News Analysis

Why returns from key asset classes struggled to beat inflation

Bavadharini KS BL Research Bureau | Updated on January 27, 2020

In the decade just past, price rise kept real returns of equity sedate; gold and fixed income instruments disappointed

Investors are typically told to park their long-term savings in asset classes that can beat inflation. But finding such an asset would have been difficult over the last decade.

According to a BusinessLine analysis, equity returns (as captured by Nifty 500 index) just about managed to beat inflation in the last 10 years. While gold has kept pace with equities, marginally beating inflation, fixed income (represented by RBI’s structure of term deposit rates over five years) delivered the lowest real returns to investors.


Between 2009 and 2019, the nominal CAGR (compound annual growth rate) of equities stood at 8.6 per cent. But when adjusted for the annual inflation (cost inflation index of the Income Tax Department) rise of 6.9 per cent, the real growth was only 1.7 per cent.

Other prominent assets classes, gold (based on WGC prices in rupees) and fixed income instruments, delivered real returns of just 1 per cent and 0.9 per cent, respectively, in the last 10 years.

With the talk about the Centre loosening its purse strings to spend more in 2020-21, there is a likelihood of the fiscal deficit widening next fiscal year. This can lead to inflation spiking up, further hurting the real returns.

Equity returns skid

Equity returns have not been as strong over the last 10 years when compared to the previous decade.

Equity returns tapered off after 2009 due to lower demand stalling private capex and hurting manufacturing.

The hit to the economy due to demonetisation, the GST and then the NBFC crisis has further hurt corporate bottomlines, impacting stock price returns. While there were few good years when nominal returns were more than 25 per cent such as in 2014 and 2017, the performance of equity was largely sedate over the past decade, yielding a nominal return of 8.6 per cent.

Inflation was high between 2009 and 2014, averaging 9.8 per cent as the Centre focussed on growth rather inflation control, to combat the threat of recession.

But after 2015, inflation targeting became more important and inflation was brought down below 4 per cent. The annual growth of inflation of 6.9 per cent between 2009 and 2019 was, however, quite detrimental to investor portfolios, whittling down their real earnings from stocks.

Gold & fixed income struggle

Global gold prices ran up smartly till they peaked at $1,669/troy ounce in 2012. Thus, gold gave strong nominal returns between 2009 and 2012.

The yellow metal remained in a bear hug since then, but there were a few good years such as 2016 and 2019, when gold gave double- digit returns.

Gold prices in rupee terms were further helped by the depreciation in the Indian unit.

The rupee depreciated 53 per cent against the US dollar between 2009 and 2019, thus helping boost nominal returns of gold in rupee terms to 7.9 per cent.

However, when adjusted for the inflation, the real return in gold over the last 10 years was a disappointing 1 per cent.

Nominal debt returns and inflation are closely related. In periods of higher inflation, interest rates tend to move up as the RBI uses interest rates as a tool to control price increase.

However, fixed deposit rates did not keep pace with the rising inflation between 2009 and 2013. So, the real return from debt was negative in the first part of the last decade.

However, with inflation moving down sharply since 2016, real returns from debt moved above 3 per cent in 2018.

Budget and inflation

Investors need to watch the fiscal deficit number on February 1 as there is a strong link between the fiscal deficit and inflation. In 2010 and 2012, for instance, when fiscal deficit as a percentage of GDP was close to or above 6 per cent, inflation, too, spiked. But as fiscal deficit moved below 4 per cent after 2015, inflation cooled.

Published on January 27, 2020

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