Nifty 50 Index boosted by India's GDP data, but valuation risk remain

The Nifty 50 Index is hovering near its all-time high as the Indian rupee slips and as the recent economic numbers point to robust performance in the third quarter, as tariffs against the United States remain. The index was trading at INR 26,200 a few points below the year-to-date high of INR 26,300.

Indian economy is doing well 

The Nifty 50 Index held steady on Monday after a report released on Friday showed that the Indian economy continued thriving in the last quarter.

This report showed that the economy expanded by 8.2% in the last quarter, the fastest growth rate in six quarters. Economists polled by Reuters expected the economy to grow by 7.4% after it expanded by 7.8% in the second quarter.

Analysts believe that the annual growth rate will be no less than 7%, which is higher than the expected range of between 6.2% and 6.8%. This view is supported by analysts from top companies like Citigroup, Goldman Sachs, and Morgan Stanley.

The economy has done well even as Donald Trump has maintained a 50% tariff on all Indian goods. He also implemented a surge in H1-B visa fees to $100,000, a level that most analysts believe are unaffordable to most people.

The growth was mostly driven by internal consumption as export growth remained under pressure in the quarter.

RBI rate cut in doubt

Ideally, a strong GDP report is a good thing for Indian companies because it means the economy is doing well. However, the risk is that it may prevent the Reserve Bank of India (RBI) from cutting interest rates later this week, as most analysts were expecting. 

Instead, analysts now believe that the bank’s decision on Friday will be a close call. This explains why bond yields have risen in the past few days as it moved to a high of 6.56% from last month's low of 6.48%.

The other risk is that Indian stocks have become significantly overvalued as the Nifty 50 and Sensex Indices have remained near their all-time highs. Data shows that some big names in the Nifty trade at a price-to-earnings ratio of 50.

The most overvalued companies based on their price-to-earnings ratio are companies like Eternal Limited, Jio Financial, Trent, HDFC Life Insurance, Tata Consumer Products, and Nestlé India. All these companies have a PE ratio of over 80, meaning that they are more expensive than fast-growing companies like Nvidia.

Nifty 50 Index technical analysis 

The daily timeframe chart shows that the blue-chip Nifty 50 Index has held steady in the past few months. It has soared from the year-to-date low of INR 21,760 in April to the current INR 26,325.

The index has moved above the important resistance level at INR 26,000, a sign that bulls remain in control. It has remained above the 50-day and 100-day Exponential Moving Averages (EMA) while the Relative Strength Index (RSI) pointed upwards.

Therefore, the most likely scenario is where the index continues rising, potentially to the key resistance at INR 26,500. A drop below the key support at INR 26,098, its highest point in October will invalidate the bullish outlook.