Valuation concerns, equity supply pose risks to Indian markets, says Christopher Wood

Valuations have once again emerged as a key concern for Indian equities, especially in the mid-cap segment, warns market expert Christopher Wood in the latest edition of GREED & Fear report published by Jefferies. He also flagged the surge in secondary equity issuances through block deals as a significant risk to market stability.

According to Wood, the ongoing rally in the Indian market has stretched valuations across the board, particularly in mid-cap stocks. “The Nifty Index now trades at 22.2 times 12-month forward earnings after a 14.1% rise from its April 7 low. Meanwhile, the Nifty Mid-Cap 100 Index has surged 23.7% over the same period and now trades at an elevated 27.1x forward earnings,” Wood wrote in the report.

As valuations rose, corporates started taking advantage by offloading shares via block deals and other routes. The report notes that Indian companies raised $7.2 billion via equity placements in May and a further $6 billion so far in June. This $13.2 billion in fresh equity supply has emerged as a near-term overhang on the markets. “It is this supply which poses the main risk to the market,” Wood warned.

The current pace of equity issuance mirrors levels last seen before the market correction which started in September last year, when supply was averaging around $7 billion a month, Wood noted.

RBI turns dovish under new governor

Despite these headwinds, Indian equities have been buoyed by a more accommodative monetary policy stance under the new Reserve Bank of India (RBI) Governor Sanjay Malhotra, who succeeded Shaktikanta Das in December. The RBI surprised markets earlier this month with a 50-basis point cut in the policy repo rate, bringing it down to 5.5%. It also announced a phased 100 basis point reduction in the cash reserve ratio (CRR), to be implemented in four tranches starting from September 6, Wood said.

The central bank attributed its action to changing growth-inflation dynamics, stating that conditions now “call for… frontloading the rate cuts to support growth.” With CPI inflation easing to 2.82% year-on-year in May and real short-term rates still at 2.68%, market participants expect further rate cuts in the coming months.

Mahesh Nandurkar, Jefferies’ head of India research, expects another 25-basis point cut by the end of 2025. Some forecasts even suggest an additional 50 basis points of easing next year, potentially bringing the repo rate to 4.75%.

However, the slowdown in credit growth—from 16.6% in February to just 9.0% in May—may further reinforce the case for monetary easing.