India’s benchmark stock index, the Sensex, regained almost 380 points from the day’s opening on Tuesday to close almost flat compared to Monday’s closing. This ended two days of losses, including a horrible Monday when it lost the most in a post-budget trading session. The immediate trigger was the market’s disappointment at the lack of an aggressive stimulus to the economy in the Union Budget presented last Friday, and fears among foreign investors that vehicles they used to invest in India would now attract the same high tax rate as the super-rich announced in the budget. By Tuesday evening, some foreign investors were expressing the hope that they would be excluded from this tax because it was clearly meant to target the super-rich and not them.Amidst much hand-wringing over Monday’s fall, though, one fact seems to have been ignored: India’s markets are clearly over-valued.On May 23, when the Narendra Modi-led NDA returned to power, the Sensex celebrated. That day, the Price Earnings (PE) multiple of the Sensex (a comparison of earnings per share and share price and a measure of whether a stock is overvalued or undervalued) touched 28.35. Many analysts said the market was clearly overvalued. But the Sensex did not stop there. It continued to march on and crossed 40,000. And its PE multiple kept rising.There are reasons it should not have – including the prediction by most equity research firms that this earnings season will not be a good one for Indian companies. Consumption demand is flagging, there is a global trade war on, and there are fears that the crisis in the shadow banking sector is far from over. The monsoon’s erratic behavior in June – it ended the month with a significant deficit – and the existence of an El Nino effect is also cause for concern.Ergo, there were (and are) very good reasons for the market to witness a correction. Yet after Friday and Monday’s fall, the Sensex was still trading at 38720.57, with a PE multiple of 27.87. That is still high. The stock market’s relationship with fundamentals has always been suspect, but this is the kind of pricing that factors in a 15-20% earnings growth – not the kind of growth that is expected in the near-term.Thus, while the immediate reason for the behavior of the markets may be the budget, it is a fact that Indian stocks seem over-priced at this point and both earnings (and, at a larger level, GDP) growth will have to play catch-up to justify this.