Buffett Indicator Drops: Is the Indian Stock Market Fairly Valued Now?

Warren Buffett has commented on the Market Cap to GDP Ratio, commonly known as the Buffett Indicator, that he believes it is probably the best single measure of where valuations stand at any given moment. The indicator is used to find out if the Stock Market is overvalued, undervalued or fairly valued, when compared to its historical average.

The indicator uses a very simple formula for the ratio Calculation. It is calculated by taking the total market capitalization of all publicly traded stocks, or just the Market Cap of the whole Index in a country, and dividing it by the country’s Gross Domestic Product (GDP). The result is then multiplied by 100 to express it as a percentage.

In General, if the indicator is above 100 percent, it is considered slightly overvalued, the indicator being at 100 percent is considered Fairly Valued, and if the Indicator is below 100 percent, it is considered undervalued. 

Current Market Cap to GDP of India

The Market Capitalization to GDP of India was 111.37 percent when Nifty hit its recent bottom of 21,964, and the long-term average is 100.34 percent. The value from 1 year ago was 121.81 percent. When the stock market started to fall in September, the ratio was 139.36 percent. During the COVID-19 low ratios had reached a low of 58.03 percent. After the recent rally of 1,836 points or  8.53 percent, the indicator is at 115.57 percent which is a little higher than the recent low.

Also read: Nifty 50 March Rebound: Here’s What’s Fueling the Market Recovery

Key Reason For Decline In Market

Nifty-50 Index had declined 16.41 percent from its peak of 26,277 in September last year to a recent low of 21,964. The total market cap of NSE listed stocks has fallen from Rs. 477.93 Lakh crores to Rs. 382.71 lakh crores, reducing the investors’ wealth by 95.22 lakh crores. Currently, the Nifty 50 Index is trading at around 22,860 and the current market capitalization stands at Rs. 415 Lakh Crore. 

The Indian stock markets have been under pressure due to continuous selling by Foreign Institutional Investors (FIIs). One of the key reasons is the strengthening of the US dollar, which makes emerging markets less attractive. Additionally, concerns over a slowdown in corporate earnings growth, global economic uncertainties, high valuations of Indian stocks compared to other emerging markets, and trump tariff risks have further contributed to the market decline.

Written By Abhishek Das

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