According to the Economic Survey 2007-08, the markets were more stable in 2007 compared with the previous year. The price-to-earnings (P/E) ratio was higher at around 27 by end-December 2007 as compared to around 21 at end-December 2006, the Survey said.
The valuation of Indian stocks as reflected in P/E multiples of around 27 times by December end was the highest among the select emerging markets. In India, as on December 30, 2007, market capitalisation of BSE 500 at $1,638 billion was 150% of the GDP which compares well with the other emerging economies as well as select matured markets, the Survey said.
It added the strong fundamentals of economy in tandem with higher growth would help in sustaining the interest of domestic and foreign investors in the domestic capital market.
According to the Survey, corporate earnings are expected to remain encouraging. Strong projected economic growth and supportive policy initiatives would enhance the investors preference to invest in the financial instruments like equity and debt papers, the Survey said.
Performance of the stock prices in the secondary market hinges on the long-term and short-term factors. In the long run, strong output growth is important to sustain investment activity across the globe. India would continue to attract significant cross-border portfolio investments since its growth performance was better among the emerging economies, it added. In the short term, expectations of higher relative returns from investments in India, favourable risk perception of investors and improved global liquidity would help the country in being an attractive destination for investment, it noted.
The capital markets remained buoyant. The stable macroeconomic conditions as reflected in the moderate rate of inflation, growth-conducive interest rate scenerio, improved fiscal conditions and larger investor participation augured well for the capital markets measured in terms of volume and value of transactions. The Survey said the BSE Sensex more than tripled between 2003 and 2007. The market activity expanded during 2007-08 with the Sensex and the Nifty scaling new peaks of 21,000 and 6,300, respectively, in January 2008. Large inflows from FIIs and wider participation of domestic investors, especially institutional investors, were instrumental in the market rally. The number of FIIs rose to 1,219 at the end of 2007 from 1,044 in the corresponding period of last year.
Factors adding buoyancy to the bourses were the relatively high GDP growth of India amongst the emerging economies, the continued uptrend in the profitability of Indian corporates, the persisting difference in domestic and global interest rates, impressive returns on equities and a strong rupee on the back of larger capital flows.
The market movement, both at NSE Nifty and Sensex, remained subdued during February and August 2007. The sell-off in Indian bourses in August 2007 could partly be attributed to the concerns on the possible fallout of the sub-prime crisis in the West, the Survey said.