Optimism among market participants over the apparent decoupling of Indian equity and bond markets from the global turmoil is not likely to sustain and has made the domestic market vulnerable to a crash, said analysts.

Brokerage firm CLSA India, in a note on September 29, warned that the Nifty 50 is vulnerable to a crash as big as 30 percent from current levels given the inflated valuations of the market as well risk of mean reversion in the bond market.

The Indian stock market has fallen less compared to most developed and major developing markets in 2022 despite surging global interest, a soaring US dollar and fears of global recession. For reference, where the Nifty 50 index has only hit a two-month low in the sell-off of the past few sessions, the S&P500 is sitting at a two-year low while the MSCI All Country World Index is now lower than its high made before the pandemic.

Similarly, the domestic government bond market has fared much better than many of its developing and developed market peers, despite the Reserve Bank of India raising interest rates by 140 basis points since May.

The difference between the 10-year Indian government bond and the US bond of similar tenor is now at its tightest in 13 years at 330 basis points. Where the US 10-year bond yields have soared 150 basis points in the last two months, Indian gilts have risen merely 25 basis points.