The post-Covid years saw most global stock markets make a thumping recovery, and the Indian market was no exception.

As can be seen in the chart below, the overall Indian market (represented by the Nifty 500), as well as the main market-cap-based indices rose at least 3x between March 2020 and September 2024.

However, this dizzying rise was rightfully accompanied by concerns that the market was becoming frothy, i.e. that stock valuations were getting decoupled from fundamentals due to investor overexuberance.

So although the steep market decline that began in September 2024 has rattled retail investors, the silver lining is that this decline is bringing valuations closer to reasonable levels once again, with this effect being especially pronounced for large caps.

Let’s back up this latter claim by looking at various valuation metrics*.

1. The Nifty 50 P/E ratio

For starters, the price-to-earnings or P/E ratio of the Nifty 50 is currently close to its long-term average after having been mostly higher over the last couple of years.

2. The Nifty 50 P/B ratio

Similarly, the Nifty 50’s price-to-book or P/B ratio, which is another common metric used to gauge valuation levels, is close to its long-term average right now.

3. The “India premium” compared to other emerging markets

Next, let’s look at the MSCI India index and compare it to the MSCI EM (emerging markets) index. Soon after Covid, the premium that India commanded over its EM peers climbed higher than its long-term average, and stayed that way until relatively recently: it finally came very close to this average in February 2025.

4. India’s market cap v/s its GDP

The ratio of a country’s stock market cap to its GDP (sometimes called the ‘Buffett indicator’ due to Warren Buffett’s endorsement of this metric as being “probably the best single measure of where valuations stand at any given moment”) is akin to a price-to-sales ratio for an entire country.

Currently, unlike the three metrics above, this long-term valuation metric as applied to India indicates that while valuations certainly are becoming fairer, the froth will need some more time to be fully washed off, as can be seen in the chart below.

The combined message from these four valuation metrics seems to be that Indian large caps, after having been overvalued for several years, are finally returning to a zone where they’re more fairly valued. As a result, they might merit a moderate allocation in your portfolio at this point.

For more actionable insights backed by data and analyses, we invite you to read the latest edition of Netra in its entirety.