a red flag; today, the overheated equity discussions on social media serve as a similar warning.

Brokerage firm Kotak Institutional Equities has been particularly vocal about the inflated market valuations, noting that many sectors and stocks are trading at excessive levels. The Buffett Indicator, which compares a country’s stock market value to its GDP, also suggests that India’s market is significantly overvalued, with the indicator surpassing its historical average.

The Economic Survey 2023-24 echoes these concerns, cautioning against overconfidence and speculation. While the long-term outlook for India’s financial sector remains positive, the survey warns that a high market capitalisation-to-GDP ratio could indicate instability rather than strength.