Real (Inflation-adjusted) Sensex From 1990 to 2021
Follow @vrk100
(This is for information purposes only. This should not be construed as a recommendation or investment advice even though the author is a CFA Charterholder. Please consult your financial adviser before taking any investment decision. Safe to assume the author has a vested interest in stocks / investments discussed if any.)
(An updated blog dated 14Mar2024 is available here)
(please find three updated charts of real Sensex as on 31Mar2022 at the end of this article)
Today's media headlines are awash with the news of Sensex reaching a record high. BSE Sensex closed yesterday at 55,437, posting a gain of 16 per cent since the start of this year. Indian equity investors have been more than happy with the gains they have made this year and last year despite the COVID-19 pandemic hitting the real economy severely in 2020.
----------------------
Read more: Fed Tapering is Postponed
----------------------
Indian economy underwent a huge change with the Indian government undertaking several economic reforms in the 1990s. The economic reforms have benefited all sections of the society, though several imbalances remain even today.
In fact, reforms are a continuum. It's pointless to precisely give a starting point for any reforms. One could also argue it was the then finance minister VP Singh who started some clean-up in the mid-1980s. Anyway, it's a different story.
The stock indices partly reflect the progress we've made in the past three decades. So, let us see how Sensex has done after the reforms started. Between 1990 and now, Sensex moved from 800 at the end of March 1990 to 55,400 now, rising by 70 times in 31 years. The annual average (CAGR) growth in Sensex since 1990 till now works out to 14.60 per cent, which is quite impressive.
Inflation adjustment
But this is not the time to be jumping for joy. Because, if you adjust the Sensex returns for the rising prices, you'll have a surprise awaiting for you. Actually, this is the time for deflation--I mean deflating this infectious enthusiasm.
What the media headlines don't tell you is the fact that inflation is a perennial problem in India. India has seen three high inflation episodes in the past three decades. The first one lasted from 1990 to 1999; the second one lasted from 2008 to 2015 and the third one started in December 2019 and continues still.
Though the magnitude of the three episodes differs, consumer prices have impacted the purchasing power of Indians very badly in the past three decades. Please check the the table below to figure out how severe inflation has been all these years:
As can be seen from above table, the average annual inflation between 1990 and 1999 was 10 per cent. And between 2008 and 2015, the average annual inflation was around 9 per cent. In the third episode that started in December 2019 and continuing unabated still, the average annual inflation is more 6.20 per cent.
Now coming to the key point of this article, we need to adjust the Sensex numbers with the inflation numbers. The average inflation (CPI is considered here) is 7.34 per cent in the past 31 years--which means one rupee is worth only 11 paise today after 31 years. To put differently, consumer prices in India have risen by 9.2 times.
These are official numbers. As everyone knows, actual inflation we suffer on a daily basis is much higher, even though price rise affects different segments of the population differently.
Real Sensex
As described above, Indian stock market players have been happy with average yearly return of 15 per cent since 1990. But most of them have no freaking idea about how inflation has eaten away their returns.
The following is a table showing the Sensex in nominal terms (nominal Sensex) and Sensex in real terms (real Sensex). Real Sensex is Sensex adjusted for inflation numbers:
(please check below graph, with yellow backdrop, for latest real Sensex)
As you can see from above (middle column), Sensex moved from 800 in 1990 to 55,400 now--which means it has gone up by 70 times in the past 30 years and odd. Now you check the extreme right column which shows the real (inflation-adjusted) Sensex. Real Sensex moved from 800 to 6,050--going up by 7.7 times only during the same period.
Against the CAGR of 14.60 per cent for Sensex in nominal terms, real Sensex has delivered a return of only 6.76 per cent. No doubt, considering the real returns generated in other countries, Sensex has done well--even in real (inflation-adjusted) terms. To sum up, this is how Sensex, real Sensex and inflation are stacked up during this period:
As you know, inflation is a silent tax shrinking our wallets constantly. So, next time someone tells you that she has made a return of 15 or 20 per cent, please ask for the real return, not the nominal returns.
- - -
Abbreviations used:
BSE - BSE Limited, formerly known as Bombay Stock Exchange
CAGR - compounded annual growth rate
CPI - consumer price inflation
P.S.: The following information is added for information purpose after the above blog was published on 14Aug2021:
Update with new data on 31Mar2022: Sensex is not 60,000 but just 6,300!
Table 1: Real Sensex
Table 2: CPI inflation from 1990 to 2022
Table 3: Sensex / Real Sensex growth in 32 years
Update with new data on 25Sep2021: Sensex is not 60,000 but just 6,600!
Disclosure: I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial products discussed, if any.
Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets.
CFA Charter credentials - CFA Member Profile
CFA Badge
He blogs at:
https://ramakrishnavadlamudi.blogspot.com/
Twitter @vrk100
No comments:
Post a Comment