Warren Buffett Indicator

 Warren Buffet Indicator is a key indicator to measure stock valuations

The indicator – named after legendary investor Warren Buffett – is defined as the total value of a stock market relative to the economy’s GDP.

If the valuation ratio falls between 50% and 75%, the market can be said to be modestly undervalued. Also, the market may be fair valued if the ratio falls between 75% and 90%, and modestly overvalued if it falls within the range of 90 and 115%.

The indicator recently hit a high of 100% for India. An over 100% ratio means that the stock market value is greater than the value of the GDP.

Rarely has India’s market cap-to-GDP ratio has exceeded 100 percent. This is because unlike developed economies – or the US where Buffett lives.

India’s economy is dominated by the unorganized sector, which is unlisted on the stock exchange.

At present, the market capitalisation-to-GDP ratio for India stands at 100 percent, which is the highest since FY2008's 103.

The ratio in India has a long-term average of just 75 percent.