Is the Nifty Overvalued or Cheap? Analysis as on 31-May-2025

As investors, it's crucial to gauge the overall market sentiment and valuation before making any investment decisions. In this blog post, we'll delve into the valuation of the Nifty 50 Index as on 31st May 2025, using various indicators. Our purpose of writing this monthly blog series is to educate our readers about the current state of the market and present information in easy-to-understand format for our readers.

Many of our readers are always in dilemma about the current state of market and whether they should sell their investments or make any new investments. We use various charts to provide insights into the state of market. It should be noted that all indicators may not agree at all times and some may tell a different story about current state during such times, readers are advised to use their own discretion and judgement.

Let’s look at various indicators to understand Trend, Volatility and Valuation of current market.

1.      Trend Analysis

Exponential Moving Average:

The Exponential Moving Average (EMA) is a widely used indicator to determine the trend direction. We use long term averages 180-day and 360-day EMAs to understand trend. When the 180-day EMA crosses above the 360-day EMA, it indicates a bullish trend, and vice versa. As on 31st May 2025, the Nifty is trading above 180EMA and 360EMA support zone.

MACD (Moving Average Convergence Divergence):

MACD is another trend-following momentum indicator. A positive MACD indicates a bullish trend, while a negative MACD suggests a bearish trend. When MACD line trades below

Signal line it shows a down trend and vice versa.

2. Volatility Analysis

We use Bollinger Bands to help identify potential overbought or oversold conditions. When the price touches the upper band, it may indicate overvaluation, and when it touches the lower band, it may suggest undervaluation. A squeeze in volatility bands is sign of market stabilizing and next move is indicated by direction of middle band (moving average). As on 31st May 2025, Nifty has bounced back from Lower Band and is near Middle Band.

3. Valuation Analysis

PE (Price-to-Earnings) Ratio:

The PE ratio compares the current price of the index to its earnings per share (EPS). A higher PE ratio indicates overvaluation, while a lower PE ratio suggests undervaluation. We have compared current Nifty PE to 7-year moving average to understand current PE is above or below its historical average. As on 31st May 2025, the Nifty's PE ratio is 22.32 which is below its historical average.

PB (Price-to-Book) Ratio:

The PB ratio compares the market price of a stock to its book value per share. A high PB ratio indicates that the index may be overvalued, while a PB ratio suggests undervaluation. Similar to PE, we compare current PB to its historical average. As of the latest data, the Nifty's PB ratio is 3.62 which is below its historical average.

(Note: NSE changed method of calculation of Price to Book Value from Standalone basis to Consolidated Basis in Sep'23. Current Price to Book Value is appx. 25% lower than earlier method.)

Dividend Yield:

Dividend yield is calculated by dividing the annual dividend per share by the price per share. Dividend yield results are to interpreted as opposite of PE and PB i.e. higher the better. As on 31st May 2025, the Nifty's dividend yield is 1.25% which is below its historical average.

Interpretation of Indicators

Trend - Bullish as indicated by Nifty trading above 180 EMA and 360 EMA.

Volatility - Fairly Valued as indicated by Index trading near Middle Band.

Valuation - Fairly Valued as indicated by Index trading near its historical averages.

Disclaimer:

It's important to note that the information presented in this blog is for information and educational purposes only. The analysis provided is based on historical data and should not be considered as investment advice. It shows you results of various indicators, but does not suggest to buy or sell or do anything. Investors should conduct their own research or consult with a financial advisor before making any investment decisions. Our analysis may be flawed and does not guarantee that results are free from errors. We are open to correcting mistakes when brought to our notice. We will not be responsible for any profit/loss suffered by reader after reading this blog post.