Why Indian Markets Should Not Fall Too Much: A Valuation Perspective.

~By Suman Mukhopadhyay.

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Gist: With rising U.S. tariffs, volatile oil prices, and stretched small-cap valuations, global investors are asking: is India due for a sharp correction? 

The answer, grounded in valuation history and policy tailwinds, is reassuring. While short-term volatility is inevitable, structural supports and earnings visibility suggest that deep, sustained declines are unlikely.

The Benchmark Comfort Zone: Nifty and Sensex:

As of late September 2025:

🔹Nifty 50 trades near 22× earnings

🔹Sensex hovers around 21–22×

Historically, these indices have ranged between: 

🔹15–16× during bear phases (2008, 2020).

🔹25–26× at bull peaks (2007, 2017, early 2021).

Today’s valuation sits mid-band—neither euphoric nor distressed. Unless earnings collapse, this zone acts as a valuation floor. Historically, dips below 16× have been brief and followed by strong rebounds.

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Chart 1: Current vs Historical P/E Ratios of Major Indian Equity Indices.

Chart Type: Vertical Bar Chart

Indices Compared:  

🔹Nifty 50  

🔹Sensex  

🔹BSE MidCap  

- Nifty SmallCap 250  

Bars per Index:  

🔵 Historical Low P/E  

 🟠 Current P/E  

🟥 Historical High P/E  

Commentary:

This chart shows that Nifty 50 and Sensex are trading near 22× earnings, comfortably within their historical valuation bands of 15–26×. These levels suggest stability—not bubble territory.

In contrast, BSE MidCap and Nifty SmallCap 250 are elevated near 33–33.1×, approaching historical highs of 35–38×. While frothy, they’re not unprecedented. Liquidity and earnings catch-up can cushion corrections.

Investor takeaway:  

Benchmark indices offer valuation comfort. Broader markets may correct, but not collapse.

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The Hot Zone: Mid and Small Caps:

Valuations in broader market segments are elevated:

🔹Nifty SmallCap 250 trades at 33.1× earnings.

🔹MidCap indices are similarly priced around 32–34×.

These levels exceed long-term norms of 22–28×, and past peaks near 35–38× (2007, 2018) often preceded corrections. However, mid and small caps tend to recover faster once earnings catch up—buoyed by strong domestic flows and India’s consumption-led growth.

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GST Cuts: A Hidden Catalyst for P/E Expansion: A Game-Changer for Earnings and Valuations:

One underappreciated trigger for earnings growth is GST rationalization.

On September 22, 2025, the Indian government implemented GST 2.0, simplifying the tax structure and reducing rates across key sectors:

New slabs: 5%, 18%, and 40% (for sin/luxury goods)  

Rate reductions:  

 🔹Essentials like food and medicines moved to 5% or 0% . 

🔹Consumer goods (TVs, ACs, autos, electronics) saw cuts from 28%/18% to 18%/5% . 

🔹Insurance premiums are now GST-exempt.

Impact on valuations:

Lower GST → Lower consumer prices → Higher volumes  

Lower tax incidence → Improved operating margins  

Higher EPS → Lower trailing P/E (even if price remains constant)

This means that even if stock prices stay flat, valuations can compress naturally as earnings rise. For mid and small caps—especially in tax-sensitive sectors—this reform is a powerful earnings catalyst.

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Why the Floor Holds:

Several structural supports limit downside risk:

Domestic Liquidity: Monthly SIP inflows exceed ₹20,000 crore, providing a steady demand base.  

Economic Growth: India’s GDP growth remains robust at ~7%, among the fastest globally.  

Valuation Anchors: Nifty/Sensex rarely sustain below 16–17× P/E. Rebounds have historically followed such dips.  

Global Rotation: With China slowing and Europe fragile, India remains a favored EM allocation.  

Policy Tailwinds: GST cuts, infrastructure push, and manufacturing incentives support earnings expansion.

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The Bottom Line:

Yes, mid and small caps may correct if earnings lag. But at the index level, India is not in bubble territory. Nifty and Sensex valuations are within historical comfort zones, supported by liquidity, growth, and resilient earnings.

For global investors: pullbacks are entry points—not signals of structural collapse.

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Sources:  

🔹Nifty SmallCap 250 PE Ratio – Trendlyne.

🔹Historical Index Data – NSE India.

🔹GST 2.0 Implementation – Ministry of Finance Press Release.