India's high P/E ratio: Riding a tiger, but can it dismount safely?

Most expensive EM relative to long-term and trough valuations

India’s 12-month forward price-to-earnings (P/E) ratio of 21x is well above its 20-year average of 17.5x and its average recession trough of 9.7x, positioning it as the costliest market in the emerging market (EM) cohort.

 

In contrast, markets such as South Korea, Taiwan, and Japan are trading close to their average recession trough valuations.

 

Most EM equity markets, with the exceptions of India and Australia, are currently valued below their 20-year average P/E multiples.

 

After a 10 per cent rebound from this month’s lows, India’s market now trades above levels observed when US President Donald Trump imposed broad tariffs on April 2. Australia has also nearly erased its losses. Meanwhile, the Morgan Stanley Capital International Emerging Markets Index remains 7 per cent below its 2025 peak.

 

Analysts caution that India’s high valuations could persist unless a market correction occurs, especially given the risk of downward revisions to 2025-26 earnings forecasts.

 

However, India’s strong macroeconomic (macro) fundamentals are expected to prevent a steep derating. “Significant improvements in India’s macro balance, strong foreign exchange reserve coverage, and steady structural inflows into domestic equity-oriented savings products provide confidence that a major derating from current levels is unlikely,” observed Morgan Stanley.