The present work, based on various spectroscopic investigations, vividly demonstrates the self-association of Nile red (NR) in aqueous medium. The rapid decrease in the absorbance as well as emission of NR in water bears the signature of the aggregation process. Appearance of a new blue-shifted absorption band in addition to the original one and a drastic decrease in the emission intensity imply that the aggregation is of H-type. Poor solubility of NR in water, hydrophobic interaction, and the planar structure of the dye are ascribed to favor the formation of the aggregate in the aqueous medium. Absorption-based kinetic studies reveal the aggregation process to be second order, thereby establishing the aggregate to be a dimer. Similar kinetic profiles of the absorbance of NR in the presence and absence of light confirm that the aggregation process is not photoassisted. The presence of an isosbestic point in the absorbance spectra and an isoemissive point in the time-resolved area normalized emission spectra bears the evidence of equilibrium between the dimeric and the monomeric species of NR in the ground state as well as in the photoexcited state. Encapsulation of the monomer of NR within the hydrophobic cavity of β-cyclodextrin is demonstrated to prevent the aggregation process.