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Equity valuation in Indian markets stretched: RBI report

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Various indices highlight that valuation of Indian equity markets are overstretched.

Equity valuation in Indian markets stretched: RBI report
Amid roaring returns and talks of a new bull market cycle emerging in the Indian equity segment, the Reserve Bank of India (RBI) cautions that valuations in the segment have outstripped traditional indicators. The central bank’s economists stated in its monthly economic bulletin that while the equity market has been performing strongly since the COVID-19 pandemic, valuations of companies are much higher than what would be expected based on financial indicators.
Price-to-book value ratio, price-to-earnings ratio and market capitalisation to GDP ratio have all remained elevated above their historical average levels. The yield gap also sits at 50 percent higher than its historical levels.
“The spectacular gains have raised concerns over overstretched valuations with a number of global financial service firms turning cautious on Indian equities,” said the report.
International firms like Goldman Sachs, Morgan Stanley, Nomura, CLSA and UBS all have expressed caution for the Indian equity market despite the fact that the BSE Sensex is up by over 45 percent since the start of 2020. Major tailwind factors that the firms have cited as risks to investments are the stretched valuations of companies, increasing inflationary pressure, and the continuing global cost pressures that may impact Indian supply chain operations.
“While domestic economic indicators are improving, concerns over uneven global growth, elevated commodity prices, supply disruptions and fears of withdrawal of monetary support in major AEs (advanced economies) over inflationary concerns have imparted volatility in portfolio flows,” added the RBI report.
But while foreign firms and banks have been circumspect about the current run, promoters of most Indian companies have expressed confidence at the same time. Holding stakes of promoters within the listed companies on the National Stock Exchange (NSE) increased by 50 basis points in September when compared to holding levels in June.
“Steadily increasing promoters’ shareholding reflects confidence on the part of the promoters about their business prospects and comfort with ongoing valuations,” the report added.
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