Buffett Indicator: Indian markets heading for a tailspin?

The data showed that India's GDP grew 7.6% in FY16.

The recent GDP data of the country has raised several doubts on its accuracy. Photo: IANS

Are we moving towards major market cash? Is the rising Gross Domestic Product (GDP) nothing but just a bubble?

Today's market crash where BSE benchmark Sensex closed down 300 points and NSE led Nifty plunged 80 points raised these questions and highlighted the term 'Buffett indicator'. For experts, this term is not new.

But, if you are a long-term investor, then you should know about this term.

'Buffett Indicator' which is the most important indicator of the stock market valuation, indicate that our equity markets are soon going to face a downturn, as reported by Economic Times (ET).

What is Warren Buffett Indicator?

According to NASDAQ, Buffett Indicator is the ratio of total market cap over Gross National Product (GNP). Term suggested by billionaire Warren Buffett, the indicator is the percentage of total market cap (TMC) relative to the US GNP is the single measure of where valuations stand at any given moment.

The indicator tells the "mismatch" between the growth rate in the country's economy and of the equity market.

The recent GDP data of the country has raised several doubts on its accuracy. The data showed that India's GDP grew 7.6% in FY16.

As per the ET report, India's market capitalisation- to- GDP ratio stands at 83% which is far above than the 10 year average of 76%. Interestingly, this market cap has been visible since FY2015.

Why Buffett Indicator shows threat?

According to the ET report, in 2014, the GDP, as per constant prices in 2004-05, stood at Rs 57.29 lakh crore. As per the old series calculation, from there on, assuming GDP grew at 7.3% and 7.6%, GDP should stand at Rs 66.2 lakh crore in 2016. But, as per the new series, it is 113.40 lakh crore, which is 151% higher and by FY16 end it may touch 143%.

Is this sudden rise a cause of worry?