Are the Indian stock markets overvalued and should we expect a market crash?

Or are we still in the middle of an unstoppable bull market and will the market continue to go up, up, and up?

Depending on which news article you read, you may end up forming diverse views on this topic. 

Globally positive signs include the US Federal Reserve indicating imminent lowering of interest rates. With inflation settling down even in India, it is expected that the RBI will also start reducing interest rates in India shortly. This would mean more affordability of credits and loans, thereby an increase in consumer demand for everything from FMCG products to automobiles and real estate. Consequently, domestic companies are expected to increase revenue, profits and thus their share prices will have to reflect that positive scenario. Additionally, with increased public spending on infrastructure, and a booming middle class with surplus expendable funds, economic growth is expected to be stable. This has led a lot of people to assume much higher returns are imminent and the bull market still has a lot of steam. There has also been a lot of interest from foreign institutional investors. Recent news also indicates entities such as the US Pension funds are eyeing India to increase the stock market returns! 

However, stock markets are forward looking, and market participants have already discounted the low interest scenario and short-term economic growth prospects, thus purchasing stocks in advance with the expectation of this positive economic momentum. This has perhaps led some stocks and some market segments to become overvalued. This means, the stock prices have likely run up disproportionally ahead of expected short-term corporate growth and profitability. Moreover, while public expenditure has increased, private Capex and consumption demand - the other legs of a resilient economy, leave a lot to be desired still. Additionally, geopolitical risks remain on the horizon - including the wars in the Ukraine and the middle east that may yet escalate and cause shocks to oil supply. For a country highly dependent on oil imports, high oil prices may lead to higher inflation (again!) putting additional pressure on consumption demand. Expecting short-term market volatility, some mutual funds have even increased their cash component or skewed their portfolios towards defensive and liquid stocks. 

What should investors do?

Risk and Volatility are default features of the stock market and are inevitable. In the short-term, it is difficult to predict whether the markets will correct now, or if they will go up to irrational valuations before crashing down, or if they will remain sideways and stay consolidated within a narrow band (time-correction). But in the long-term, the prospects of the Indian economy remain promising, especially buoyed by a rising middle class, and a diverse set of industries that are still able to attract considerable new investments from domestic and foreign investors. The best thing for investors to do, is to ignore short-term cycles, and remain focused on the long-term. Instead of tactically trying to time the market, rupee cost averaging with SIPs, based on a clear goal-based financial plan, and clear asset allocation between both equity and debt/fixed income instruments, proper portfolio-level risk management, will ensure that you achieve CRATON - Corpus Required At the Time of Need, regardless of market conditions.