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Chart: India’s Market Cap To GDP Ratio Above 100%

Indian equity markets have surged, while the improvement in the underlying macro economy has been moderate.

Chart: India’s Market Cap To GDP Ratio Above 100%

As benchmark equity indices move from one record high to the next, indicators that reflect the value of listed firms vis-a-vis fundamental of the economy are flashing red. Or at least amber.

The market capitalisation to GDP ratio of BSE-listed firms is now above 100 percent, based on the four quarter trailing nominal GDP of the economy. As of Jan. 23, the market capitalisation of BSE listed firms stood at Rs 156.56 lakh crore, shows data on the exchange’s website. This is 103 percent of the four quarter trailing nominal GDP of the country. If compared to the advance estimates for nominal GDP in FY18 released by the Central Statistical Office, the market cap to GDP ratio stands at 94 percent.

The market cap to GDP ratio is a reflection of the valuation of listed enterprises vis-a-vis the value of goods and services produced in an economy. In theory, equity valuations should be linked to earnings expectations, which in turn are linked to the underlying economy. The indicator was popularised by the likes of Warren Buffet, who cited it as a key metric he watches. However, not everyone believes that the indicator is relevant to India. Some argue that listed enterprises in India may represent a smaller subset of industries where growth is higher than in the broader economy.

Still, data from Bloomberg shows that the market cap to GDP ratio is above 100 percent for the first time since 2007. Back then, market cap to GDP had hit a 146 percent. The indicator is not strictly comparable over time since the set of listed companies continues to change as new firms enter the market and some exit.

The Indian economy has seen a moderate revival in growth so far. GDP growth in the second quarter of fiscal 2018 rose to 6.3 percent from 5.7 percent in the first quarter. For the full year, the government’s statistical office has estimated growth at 6.5 percent. Indian equity markets have mostly ignored signs of economic sluggishness and surged due to strong inflows of domestic and overseas capital. The S&P BSE Sensex is up 32 percent over the last one year.

Chart: India’s Market Cap To GDP Ratio Above 100%