High price - earnings ratio of Indian stock market and investment by foreign financial institutions

Abstract

This paper explores the high level of the price-earnings (P/E) ratio of the Indian stock market in the context of investments by foreign financial institutions. The measured P/E ratio may be high because of abnormally low earnings during 1991-92 and the high P/E ratios of foreign controlled enterprises. Even after adjusting for these two factors the P/E ratios is likely to be high relative to historical levels and relative to P/E ratios of other emerging markets. However, given its excellent diversification potential the Indian stock market may be attractive to foreign investors in spite of its high P/E ratio