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Charts & Analysis

The “Real” Nifty Adjusted for “Real” Inflation Will Shock You

I spoke earlier about how the Real Nifty – that is, adjusted for inflation and purchasing power drop – is now 32% below the 2007 peak, despite the actual index value being about the same.

But that was adjusted for “Wholesale Price Index” (WPI) based inflation. The wholesale index is just one indicator of inflation, and does not consider important elements like services (eg. haircuts, washing and so on) and housing (rent).

To get that data, we have a Consumer Price Index (CPI) which includes these items. It is therefore a little more “real” than WPI. (In Aug 2013, WPI was at 6.1% and and CPI at 9.5%)WPI vs CPI

CPI unfortunately is confusing. There are four indexes. The most reliable one – called the CPI (Urban) has only been around for two years. The others – CPI for Agricultural Labourers, Rural Labourers and Industrial Workers. Of these, the only thing that comes close to being useful is CPI (IW), or the Industrial workers number. Luckily we have this data since 1968.

What is Inflation Adjustment?

Let’s now calculate what it means to have invested some money, say Rs. 10,000, in the Nifty in 2000. Let’s add dividends and reinvest them. We’ll end up with some money today. That money can buy things, but it can’t buy the same amount of things it could in 2000. Because those things got more expensive due to inflation.

So, in away, we want to see how much the growth in the index has been, accounting for inflation. If we used the Inflation indexes we can see how much your money has really grown since 2000 – and in the same purchasing power of the year 2000.

And the Winner Is:

Nifty Adjusted for CPI Inflation

Rs. 10,000 has actually become Rs. 45,000 till July 2013 (data of the CPI-IW is not available after that) if you had invested in the Nifty, and reinvested dividends.

But in purchasing power, it has increased only till Rs.17,000 if you consider the CPI Index for inflation.

Worse, since 2008, your money has dropped 43% in purchasing power when invested in the index. In unadjusted terms, you still have the same amount of money!

What this also tells you is: if your money hasn’t grown 43% since 2007, no matter what you invested in, you’ve just lost purchasing power.

Finally, here’s the shocker. To regain the same purchasing power, the index has to go up 76%.

If it takes a year, at the current rate of inflation (10%), the Nifty has to grow 84%. Just so you can break even with 2008.

Inflation is a silent tax, they say. Once in a while, it talks.

  • amit says:

    amazing and they say buy equity and you will beat inflation handsomely ….. 6-7 years is a long enough time …

  • Ravi says:

    Deepak,
    It would be great if you had compared what a 10 year bond and gold would have returned during the same period after inflation adjustment. That would have probably given a better perspective of what holds value in indian context as we always go by what the western analysts say in terms of what returns best on long term.
    Regards
    Ravi

  • Sanjay says:

    One should compare one asset class with another asset class. Comparing one asset class with inflation (though that is the goal) is not so fair. How would PPF – best tax saving instrument in debt – would have fared in same time period?

  • Senthil says:

    Just want to make a comparison of inflation adjusted nifty returns with investments in a developed country.
    As am based in UK, I will compare with UK returns.
    1£= 70 rs in 01-Jan-2000
    so for 10,000 Rs, I will get £142 and If i invested this on a tracker fund in UK, the current value would be 197.14 ( i have taken fidelity money builder fund for calculation) and if I transfer this back to india now, I would get 19714.
    there is not much difference between a nifty (17,000) with a FTSE (19,000) or S&P 500 if you take the currency fluctuations in to consideration.

  • Ram says:

    Now that’s an eye opener…. It would be interesting if you were to make a similar analysis of CPI over a debt instrument such as an FD or a debt MF……

  • KS Bose says:

    Deepak,
    Good work. You need to calculate the cost of investment also. Nifty ETFs have about 1% expense ratio. Did you subtract that every year?

  • shakeel says:

    this is good.
    wonder why isnt this spoken in the same breath as when everyone talks about how inflation adjusted FD rates are negative.
    Shouldnt this (adjusting for inflation) be a standard way of measuring ?? What am I missing ?

  • Sandeep says:

    this is if you invested in Nifty. If you invested in Mid or Small Cap you messed up bigtime.

