Comparing Nifty and S&P 500: The Right Way
When comparing the performance of the Indian Nifty index and the US S&P 500, it’s easy to misinterpret data if key factors like currency exchange rates aren’t accounted for. A recent chart highlighting the last 25 years shows the Nifty outperforming the S&P 500 by a significant margin—1400% versus 321%. However, this comparison overlooks a critical aspect: the impact of the USD-INR exchange rate.
The Mistake in Straight Comparisons
The chart in question compares Nifty’s rupee-based returns directly with the S&P 500’s dollar-based returns. This approach is flawed because it ignores the depreciation of the Indian rupee against the US dollar over the past 25 years. To make a fair comparison, Nifty’s returns must be adjusted to reflect their value in US dollar terms.
Adjusting for Currency Exchange Rates
To normalize Nifty’s performance for US dollar terms, we divide Nifty’s returns by the USD-INR exchange rate over the same period. When this adjustment is made:
Original Chart: Nifty showed a 1400% return, appearing to outperform the S&P 500 significantly.
Adjusted Chart: Nifty’s return drops to 682% in dollar terms, which is still an outperformance but with a narrower margin compared to the S&P 500’s 321%.
This adjustment provides a clearer and more accurate comparison between the two indices.
Key Insights from the Adjusted Data
Nifty Still Outperforms: Even after accounting for currency depreciation, Nifty has delivered better returns than the S&P 500 over 25 years.
Recent Performance Boost: Much of Nifty’s outperformance in dollar terms comes from the post-COVID rally, which has widened the gap significantly.
Minimal Gap Until 2020: From 2000 to 2020-21, the performance gap between Nifty (in dollar terms) and the S&P 500 was relatively small. The outperformance is largely a recent phenomenon.
Why Currency Matters
Global Comparisons: To compare assets across jurisdictions, you must consider currency exchange rates to understand their relative performance.
Purchasing Power: Returns in dollar terms better reflect an investor’s global purchasing power and competitiveness in the international market.
Realistic Benchmarking: For foreign investors or those with global portfolios, comparing performance without adjusting for currency can lead to misleading conclusions.
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