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"BSE SENSEX PERFORMANCE AND ECONOMIC VARIABLES - A STUDY OF CAUSE AND EFFECT RELATIONSHIP"t
"BSE SENSEX PERFORMANCE AND ECONOMIC VARIABLES - A STUDY OF CAUSE AND EFFECT RELATIONSHIP"t
Prof. RK Sharma
Submitted by:
Deepak Sharma
I hereby declare that the project work entitled “ BSE SENSEX PERFORMANCE
AND ECONOMIC VARIABLES – A STUDY OF CAUSE AND EFFECT
RELATIONSHIP” is an authentic work carried out by me under worthy and
esteemed guidance of Dr. RK Sharma. This work has not been submitted to any
other university for Award of any Degree/Diploma and is the whole sole property
of Deepak Sharma. Any unauthorized use of this Project is strictly prohibited.
For further use, approval of the concerned authority is mandatory.
Deepak Sharma
during the period of his/her study under my guidance, and that the dissertation has
not previously formed the basis for award of any degree, diploma, associate ship,
him/her.
IITM, JANAKPURI
This kind of projects plays a very important role not only in the successful completion of
cooperation during the course of the project. He provided me with his assistance and
support whenever needed that has been instrumental in completion of this project.
I am also thankful to all faculties of finance for their invaluable guidance and support.
Last but not the least I would also like to thank my friends.
RELATIONSHIP”. The process of study involves collection of data, analysis of data &
finally conclusions.
Deepak Sharma
A country’s economic growth is largely associated with the changing dynamics of its
stock market. Since independence, Indian stock market has been incessantly growing.
Lot of government norms and legislations had been imposed for keeping the market free
from the trickery and deception. In spite of these norms and regulations, Indian stock
market could not be perfectly sterilized from scams, even though their performance was
quite noticeable. But the market was really boosted up after the financial sector reform,
which opened the door for the FII inflow. The market was already on its path to maturity
and attained a phenomenal height in March, 2006. My research work attempts to frame a
brief account on the changing dynamics of the Indian stock market and tries to explain
the growth of the market in the light of various economic as well as international
aspects.
merely depend upon the theoretical Knowledge. Classroom lectures make the
fundamental concept of Management clear. They also facilitate the learning of practical
Things. However, Classroom lectures must be correlated with the Practical training
situations. It is in the sense that practical Training in a company has a significant role to
play in the subject of business economics. Market Research is indeed an Ancient Art; it
has been practiced in one form of the other since the day of Adam and Eve. Its
Emergence is of relatively recent origin for success of any business and with in this
achieve professional competence, manager ought to be fully occupied with theory and
increases their decision-making ability and sharpens their tools for this purpose. As an
essential part of our course, I got the privilege to work under guidance of our faculty
PAGE NO.
DECLARATION---------------------------------------------------------------------------2
ACKNOWLEDGEMENT----------------------------------------------------------------3
ABSTRACT---------------------------------------------------------------------------------4
PREFACE-----------------------------------------------------------------------------------5
INTRODUCTION--------------------------------------------------------------------------7-8
LITERATURE REVIEW------------------------------------------------------------------9-13
OBJECTIVE--------------------------------------------------------------------------------14-15
HYPOTHESIS----------------------------------------------------------------------------- 16
INDIAN STOCK MARKET OVERVIEW---------------------------------------------17-24
FUNDAMENTAL ANALYSIS-----------------------------------------------------------25-35
METHODOLOGY ------------------------------------------------------------------------36-37
FINDINGS----------------------------------------------------------------------------------38-51
C0NCLUSION& RECOMMENDATION --------------------------------------------52-54
REFERENCES----------------------------------------------------------------------------55-56
APENDIX-----------------------------------------------------------------------------------57-59
INTRODUCTION
The movement of stock indices is highly sensitive to the changes in fundamentals of the
economy and to the changes in expectations about future prospects. Expectations are influenced
by the micro and macro fundamentals which may be formed either rationally or adaptively on
economic fundamentals, as well as by many subjective factors which are unpredictable and also
non quantifiable. It is assumed that domestic economic fundamentals play determining role in the
performance of stock market. However, in the globally integrated economy, domestic economic
variables are also subject to change due to the policies adopted and expected to be adopted by
The common external factors influencing the stock return would be stock prices in global
economy, the interest rate and the exchange rate. For instance, capital inflows and outflows are
not determined by domestic interest rate only but also by changes in the interest rate by major
economies in the world. Recently, it is observed that contagion from the US sub prime crisis has
played significant movement in the capital markets across the world as foreign hedge funds
unwind their positions in various markets. Other burning example in India is the appreciation of
currency due to higher inflow of foreign exchange. Rupee appreciation has declined stock prices
of major export oriented companies. Information technology and textile sector are the example of
From the beginning of the 1990s in India, a number of measures have been taken for economic
liberalization. At the same time, large number of steps has been taken to strengthen the stock
market such as opening of the stock markets to international investors, regulatory power of
SEBI, trading in derivatives, etc. These measures have resulted in significant improvements in
the size and depth of stock markets in India and they are beginning to play their due role.
