India's not so literate policy makers response to the global financial crisis has been to reduce public savings to boost growth. The collateral damage has been persistent consumer inflation and declining corporate savings or profit share in GDP.
Persistent inflation has deflated public debt relative to GDP – but it has also punctured corporate profits (and, thus equity), causing corporate financial leverage to rise.
In such a situation, the valuation template for investors is as it was in 1998 – not the P/B multiple – but the earnings yield minus the short-term bond yield. This metric is in negative territory – implying that Indian equities are not cheap, as they may have appeared before mid-July policy action. The macro construct threatens India's relative gains against its most relevant peer group (the BRICs) in the 18 months preceding mid-July
