The spread that predicts returns

One way to assess whether Indian equities are relatively attractive today is by comparing two simple numbers:

• Nifty earnings yield (the earnings generated per rupee invested in equities): ~4.6%
• 10-year Government bond yield (the return offered by a risk-free asset): ~6.8%

The gap between them is roughly 211 basis points (bps). In simple terms, bonds currently offer a higher yield than equities on a pure income basis.

History offers an interesting perspective on what this spread has meant for equity market returns.

There have been only three instances when the Nifty earnings yield was equal to or higher than the bond yield: 2005, 2009 and 2020.

Each of these periods was followed by exceptionally strong equity market returns, marking some of the most attractive entry points for long-term investors.

The current spread of ~211 bps does not represent such an extreme opportunity. However, historically, spreads in this range have been associated with mid-teen Nifty returns over the subsequent 12 months.

The signal may not be dramatic, but it is informative.

For investors with patience and a one-year horizon, the risk-reward equation in Indian equities today appears more balanced than recent headlines might suggest.

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