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Charts & Analysis

The Nifty Adjusted for Inflation Hits a New High! Are we in a Bubble?

The Nifty has hit a phenomenal new high, even including dividends and (Wholesale price) inflation! We were requested recently (thanks!) to update our inflation-adjusted Nifty chart – Capital Mind is the only site in India that provides this information.



And that brings us to this chart:


How do we make this chart? We take monthly WPI inflation back-casted to 2000 and adjust each month’s data as it it were in “purchasing power of the 1999 rupee”.

Adjusting for Inflation effectively means this:

  • If the Nifty was 100 in 1999
  • and went to 110 in 2000
  • but inflation was 8% (that is, Rs. 100 in 1999 had same purchasing power as Rs. 108 in 2000)
  • Your actual index number must provide the return = 110 * 100 / 108 = 1.85%.
  • Which means the inflation adjusted index is 101.85

For this calculation we don’t just include the Nifty, we assume any dividends paid by the Nifty are reinvested. This is available from the NSE as a “Total Returns Index”.

What about the CPI?

Consumer price wise, we aren’t there yet. Since current CPI data was only released 2011 onwards, our statistical adjustment is with other CPI data available earlier. Here’s how Rs. 10,000 would have grown in inflation indexed terms, with the Nifty (including dividends reinvested).


(On an aside, don’t you think it’s awesome that Rs. 10,000 in 2000 is now 7x in the stock market?)

And the CPI adjustment shows:

  • the inflation adjusted amount (in constant purchasing power terms) went to Rs. 31,454 in 2008 (Jan)
  • we are currently at Rs. 26,398

That means we have another 20% to go before our purchasing power goes up on a consumer price adjusted basis.

Is this a bubble?

On a P/E basis, it’s not quite so yet:


With the P/E at 22.5 this is not yet a crazy bubble. For that, the P/E would have to be 25 or more. A 25 P/E is about 1,000 points higher, so we should think that we are frothing over, given past past data, only at Nifty 10,000. (It’s 8,800 today).

While the WPI data shows us at new highs, valuation (by P/E) and based on CPI inflation shows we aren’t there yet.

The Nifty would be as “bubbly” as 2008 only with a 15% to 20% higher jump from here.



Note: historical data never provided a firm basis for bubble levels. We could stay below the past P/E highs (like we did in 2011) or go totally overboard (like in 1999, when the P/E was 40+).



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  • madhavan says:

    Superb analysis Deepak. Consider all the noise that is out there your analysis bring GS clarity on this run..helps one to have better understanding. So we are still in a buy on dip

  • rakesh ojha says:

    Thank you for publishing this data.
    To help people realize how much they loose by keeping money in fixed deposits, you should report how much would Rs. 10,000 have grown to with 30% tax on interest earned since 2000 OR with risk free return on 10 year govt bond (again after 30% tax on interest). Also, that will help show how much behind post tax return is to inflation.
    That would make stock investing even more worthwhile to people who are not comfortable with stock investing and stick to FD’s.

  • Phoenix says:

    I recall when people were cursing the country for corruption and writing crude things in comments section just 1 year back. Most slept through the pessimism missing the early bull market. The easiest returns are already over.
    Hopefully they have got over the difficult times. Things are returning to normalcy slowly, I still see a lot of Doubting Thomases.
    To quote Sir John Templeton, ““Bull markets are born on pessimism, grown on scepticism, mature on optimism and die on euphoria””.
    In my opinion, we are a little bit ahead of scepticism now and closer to optimism………….. but a long long way away from euphoria. Some people 6 months back said the market is running ahead of itself.
    The Doubting Thomases will never get anything in the stock markets.

    • Vikram says:

      You don’t recall those “crude things” accurately at all!!! I had posted those “crude things” back then in the comments over here:
      May I remind you that I had also said that I am long the market since Nifty 4800. I had said precisely this (as far as implications of my crude comments on investment decisions go):
      “I agree with you here. Some may not differentiate aggressive denouncing of governance vs stock market performance. I’m long stocks myself since 4800 Nifty levels. I’m long Coal India, which has been one of the better large caps, even though I know it is a stupid PSU representative of all the ills I spoke of. But, the way I see it, the more we talk and resolve the negative issues, at least within the limits of what every individual can do, we lay the basis for a better country, one tiny bit by bit. The more people and govt recognize problems and take ownership, I will likely increase my stock allocation. When they are blind and ignoring “negativity”, I will run away from stocks. But, you did not make that argument directly, instead making irrelevant (and may I say incorrect) comparisons between countries, etc. You are partially right with your investment-related conclusions, but I don’t agree with your reasons for it.”
      Let me repeat: “Some may not differentiate aggressive denouncing of governance vs stock market performance.”
      And, by the way, not much has changed. The concern for corruption remains. Much of the optimism is because we are facing up to those problems (which justifies the concerns), or at least that is the hope. That is hugely different from your “all is well” attitude back then.
      Oh and generally speaking, there are plenty of doubting thomases who make money in bear markets. You can check with the people who shorted oil this year as an example. Or, at the least, there are plenty of doubting thomases that save their money by not going with the herd, so save the inaccurate generalizations please. Cheers.

    • Vikram says:

      The market returns have come along with the cognizance of the corruption problems and the perception that things will change for the better. On the other hand, your argument back then was that we don’t even have any problems and that at that time, comparison with other countries was favorable (not on a valuation basis, not on a stock market risk premia basis, but in the real economy and on corruption). On that, you are still as wrong as then!!

  • Kiran says:

    Those are pretty good charts. How do you conclude that P/E 25 is bubble territory? Is that based on the previous high from where the bubble popped? Or are you using P/E to EPS ratio. Even then, I am not able to correlate the two. Can you help ?

  • Shyam says:

    Thank you! I was curious about this after the recent run up. It is good to know that the market has given real returns even for someone who has invested at the peak of 2008 bubble.