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India’s stock market is back near levels last seen almost two decades ago, with the market cap-to-GDP ratio, or the Buffett Indicator, at 137.70% in 2025—its highest since 146.52% in 2007, according to Mint’s analysis of Bloomberg data.

While a high ratio can signal ‘expensive’ valuations in a textbook sense, several market participants say, this time, it may point to a different narrative.

Even as India’s market cap-to-GDP ratio hovers near its 2007-08 bull run peak, the backdrop today is markedly different. A larger share of the economy is now formalised, with far more companies listed than in the past, which has changed the context meaningfully, according to market participants.

While a high ratio traditionally signals that a market is “priced for perfection” and may lead to more tempered future returns as valuations eventually revert to the mean, India’s position is often justified by its superior nominal GDP growth and the formalization of its economy, explained Bino Pathiparampil, head of research at Elara Capital.

He suggested that while the “easy money” from valuation expansion may be in the past, long-term returns will likely be more closely tied to actual economic output and corporate earnings growth than to further multiple expansion.

Also, the ratio tends to be high when markets expect strong earnings growth along with lower risk and interest rates, and lower when growth expectations are weak, or risks are higher, said Jay Kothari, lead investment strategist and head of international business, DSP Asset Managers.

Besides a broader, higher-quality listed universe that captures a larger share of economic activity in India’s case, he highlighted that the rise in the market’s size relative to GDP reflects deeper structural changes, stronger macro stability, and a more balanced external position.

Nirav Karkera, head of research at W by Groww, said the ratio shouldn’t be viewed in isolation and is better understood alongside metrics like corporate profit-to-GDP, which has improved steadily and points to stronger underlying profitability in Indian companies.

Besides the new-age listings, he added that the rise in market cap also reflects structural changes such as deeper financialization of savings, greater retail participation, and strong foreign investor interest.

Karkera contrasted this with 2007, when a spike in the ratio was driven by leveraged balance sheets and easy global liquidity, and followed by a sharp correction. “Today, balance sheets are among the cleanest in decades, and bank non-performing assets (NPAs) are at multi-year lows. This doesn’t look like a bubble; it looks more like a structural re-rating.”

He also noted that India’s transition from an emerging market to a developed one makes comparisons with past ratios or other countries less relevant. That said, he flagged key risks: if valuations outpace earnings growth, if leverage builds up again, or if large buyers like domestic institutional investors turn fragile, the ratio could start flashing warning signs.

HSBC Global Investment Research has downgraded India to underweight from neutral, as it is “concerned about the durability of the ongoing earnings recovery”, given India’s reliance on imported energy and the potential knock-on effects on inflation and domestic demand.

In a 23 April report, it expected consensus forecasts to be slashed in the coming months from current expectations of 16% year-on-year for 2026. While valuations have corrected materially from their peak, they will appear elevated as earnings downgrades feed through.

JP Morgan has also downgraded Indian equities to ‘neutral’ from ‘overweight’, citing elevated valuations versus emerging market peers and earnings pressure from energy supply shocks linked to the US-Iran war.

Similarly, Kotak Institutional Equities, in its 27 April report, noted that while valuations have improved, due to the recent market correction following the West Asia war, they remain unattractive enough to drive deeper investment interest. “In addition, India’s earnings outlook and valuations pale in comparison to its global peers.”

Meanwhile, Bernstein, in a strategy note titled Open Letter to the Prime Minister, said India still trails key peers in physical infrastructure, innovation capacity, and readiness for the next technology wave.

Harsh Gupta Madhusudan, fund manager of private investment in public equity strategy at Ionic Asset, said that as more Indian economic activity becomes formalized and flows through listed entities, the country's market cap-to-GDP ratio is structurally re-rated.

“On top of that, the listed profit-to-GDP ratio is cyclical, and we are not at the peak of the cycle; we are early- to mid-stage.” Listed profit-to-GDP could rise from around 5% to 8% over the next 5-10 years, given the low operating and financial leverage in Indian companies currently, he said.

But he added that, as the real cost of capital gradually declines, reasonable multiples and market cap-to-GDP levels could be sustained: India is one of the few major diversified (EM or DM) economies with high return on equity and where nominal GDP translates into earnings per share, not just profits after tax.

While India sits in the middle of the pack, it is in a better position from a long-term growth perspective, according to Kothari of DSP Asset Managers. Taiwan has the highest market cap-to-GDP ratio at 286%, followed by the US at 225%. At the other end, Brazil has the lowest ratio at 43%, with Germany at 58% and China at 69%.

“This is why a relative view is more meaningful than an absolute one. It is also important to consider average valuations across countries, rather than focusing only on the headline number."Dipti has spent nearly a decade happily knee-deep in the fast-moving, occasionally nerve-wracking, and always fascinating world of stock markets, tracking everything from sharp sell-offs to surprise rallies, and the narratives that drive them. She began her journalism journey at Informist, sharpened her market instincts at CNBC Digital and Moneycontrol, and is now charting new territory with Mint. Here, she is exploring new ground, bringing together sharp analysis, on-ground insights, and a keen eye for what really moves markets.Before stepping into journalism, Dipti studied law and worked with a solicitor firm for close to three years, an experience that gave her a strong foundation in analytical thinking, contracts, and corporate structures. But the pull of markets and storytelling proved stronger, prompting a switch from law to journalism.She writes about stocks and investments, but that’s only part of the story. Dipti also teams up with market experts to turn complex trends into sharp, easy-to-understand videos, occasionally peeks at deals and acquisitions, and regularly picks the brains of industry leaders. Somewhere between earnings calls, market swings, and boardroom chatter, she’s always looking for the next story that explains what’s really moving the markets.

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