India's equity benchmark Nifty 50 Index is trading at record valuations. The gauge's one-year forward price-to-earnings multiple rose above two standard deviations for the first time.
Standard deviation measures the divergence from the long-term average. Nifty's forward PE multiple has oscillated in the range of 10 to 22 times with the average of 16.6 times.
The last time the valuation was close to two standard deviations in 2007, it was followed a 65 percent drop in the Nifty 50 to its next low. In fact, it declined every time the valuations rose above one standard deviation.
If the valuations revert towards the mean, Nifty 50 will decline from its all-time highs.
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