India’s benchmark stock index is flashing one of its strongest valuation signals in a decade. The Nifty 50’s PEG (price/earnings to growth) ratio is near 1, while its forward price-to-earnings multiple has fallen sharply from its 2024 peak. But investors are still waiting for proof that the market has become genuinely cheap.
The Nifty’s valuation looks attractive against expected earnings growth, yet remains expensive when measured against bond yields, market capitalisation and the risk of earnings downgrades. The result is a market where the headline valuation has improved, but the margin of safety remains debatable.
The Nifty 50’s 12-month forward P/E fell 31% from 24.8 times in September 2024 to 17.2 times by September 2026, according to Bajaj Asset Management. The Nifty Midcap 150 multiple declined 36% to 22.8 times from 35.6 times, while the Nifty Smallcap 250 eased to 23.2 times from 25 times.
The correction in valuations has taken place even as earnings estimates have continued to rise. The Nifty 50 fell 8% year-on-year in September 2026, while its 12-month forward earnings-per-share estimate increased 9.62%, Bajaj AMC said.
“Valuation multiples have eased from recent highs, but the market capitalisation-to-GDP ratio remains elevated. Sustained earnings growth will be important for market performance ahead,” Sorbh Gupta, head of equity at Bajaj AMC, said.
Bajaj AMC estimates BSE 500 earnings will grow 17% in FY27 and 16% in FY28. For FY27, earnings growth is projected at 16% for large caps, 19% for midcaps and 28% for small caps.
Domestic brokerage ICICI Securities said the Nifty 50’s PEG ratio is nearing the attractive zone of 1, among the lowest levels seen over the past decade. The index trades at around 17 times forward earnings, while consensus expectations point to earnings growth of about 15% in fiscal 2027.
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Bajaj AMC also highlighted an improvement in corporate earnings. Large-cap earnings growth strengthened to 23% in the first quarter from 10% in the previous quarter, while midcap earnings also grew 23%. Nifty 50 profits increased 19% year-on-year, with commodity and telecom companies contributing about 60% of incremental profits.
But earnings growth is not the only determinant of equity valuations.
Nuvama Research argues that valuations should be assessed against the rates and earnings backdrop rather than absolute multiples alone. NSE 500 valuations have declined from around 24 times forward earnings at their 2024 peak to approximately 18 times now, bringing them close to their long-term average. Nifty valuations have slipped slightly below their long-term average, but midcap valuations remain above theirs.
“Overall, from the discussion above it appears that equity valuations have cheapened. But have they turned attractive?” Nuvama wrote in a note.
The brokerage said bond yields have risen globally and in India, raising the cost of capital and the opportunity cost of owning equities. It added that valuations relative to rates remain close to levels seen in 2007 and 2024.
That means the market’s PEG ratio can look attractive only if earnings growth is delivered and bond yields begin to moderate. If yields remain high, a forward P/E of 17 times may not offer sufficient compensation, particularly if earnings estimates are revised lower.
There are already several risks to the earnings recovery. Nuvama said margins could moderate as inventory gains fade, while higher domestic interest rates, weak incomes and a fading GST-cut tailwind could weigh on growth. It also warned that the second derivative of artificial-intelligence capital expenditure may be peaking, potentially affecting Indian companies through weaker exports, metal prices, machinery demand and a softer rupee.
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Bajaj AMC also flagged global uncertainties, crude oil prices, US interest rates, currency movements and foreign portfolio flows as factors that could keep markets volatile in the near term.
Still, the market is not without support. The Nifty’s five-year return has fallen to around 6%, while the NSE 500’s five-year rolling return is below 10%. Nuvama said the Nifty’s five-year return has moved below debt returns and is nearly one standard deviation below its long-term average. That could raise the probability of a mean-reversion phase if earnings and liquidity improve.
ICICI Securities sees a more supportive external backdrop. It said the retreat in artificial intelligence stock euphoria has helped push US bond yields lower, easing pressure from the global risk-free rate. A moderation in the relative appeal of AI stocks could also improve the attractiveness of the Nifty50.
The brokerage also pointed to upgrades to India’s growth outlook from global agencies and the Reserve Bank of India. A stronger rupee and the possibility of easing pressure on capital market taxation were cited as additional positives.
Bajaj AMC, however, sees the opportunity as selective rather than broad-based. It said improving credit growth and valuations support the banking outlook, although margins need to be monitored. Banks where loans reprice faster than deposits may be better positioned, Gupta said.
Healthcare, power and power equipment also find support from long-term demand trends, government capital expenditure, grid expansion and sustainable energy investment. Automobile volumes and affordability have improved, but raw material and currency costs could pressure margins.
Information technology remains an area of caution because of subdued demand visibility, global policy uncertainty and possible AI-led disruption. Pharmaceutical companies could benefit from domestic formulations and contract manufacturing, while US generics face tariff-related risks.
“Easing valuations and improving earnings offer a more supportive market backdrop, but global risks remain. Our focus is on selective opportunities, disciplined valuations and sustainable earnings growth,” Gupta said.
Domestic liquidity offers another complication. Nuvama said strong investor flows into Indian equities have largely funded promoter and private equity exits through IPOs, offers for sale and block deals. In its view, those flows do not automatically justify a further valuation re-rating.
For now, the Nifty’s PEG ratio is pointing to opportunity but bond yields and the earnings cycle are demanding confirmation.