  • lohit says:

    All the more reason to keep investing now, when retail investors are leaving in droves.
    Over the long term, no firm can survive by earning consistently less than the cost of borrowing. In turn, no bank can survive by lending consistently at less than inflation. (This is somewhat possible in a financially repressed country like India). Therefore, on the whole earnings have to be more than inflation.
    Of course, this does not mean that the returns from the firms stock have to do the same. In the short term the returns could under perform for long (‘The market can stay irrational longer than you can stay solvent’). But eventually, and always, fair value returns. All the more reason to keep buying consistently and in a disciplined manner.
    Deepak, it would be instructive to add a SIP returns chart. From 1st Jan 2001, a no-brainer, no-effort monthly investment of Rs 1000 into the Nifty would have yielded 13.9% (I have not included expenses, but equally have left out the dividend yield too). If you had increased your monthly investment at the rate of inflation (0.7%), then the return would have dropped marginally to 13.25%.
    Assuming a long term CPI of 9%, that means a real-return of about 4%. That is about in line with what large cap equity has yielded in real terms over the last 100 years in other countries. (USA, AU, UK etc all have given 4-5% real returns).
    BTW, 6-7 years is not long term by any means. That is just marketing speak peddled by the MFund companies. 15-20 years is more like it.
    I remember reading somewhere that in the 1990s in the US, that while the stock market had phenomenal returns (8-9% in real terms I think), the average retail investor made about 500 basis points lesser. Main reasons – expenses and lack of discipline. And people wonder how the folks on wall street lead such gilded lives. It is the average joe who pays for it.

    • I’m not sure I agree now – especially on the 6-7 year front. In the US, you had a 16 year such period (1966 to 1982) and that was definitely long term. We are in India in a very similar situation – high inflation, low growth, stock market poking at an old high but never really breaching it.
      We’ll succeed when, like Volcker, a central banker becomes serious about cutting inflation, and reduces it to 3% types. But a recession means a pretty rough market.

  • mangoman2012 says:

    //this is if you invested in Nifty. If you invested in Mid or Small Cap you messed up bigtime.//
    ofcourse..this is what happened to 90% of retail investors and sadly to all the mutual funds for all the schemes may be except the index schemes

  • Krish says:

    Deepak, if the NIFTY returns are compared in dollar terms, much of the NRI community would get heartache.

  • Sanjay says:

    A basic question : how much time a business cycle takes? Time period of one complete business cycle should be considered as “long term”. Also, interestingly we are picking the 7 years of great recession.
    But it is pretty much obvious : by the time common people identifies a trend, it reverses 🙂 Most common investment advice is already mentioned few days back in this blog in 10 points. 🙂

  • lohit says:

    http://www.ritholtz.com/blog/2012/07/dow-jones-industrial-average-since-1900/
    I only have data since 1979 for the Indian stock markets. But when plotted, our markets too follow the staircase pattern as done by the Dow. i.e. rise up quite sharply (i.e. overshoot fair valuations due to exuberance) and then move sideways till the next cycle of hype starts.
    As for our recession, yes it and the corresponding default cycle has just started. Small companies are already defaulting by the droves. We are also starting to see defaults at the individual level, esp the lower income groups. Notably, the two-wheeler loan segment has seen a rise in defaults. Next will be the inflation stretched middle classes and car owners.
    Falling home prices will see further stress. Banks will have to ask for an additional down payment to maintain the loan to value ratio. This happened in 2008.

  • Sanjeev B says:

    Deepak, thanks for the CPI analysis!
    As you mentioned, this is against CPI (IW). CPI (Urban) may fare worse, but I could be wrong.
    For those advocating ETFs or SPIs, #KSBose’s observation above is correct, we need to account for the 1% or more annual management fees, not to mention entry and exit costs. That is substantial, and that’s really the oil that runs the financial services juggernaut.

  • One. Indexes are not hot. And in India we like to keep tinkering with the components. Pick and choose is the only strategy that COULD give you an edge on inflation. And I suspect, in India it would continue to be retail driven & a handful of MNCs. Maybe if we take a cutoff of stocks with ROE greater than 25% ( a ten year plus average), we have a fair chance of beating inflation. Had done work on six or so stocks that did. Not rocket picks- Large stocks- HDFC, HUL, Colgate, Nestle, ITC, Cummins, Bosch. One could still do a SIP in these stocks and come out winner. And could consider adding a CRISIL/ICRA to this bucket.