As government bond yields approach 7 per cent, Indian equity investors are favouring large-cap stocks, with mid- and small-cap segments appearing increasingly overvalued amid rising borrowing costs and frothy valuations.
Indian equity investors are getting a sharper signal from the bond market: large caps now look relatively better placed than their smaller peers as borrowing costs rise. On Wednesday, the 10-year government bond yield briefly touched 7 per cent before ending at 6.9739 per cent, a level that has made traders more cautious even as the Nifty 50 has fallen 3 per cent over the past year and oil prices have moved higher.
What stands out, according to Business Standard, is that the Nifty 50’s equity risk premium is still favourable by historical standards. The gap between the earnings yield on the index and the 10-year bond yield is about minus 2.41 per cent, which places it in the 66th percentile of weekly readings since 2012. In simple terms, the large-cap benchmark is cheaper relative to government bonds than it has been in most of the past 14 years, even though its earnings yield is only 4.61 per cent.
The picture is less supportive for mid- and small-cap shares. Business Standard said the Nifty Midcap 100 and the Smallcap index have equity risk premiums of minus 3.85 per cent and minus 3.61 per cent, respectively, leaving them in the lower part of their long-term ranges. The same report said those segments trade on price-to-earnings multiples of 31 times and 33 times, making them among the most expensive they have been in 14 years after a strong 2023-24 rally that regulators had already warned was frothy.
Recent market data backs up that caution. The Economic Times said the Nifty Midcap 100 stood at 63,001.60 on September 2, 2026, with a price-to-earnings ratio of 29.9 and a one-year gain of 10.57 per cent. IndexPE put the mid-cap index’s P/E at 30.95 on August 31, above its five-year median, while its small-cap counterpart was valued at 31.50 on September 1, slightly above its own historical norm. Taken together, the numbers suggest that rising bond yields may be shifting the market’s appeal back towards blue-chip names, while leaving less room for error in mid- and small-cap stocks.
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