New Delhi: For nearly a decade, Indian stock markets have been on a relentless rise, shrugging off global crises, foreign investor pullouts, and economic slowdowns. Even during the pandemic, when the economy contracted sharply, the Sensex and NIFTY 50 continued their upward march. According to Dhruv Goyal, Founder of Four Lion Capital, this resilience stems from two key factors: strong earnings growth and an unprecedented flood of domestic capital. However, with valuations soaring—particularly in small and mid-cap stocks—investors are now asking: Is this the beginning of a new golden era for Indian equities, or are we inching toward a bubble waiting to burst?
A Decade of Market Resilience
“The last time Indian indices posted negative returns for a full calendar year was in 2015,” says Dhruv Goyal. Even in 2020-21, when the Indian economy contracted by -7.3% due to the COVID-19 pandemic, the stock market remained largely unfazed. Despite aggressive rate hikes by the U.S. Federal Reserve in 2022, which led to foreign portfolio investors (FPIs) withdrawing approximately $18 billion, Indian markets continued their upward trajectory.
Goyal attributes this resilience to a fundamental shift in market dynamics. “Strong domestic capital inflows have played a crucial role in absorbing the volatility caused by foreign investor exits,” he explains. Over the past few years, Indian investors—both retail and institutional—have stepped up, replacing FPIs as the dominant market force.
Valuations: A Reason to Be Cautious?
While market strength is evident, Dhruv Goyal warns of potential risks ahead, particularly concerning valuations. As of early September, the NIFTY 50’s forward price-to-earnings (P/E) ratio stood at around 21.0x, which is about three points higher than its 10-year average. “For large-cap stocks, these valuations seem justified given the strong CapEx cycle, corporate deleveraging, and political stability,” he notes.
However, Goyal raises concerns about small and mid-cap stocks. The NIFTY MidSmallCap 400 Index, which represents a mix of mid- and small-cap companies, is currently trading at a P/E ratio of 38.6x—up from 25.4x just a year ago. “That’s a significant jump, and it suggests that prices are being driven more by multiple expansion rather than earnings growth,” he cautions.
The Rise of Domestic Investors
One of the most significant shifts in recent years has been the rise of domestic investors in Indian equities. “Retail and domestic institutional investors (DIIs) have been increasing their stake, while FPIs have steadily reduced their positions,” says Dhruv Goyal. The numbers tell the story: FPI ownership in the NIFTY 500 recently dropped to a 12-year low of 18.8%, while domestic investors now control 53% of the market. DIIs alone hold 35%, while retail investors account for the remaining 18%.
This change in ownership structure has also had a stabilizing effect on market volatility. “FPIs are highly sensitive to currency risks and global macroeconomic factors, which makes their investments more volatile. In contrast, DIIs and retail investors tend to be more stable, creating an environment where we see higher returns with lower volatility,” Goyal explains.
What Lies Ahead?
While Indian markets continue their bullish run, Goyal urges investors to remain cautious. “There are real risks to consider—elevated valuations, potential slowdowns in earnings growth, and political uncertainties,” he warns. With general elections coming up, any shift in policy direction could impact market sentiment.
Despite these risks, Goyal remains largely optimistic. The sheer scale of domestic capital inflows remains a key driver of market strength. “In August, assets under management (AUM) for equity schemes crossed Rs. 30 lakh crore (approximately $357 billion), a massive jump from Rs. 2 lakh crore in 2014,” he highlights.
Looking ahead, Dhruv Goyal believes that as long as domestic investors continue to pour money into the markets, Indian equities are likely to sustain their upward momentum. “It’s been an incredible run, but investors should stay alert to potential bumps along the way,” he concludes.
With markets at record highs, the question remains: Is India’s market resilience a sign of lasting strength, or are we witnessing an unsustainable surge fueled by excessive optimism? Only time will tell.
