First and foremost the Nifty is way overvalued at current levels with a trailing P/E in excess of 23. Have a look at Sanjay Jaiswal's comprehensive P/E computation below at Niftypulse. This makes the market way overvalued on an earnings yield basis:
Nifty P/E Ratio
| Date | P/E |
| 8/7/15 | 23.18 |
| 7/7/15 | 23.59 |
| 6/7/15 | 23.62 |
| 5/7/15 | 23.52 |
| 2/7/15 | 23.40 |
Next FII interest in the Indian market has been declining steadily over the last 3 years. Here is some data from Traderscockpit:
Yearly FII Purchases/ Sales (INR 10 Million):
| Date | Gross Purchase | Gross Sales | Net Purchases/Sales |
| 2015 | 651299.9 | 631312.0 | 19987.861 |
| 2014 | 1001752.4 | 928095.94 | 73656.42 |
| 2013 | 758407.75 | 671048.94 | 87358.79 |
| 2012 | 633960.4 | 532794.25 | 101166.11 |
A continuation of this trend could eventually weaken the Rupee significantly and destabilize the macro economic back drop in India.
Thirdly Indian market volatility is on the rise. However on the most recent bounce in the market it declined below US market volatility which suggests complacency and a large decline ahead in the mark. See the graphic below from Vix.co.in for a rounding bottom type pattern emerging in the India Vix which is bearish for the market in the long term:
Last but not the least the Chinese authorities seem to have lost control of their market which has resulted in a free fall. Contagion risk to other BRIC countries like India is likely:
