Asian stocks are lower today as Japanese and Hong Kong shares fall. The Nikkei 225 is off 1.28% while the Hang Seng is down 0.10%. The Shanghai Composite is trading down by 0.96%. US stocks rose on Wednesday, capping off a strong start to 2018. The Dow Jones industrial average and S&P 500 notched their best monthly performances since March 2016.

Back home, India share markets opened the day on a firm note as market participants await Union Budget 2018, to be presented by Finance Minister Arun Jaitley today. The BSE Sensex is trading higher by 136 points while the NSE Niftyis trading higher by 46 points. The BSE Mid Cap index and BSE Small Cap index opened the day down by 0.1% & 0.4% respectively.

All sectoral indices have opened the day in green with consumer durables stocks and capital goods stocks witnessing maximum buying interest. The rupee is trading at 63.69 to the US$.

With Indian Indices trading at all-time high levels, the question many have in mind is if the Indian stock market is overvalued. To gauge this, we generally refer to PE or price to earnings ratio. If we go by this ratio, the Indian market is clearly in overvaluation territory. The Sensex is trading at a PE of around 26 times.

However, there is still another ratio, which is frequently used to evaluate the valuations. The market capitalization to GDP ratio. It is one of Buffett’s favorite indicators of broader market value. The market cap of all the listed companies in the country divided by the gross domestic product (GDP) of the country gives us this ratio.

The idea behind this ratio is simple. Stock prices are derived from expected earnings for corporates and GDP represents revenue of the country. This gives investors an estimate of whether the two are moving in tandem. A ratio above 100% shows overvaluation and one below 50% shows that the market may be undervalued. So what does the ratio presently indicates about Indian stock markets?