A stock market, or (equity market), is a private or public market for the trading of company stock
and derivatives of company stock at an agreed price; these are securities listed on a stock
exchange as well as those only traded privately. The size of the stock market is estimated at
about $51 trillion. The world derivatives market has been estimated at about $480 trillion face or
nominal value, 30 times the size of the U.S. economy. and 12 times the size of the entire world
economy. It must be noted though that the value of the derivatives market, because it is stated in
terms of notional values, and cannot be directly compared to a stock or a fixed income security,
which traditionally refers to an actual value. Many such relatively illiquid securities are valued as
The stocks are listed and traded on stock exchanges which are entities a corporation or mutual
organization specialized in the business of bringing buyers and sellers of stocks and securities
together. The stock market in the United States includes the trading of all securities listed on the
NYSE, the NASDAQ, the Amex, as well as on the many regional exchanges, e.g. OTCBB
and Pink Sheets. European examples of stock exchanges include the Paris Bourse, now part of
Varying evidences of causal links of stock returns and macro variables have been found in the
literature using various asset pricing specifications. In the literature, widely popular CAPM has
been severely challenged since returns can be predicted from other financial factors. This has led
to the development and testing of various alternative asset pricing specifications, such as the
Arbitrage Pricing Theory (APT) and Present Value Model (PVM). In the context of macro
dynamics of stock returns, APT assumes that returns are generated by a number of
macroeconomic factors. It allows multiple risk factors to explain asset returns. Chen, Roll and
Ross (1986) have argued that stock returns should be affected by any factor that influences future
cash flows or the discount rate of those cash flows. In an empirical investigation they found that
the yield spread between long and short term government bonds, expected inflation, unexpected
inflation, nominal industrial production growth and the yield spread between corporate high and
low grade bonds significantly explain stock market returns. An alternative way of linking
macroeconomic variables and stock prices is the discounted cash flow or present value model
(PVM). This model relates the stock price to future expected cash flows and the future discount
rate of the cash flows. Again, all macroeconomic factors that influence future expected cash
flows or the discount rate by which the cash flows are discounted should have an influence on
the stock price. The advantage of the PVM model is that it can be used to focus on the long run
prices and key macro economic variables. For instance, Friedman (1988) suggests ‘wealth effect
and substitution effect’ as the possible channels through which stock prices might directly effect
money demands in the economy. Friedman (1988) expected that the wealth effect will dominate
and thus the demand for money and stock prices to be positively related. The theoretical basis to
examine the link between stock prices and the real variables are well established in economic
literature, e.g., in Baumol (1965) and Bosworth (1975). The relationship between stock prices
and real consumption expenditures, for instance, is based on the life cycle theory, developed by
Ando and Modigliani (1963), which states that individuals base their consumption decision on
their expected life time wealth. Part of their wealth may be held in the form of stocks linking
stock price changes to changes in consumption expenditure. Similarly, the relationship between
stock prices and investment spending is based on the ‘q’ theory of James Tobin (1969), where q
is the ratio of total market value of firms to the replacement cost of their existing capital stock at
current prices.
In retrospect of the literature, a number of hypotheses also support the existence of a causal
relation between stock prices and exchange rates. For instance, ‘goods market approaches’
(Dornbusch and Fischer, 1980) suggest that changes in exchange rates affect the competitiveness
of a firm as fluctuations in exchange rate affects the value of the earnings and cost of its funds as
many companies borrow in foreign currencies to fund their operations and hence its stock price.
