Is the Nifty-Gold ratio signalling a major rebound in Indian equities? What historical trends show

The Nifty 50–gold ratio, one of the most reliable long-term indicators of market sentiment, has narrowed further to 1.56, suggesting that the Indian stock market is oversold and equities are deeply undervalued relative to gold.

For those unfamiliar with the metric, the ratio is simple: you take the Nifty 50 index and divide it by the price of 1 gram of gold in India. It acts as a kind of ‘value meter’ for the Indian economy.

When the ratio is high, equities are considered expensive relative to gold. When it is low, stocks are effectively trading at bargain valuations.

If the ratio jumps above 4, it is generally considered a sign that equities have run too far ahead of gold. On the other hand, when the ratio drops below 2, it indicates that gold has significantly outperformed equities.

What history suggests when the Nifty-Gold ratio falls below 2

Although rallies in equities and gold are influenced by several factors such as inflation, interest rates, government policies, and geopolitical developments, the ratio often provides important clues about their future trajectory. It also helps investors decide whether they should increase or reduce their allocation toward equities and gold.

Generally, gold and equities tend to move in opposite directions. To better understand the direction of both asset classes, it is useful to look at historical trends.

This ratio has followed a fairly consistent pattern over the past 35 years. Almost every time the ratio fell below 2, equities delivered strong returns over the following months or years, and vice versa.

For instance, the ratio dropped to 1.95 in April 2003, which was followed by a strong rally in the Nifty 50. A similar pattern was recorded in 2009, when the ratio slipped to 2.05 during the global financial crisis, eventually leading to a sharp rebound in Indian equities.

Similarly, the Covid-led selloff in 2020 pushed the ratio down to 2.20, but the Nifty 50 surged in the following months. Conversely, whenever the ratio climbed to around 4 or higher, markets appeared overheated and major corrections followed — as seen during 2008 and late 2021.

However, the current scenario is unusual, as both equities and gold are witnessing elevated volatility. Uncertainty surrounding a potential peace deal in West Asia is keeping bullion prices under pressure.

Although geopolitical tensions typically drive investors toward safe-haven assets such as gold, the current macroeconomic backdrop is different. Rising crude oil prices are heightening expectations that the US Federal Reserve and other major central banks could tighten monetary policy further to combat inflationary pressures.

Inflation readings in major economies, including the US, have breached central bank target ranges, fuelling expectations of imminent rate hikes.

Meanwhile, energy experts believe that even if the blockade of the Strait of Hormuz is lifted, supply disruptions caused by the ongoing conflict could persist through the end of 2026.

At the start of the year, investors had anticipated multiple rate cuts from the US Federal Reserve. However, that sentiment has turned increasingly hawkish, with expectations for policy easing declining sharply since the outbreak of the conflict in the Middle East in late February.

Disclaimer: We advise investors to check with certified experts before making any investment decisions.