Indian equity markets appear less expensive than their US counterparts when evaluated on market capitalisation to GDP metrics, despite trading above historical averages, according to a recent report by Axis Direct. The analysis suggests that while Indian markets show elevated valuations on certain indicators, they remain reasonably priced when adjusted for growth expectations and earnings strength.

Current Valuation Metrics

The report reveals that India's total market capitalisation to GDP currently trades at 137%, which exceeds the long-term average. However, this assessment has been recalibrated following the government's revised FY25 GDP estimate of ₹324.00 trillion released on February 1, 2025.

When the projected nominal GDP for FY26 is factored in, the Mcap-to-GDP ratio moderates to approximately 125%, which the report characterizes as fairly valued.

Bond Market Developments

The bond market has witnessed significant corrections that support the valuation assessment. Indian bond yields have declined by 26 basis points since November 2024, coinciding with the start of the US Federal Reserve's rate cut cycle. This correction stems from multiple factors including expectations of consumption growth, fiscal consolidation measures outlined in the Union Budget, and potential rate cuts by the Reserve Bank of India.

Following recent equity market corrections, the Bond to Equity Earnings Yield Ratio (BEER) now trades slightly above its long-term average, indicating relatively balanced valuations between bonds and equities.

Historical Context and Earnings Momentum

The report draws comparisons with previous market cycles to provide historical perspective. A similar phase of strong upward earnings momentum occurred in FY10, immediately after the global financial crisis, when the Market Cap-to-GDP ratio reached 95-98%. The analysis suggests that with positive earnings momentum in the current cycle, higher Mcap-to-GDP ratio levels could emerge in upcoming quarters.

Comparative Analysis

Despite trading above long-term averages, the report concludes that Indian equity valuations remain reasonable when adjusted for growth expectations and earnings strength. The key finding indicates that Indian markets compare favorably with US markets on the Mcap-to-GDP metric, suggesting relatively attractive valuations for domestic equities despite elevated absolute levels.

Indian equity markets kicked off 2026 with a subdued range-bound session, managing to close marginally higher despite challenging conditions. The trading session was characterized by thin volumes due to global holidays and persistent foreign institutional investor selling pressure that has been weighing on market sentiment.

Market Performance and Technical Outlook

The market's performance reflected a cautious start to the new year, with investors adopting a wait-and-watch approach. From a technical perspective, the current trend remains inconclusive, though there are signs of potential recovery in the near term. Unlike the Bank Nifty, which has demonstrated a clear breakout pattern, the broader market trend is not decisively bullish yet.

Technical analysts suggest that on the upside, the index could move towards the 26,315 level, while 26,100 may serve as the initial support level for any potential downward movement.

Institutional Investment Flows

The institutional investment landscape presented a mixed picture on the first trading day of 2026:

The continued FII selling pressure highlights ongoing concerns among foreign investors, while domestic institutional investors provided some cushion through their buying activity.

Currency and Volatility Indicators

The Indian rupee faced pressure on the first trading day, depreciating by 10 paise to close at 89.98 against the US dollar. This weakness was attributed to sustained foreign fund outflows and the negative trend in domestic equities, which collectively dented investor sentiment.

In contrast to the currency weakness, market volatility showed signs of easing. The India VIX, which measures fear levels in the markets, declined by 3.06% to settle at 9.18 levels, suggesting reduced anxiety among market participants.

F&O Segment Updates

In the derivatives segment, SAIL has been placed in the F&O ban category. Securities enter the ban period when they cross 95% of the market-wide position limit, restricting further position creation in these stocks.

Market Outlook

Looking ahead, several factors are expected to influence market direction in the coming days. Q3 earnings results will be closely watched for signs of corporate performance, while budget expectations continue to build among investors. Global developments, including potential India-US trade deals and Federal Reserve policy actions, are also likely to play a crucial role in shaping market sentiment. Analysts believe that earnings growth will remain the primary driver for market performance throughout 2026.