Nifty–Gold ratio drops below 2.5: Are Indian equities signalling a rebound?

A sharp fall in the Nifty 50–gold ratio, now well below the key 2.5 threshold, is reviving optimism around Indian equities. Historically seen as a bullish signal, the ratio suggests a potential catch-up rally for stocks, supported by improving macro fundamentals, renewed FII inflows and sustained buying by domestic institutions, even as geopolitical risks remain a key overhang.

Soaring gold prices amid global uncertainty and a volatile equity market have created a rare but closely watched signal for investors: the Nifty–gold ratio has slipped to around 1.7, based on February 10 closing data. Market experts note that whenever this ratio has fallen below 2.5, Indian equities have typically delivered strong returns over the following months.

Historical trends underline this pattern. In October 2020, when the ratio dipped below 2.5, the Nifty 50 went on to rally over 65%. Similar signals appeared in April 2014 and April 2009, preceding gains of more than 40% and 70%, respectively. However, analysts caution that this remains a relative valuation indicator, not a guaranteed predictor of market direction.

The ratio reflects shifting investor sentiment between two contrasting asset classes. Gold generally benefits from geopolitical stress, inflation concerns and interest rate cuts, while equities tend to outperform during periods of strong economic growth, rising earnings and ample liquidity. A narrowing ratio often indicates easing pessimism and a gradual return of risk appetite.

According to VK Vijayakumar of Geojit Investments, a sharp decline in the Nifty–gold ratio may signal profit booking in gold and a gradual reallocation of liquidity towards equities. Meanwhile, Anuj Gupta, a SEBI-registered analyst, stresses that the ratio only highlights relative performance and should be used alongside broader market indicators.

Beyond ratios, several macro and flow-based signals point towards a potential rebound. India’s economy is projected to grow at around 7% in FY27, while inflation is expected to remain within the tolerance band set by the Reserve Bank of India. Expectations of stable earnings growth, a weaker dollar, and progress on global trade agreements further strengthen the outlook.

Investor flows are also turning supportive. Foreign institutional investors (FIIs) have turned net buyers in February after seven months of selling, while domestic institutional investors (DIIs) have remained consistent buyers since August 2023. According to data from Motilal Oswal Financial Services, DIIs now marginally hold a larger share of the Nifty 50 than FIIs, underscoring the growing role of domestic capital.

Looking ahead, Vijayakumar expects the Nifty 50 to deliver over 10% gains in 2026, driven by improving global asset allocation towards emerging markets like India. The primary risks, analysts say, remain geopolitical tensions and uncertainty around US trade policies. If these risks stay contained, Indian equities could be poised for a meaningful rebound.