The impact of demonetization on Indian market valuations

One way to isolate the impact of demonetization is to consider the premium valuations that the Indian market enjoys vis-à-vis its peers in Asia


Graphic: Naveen Kumar Saini/Mint
Graphic: Naveen Kumar Saini/Mint

Emerging markets have been hit by rising bond yields in the US after the election of Donald Trump as president. At the same time, the Indian market has been affected by demonetization. One way to isolate the impact of demonetization is therefore to consider the premium valuations that the Indian market enjoys vis-à-vis its peers in Asia. The accompanying chart plots this premium that the MSCI India Index has over MSCI Asia ex-Japan Index.

As the chart shows, the premium has come down since 8 November. MSCI India’s one-year forward price-to-earnings (P-E) multiple was 16.85 on 8 November, compared to 12.84 for MSCI Asia-Pacific ex-Japan. By 6 December, MSCI India’s P-E was at 15.9 compared to 12.59 for MSCI Asia-Pacific ex-Japan. Clearly, the Indian market’s P-E has fallen much more than that for the Asia-Pacific ex-Japan markets. That compression in the India premium is the impact of demonetization.

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