Though the stock prices have fallen by about 15 per cent in India this year, the price-earnings ratio (P/E) is still at about 20, and the growth of earnings is not high. The valuations are, compared to emerging market economies, still about 40 per cent higher.

This is even when we have left out the mid- and small-cap stocks, where the valuations are even higher in India.

However, all this is not the complete story. High valuations are not confined to just stocks. Assets in general in India, are and have been for a long time, over-priced in India.

Stocks are, as we will see, actually the least over-priced asset class in India at this juncture. In other words, expected long-term returns on other financial or real assets in the country are effectively even lower. This larger picture usually does not get much attention in the usual narrative.

It is true that a comparison between different kinds of assets is problematic, and investors differ from each other. However, some observations are made here, which can be generally useful. Let us consider the various other asset classes one by one before we come to the stock market.

Bank FDs

Let us begin with the fixed deposits (FDs) in banks. The interest rate on an FD for five years or more in a leading bank is, for example, 6 per cent per annum. At 4 per cent long-term target inflation, the real return rate is 2 per cent.

When inflation jumps up, now and then, due to some shock, and the nominal long-term interest rates do not rise adequately, then the real return on FDs can be lower, and even negative for some year(s). So, bank FDs are not always very safe in real terms.

Other debt instruments like government bonds, corporate bonds, debt mutual funds, schemes run by alternate investment funds (AIFs), public provident fund (PPF), etc. can be better than bank FDs. However, some concerns apply here as well. For many investors, there is also a relative tax disadvantage for debt instruments including bank FDs.

This is not to say that these should not have some place in the asset portfolio. What about gold? The international price of gold fell by about 15 per cent in a few weeks. And, the real annualised return is 1.1 per cent over 175 years from 1836 to 2011 (Barro and Mishra 2016). It is true that in recent years the central banks have been buying a good amount of gold. There is also more private demand. All this may suggest a sustained high return on gold in future.

However, one cannot be sure. It is, going forward, apparently viable and profitable to mine out more gold in the long term, given the market price and the significantly lower total mining cost. Also, there is some new competition for an asset like gold.

Bitcoin is credibly limited in quantity, possibly more than gold is. So, it is not clear if the gold price will continue to rise anywhere near the way it has done in the last two years. And, compared to gold, the story of silver is really no better at this point of time.

Real estate

Let us next come to real estate in India. There is, of course, high demand for homes. And, real estate as an asset continues to be very useful for anyone with black money in India. However, beyond these considerations, real estate is not an easy asset for just investment purposes for an ordinary investor. The past returns may seem good on the surface.

However, the inflation-adjusted, risk-adjusted, effort-adjusted and stress-adjusted returns on real estate are questionable for very many investors. There is more to the story. At present, there are many obstacles for real estate development on the scale needed in India. However, there can be, going forward, a big reform, and a major liberalisation in policy.

When this happens, it can bring down future returns on real estate. Relative to physical real estate, it can be better for many to invest in real estate investment trusts (REITs). However, considering the volatility and the expected returns, it is not clear why, at this juncture, stocks should not get significantly more attention.

In the stock market, there has been a time correction from September 2024. And, there has been a serious price correction as well this year. The corrections have been for the high valuations and also for the effect of the war in the Middle East. Stocks are no longer very expensive.

In fact, relative to other assets in India, they are now arguably the least over-priced. This is assuming that India remains distant politically; it is distant geographically anyway. It is true that the public and the economy in India are being significantly impacted by the war in the Middle East.

The stock market story

But the story of the stock market is different. The stock prices represent the returns in all the future years to come. And, as history and theory suggest, the effect on the fundamental values of stocks can be limited. It is also true that regardless of the war, sentiment and fundamentals can vary, and stock prices can fluctuate considerably. This can discourage investors.

However, long-term investors can invest in a seemingly boring financial product like the balanced advantage fund, which invests in equity and debt dynamically on its own.

A corollary is that the much-hyped index funds are not always suitable. In conclusion, stocks are arguably the least over-priced asset class at present in India. But the fact remains that these are over-priced! So, there is a need to selectively invest outside of India to an extent and in a phased manner.

This is, a fortiori, the case as there can be an additional long-term benefit due to the real appreciation of some foreign currencies. These arguments are about expected returns on stocks abroad at this juncture. So, it is not just about the benefit due to international diversification.

The writer is an independent economist. He has taught at Ashoka University, ISI (Delhi) and JNU

Published on April 16, 2026