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Charts & Analysis

Chart: Nifty Adjusted For Inflation Shows Us The Lost Decade In Indian Stocks

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Stocks are great for long term investment but the returns should beat inflation. Inflation is essentially a drop in purchasing power – so what you buy in 2007 for Rs. 100 will cost you Rs. 200 today at an average of 8% inflation each year. So your stocks need to be going up by at least 2x since 2007, which is just about meeting inflation. Anything more than that is your “real” return.

We take the Nifty – and to be fair, we add the impact of dividends (the concept is: when you get dividends you reinvest it back into the Nifty) – and then use the CPI (Consumer Price Index) to “deflate” it to have a constant purchasing power back to 1999.

This tells us how much the Nifty has returned, net of inflation.

Nifty Adjusted for Inflation

The answer isn’t great. An investment of Rs. 10,000 in the Nifty in the year 2000 would net us Rs. 20,679 now in real terms – a post inflation return of around 5% a year (this is not bad at all).

However, what it also says is that the net return is lower than the peaks of 2007 (29K in the same purchasing power) and in 2010 (24K). While the peak in Jan 2015 was higher, we have currently reverted to levels that were earlier seen in April 2006!

This almost means a lost decade, mostly due to high inflation. You can see the unadjusted number is much higher – so inflation has lifted your stock values, but in real terms has given you very little. 

  • Sanjay says:

    Which asset class has done better? Comparison should be done across asset classes.

  • so what should be done to get good return.

  • sudhin says:

    See the nifty has stocks with a high and low pe so to that extent the result will not be correct, ril for example has the maximum weight age in the index (correct if I am wrong) and this has not even given savings interest returns for a pure buy and hold assume if one bot it just before the last bonus, so it has to be stock specific. Ditto metals have not gone any where for the last decade.

  • AVM says:

    Equity at least has kept pace with inflation. Is there any other asset class (fixed income, gold, real estate etc.) that on AVERAGE has beaten inflation?

  • Kamal Garg says:

    What is the inflation rate taken. Is it CPI or WPI. It would have been better if inflation graph is also plotted along with unadjusted NIFTY return line.
    And more importantly, whether the culprit is more inflation or less return. This also should have been given based upon historical data on inflation and index return.
    I agree comparison with other asset classes should have been given to draw some investment lesson in different asset classes.

  • Gaurav says:

    do you have the earnings growth as well over this period? If earnings of the index companies have stagnated, it makes sense then for the Nifty to be at these levels

  • Pradeep says:

    Hi Deepak,
    This is Pradeep from niftytrader.in
    Once again very good analysis. I believe after adjusting for survivorship bias, this chart will show negative real returns. I remember Sensex touching 10,000 mark in 2005~06. With Sensex at 23,400 after 11 years, we are talking about 8% CAGR. Sensex now 2.34 times that of 2005 levels whereas the price of most services, commodities have increased significantly more.
    I don’t know the exact number but it seems Real Estate has done extremely well when compared to equity during the same period esp. between 2009~2013
    Keep up the good work.
    Cheers,
    Pradeep
    http://www.niftytrader.in