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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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