India's MCap-To-GDP Ratio Hits 15 Year High

According to data from BSE, the 4,357 companies available for trade had a combined mcap of around Rs 416 trillion on Tuesday against India's GDP at current prices of Rs 296.6 trillion in FY24.

The stock prices of listed companies continue to outpace growth in India's GDP.

The market capitalisation (mcap) of all companies listed and traded on the BSE is up 61 per cent since the end of March 2023, compared to an estimated 10 per cent growth in India's GDP at current prices in 2023-2024 (FY24).

As a result, India's mcap-to-GDP ratio has hit a 15-year high of 140.2 per cent, up sharply from 95.8 per cent at the end of March 2023.

According to data from BSE, the 4,357 companies available for trade had a combined mcap of around Rs 416 trillion on Tuesday, May 21, 2024, against India's GDP at current prices of Rs 296.6 trillion in FY24.

The current ratio is a few notches below the all-time high of 149.4 per cent at the end of December 2007.

At that time, the combined mcap of all BSE listed and traded firms had reached Rs 71.7 trillion compared to India's GDP at current prices of Rs 48 trillion during the trailing four quarters ending December 2007.

The record mcap-to-GDP ratio was followed by a sharp correction in equity prices, and the ratio declined nearly two-thirds over the next 15 months to a low of 54.8 per cent at the end of March 2009.

The combined mcap of India's top 30 listed companies that are part of the S&P BSE Sensex is up only 27.2 per cent in this period.

The Sensex companies' combined mcap has risen from Rs 115.9 trillion at the end of March 2023 to Rs 147.4 trillion on Tuesday.

Similarly, the combined mcap of the National Stock Exchange Nifty 50 is up 33.2 per cent in the period, from Rs 136.5 trillion at the end of March 2023 to Rs 181.8 trillion on Tuesday.

The traded value of the two indices tracks the changes in the combined free-float mcap (market value of non-promoters' stake in companies) rather than the companies' full mcap.

For comparison, the Sensex is up 25.8 per cent since the end of March last year, while the Nifty 50 has rallied 30.2 per cent in the same period.

A sharp rise in the mcap-to-GDP ratio has prompted some analysts to advise caution to investors.

"I would not have worried if the rise in the ratio was driven by largecap stocks that still account for the lion's share of corporate profits in India, but the rally has been driven by small and midcap stocks," says Chokkalingam G, founder and head of research at Equinomics Research.

"Most of these stocks have seen a sharp rise in their valuation in the past few quarters as their earnings have failed to keep pace with their mcap," points out Chokkalingam.

The S&P BSE MidCap is up almost 64 per cent in the past year; the S&P BSE SmallCap is up 60.6 per cent in the same period.

The sharp rally in small and midcaps, in turn, is being driven by a record entry of new retail investors into the equity market.

According to Chokkalingam, nearly 100 million new domestic retail investors have entered the equity market in the past five years, and most of them invest mainly in small and midcap stocks regardless of these companies' valuations and earnings fundamentals.

Feature Presentation: Ashish Narsale/Rediff.com