| Abstract |
We estimate the Cyclically Adjusted PE ratio (CAPE) for equity indices in the
Indian market. We find the average CAPE ratio of the Indian market is lower than that of the US. Judging the market valuation level based on a long-term moving average of CAPE, we find that the CAPE has remained above the average since 2014. Prominent episodes where CAPE exceeds its average include the period before the 2008 Global Financial Crisis and the post-COVID-19 period. We find that a higher CAPE is associated with lower future returns for holding periods varying from one year to ten years, indicating the negative association between expected returns and CAPE. We also find that a higher CAPE is associated with a greater
demand for IPOs by investors and more optimistic earnings forecasts by analysts.
Net fundraising through equity significantly increases during periods of high CAPE
suggesting rational market timing by firms.
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