An alternative explanation for the relation between exchange rates and stock prices can be
provided through ‘portfolio balance approaches’ that stress the role of capital account
transaction. Like all commodities, exchange rates are determined by market mechanism, i.e., the
demand and supply condition. A blooming stock market would attract capital flows from foreign
investors, which may cause an increase in the demand for a country’s currency. The reverse
would happen in case of falling stock prices where the investors would try to sell their stocks to
avoid further losses and would convert their money into foreign currency to move out of the
country. There would be demand for foreign currency in exchange of local currency and it would
lead depreciation of local currency. As a result, rising (declining) stock prices would lead to an
could increase over time due to benefits of international diversification that foreign investors
would gain. Furthermore, movements in stock prices may influence exchange rates and money
demand because investors’ wealth and liquidity demand could depend on the performance of the
stock market.
Economic theories suggest causal relations between stock prices and exchange rates, existing
evidence also provides relatively stronger relationship between stock price and exchange rate.
Ma and Kao (1990) find that a currency appreciation negatively affects the domestic stock
market for an export-dominant country and positively affects the domestic stock market for an
import-dominant country, which seems to be consistent with the goods market theory. Bahmani
and Sohrabian (1992) found a bi-directional causality between stock prices measured by the
Standard & Poor's 500 index and the effective exchange rate of the dollar, at least in the short
run. The co-integration analysis revealed no long run relationship between the two variables.
Similarly, Abdalla and Murinde (1996) investigate interactions between exchange rates and stock
prices in the emerging financial markets of India, Korea, Pakistan and the Philippines. The
results of the granger causality tests results show uni-directional causality from exchange rates to
stock prices in all the sample countries, except the Philippines. Ajayi and Mougoue (1996), using
daily data for eight countries, show significant interactions between foreign exchange and stock
markets, while Abdalla and Murinde (1997) document that a country’s monthly exchange rates
tends to lead its stock prices but not the other way around. Pan, Fok & Lui (1999) used daily
market data to study the causal relationship between stock prices and exchange rates and found
that the exchange rates Granger-cause stock prices with less significant causal relations from
stock prices to exchange rate. They also find that the causal relationship have been stronger after
Bodie [1976], Fama [1981], Geske and Roll [1983], and Pearce and Roley [1983], Pearce [1985]
document a negative impact of inflation and money growth on equity values. Many experts
however believe that positive effects will outweigh the negative effects and stock prices will
eventually rise due to growth of money supply (e.g., Mukherjee and Naka, 1995). They argue
that a change in the money supply provides information on money demand, which is caused by
future output expectations. If the money supply increases, it means that money demand is
increasing, which, in effect, signals an increase in economic activity. Higher economic activity
implies higher cash flows, which causes stock prices to rise. Bernanke and Kuttner (2005) argue
that the price of a stock is a function of its monetary value and the perceived risk in holding the
stock. A stock is attractive if the monetary value it bears is high. On the other hand, a stock is
unattractive if the perceived risk is high. The authors argue that the money supply affects the
stock market through its effect on both the monetary value and the perceived risk. Money supply
affects the monetary value of a stock through its effect on the interest rate. The authors believe
that tightening the money supply raises the real interest rate. An increase in the interest rate
would in turn raise the discount rate, which would decrease the value of the stock as argued by
the real activity theorists. The impact of real sector macro variables on equity returns has been
much more difficult to establish. Mukherjee and Naka (1995) reveal that cointegration relation
existed and positive relationship was found between the Japanese industrial production and stock
return. However, Cutler, Poterba, and Summers [1989] (CPS) find that Industrial Production
growth is significantly positively correlated with real stock returns over the period 1926-1986,
but not in the 1946- 85 sub-period. In Indian context, Bhattacharya and Mukherjee (2002)
studied the nature of the causal relationship between stock prices and macro aggregates for the
period of 1992-93 to 2000- 2001.Their results show that there is no causal relationship between
stock price and macro economic variables like money supply, national income and interest rate
but there exists a two way causation between stock price and rate of inflation. Their results also
As discussed above, literature reveals differential causal pattern between key macro economic
variables and stock prices. This relationship varies in a number of different stock markets and
time horizons in the literature. This paper will add to the existing literature by providing robust
result, which is based on more than one technique, about causal links for the longer period, i.e.,
OBJECTIVE OF STUDY
Almost everyone in this developing nation has heard the name of share market. But very few
people have knowledge about it. Even those who are investing in this bulls and bears market are
investors in this nation as the sennsex crossed 21000 mark in its all time history. But no one at
that time have thought in a dream about the present bearish market. Today most of them are
either sit after getting huge losses or are waiting for to stablize this volatile market.
I met many people and noticed that people are confused about the reasons behind this bearish
run. Everyone are having different views and not even have confirmation about their answers.
So, I think that it is valuable and urgent to study about the effects of local and global issues on
indian share which is not only favourable for those who have already put their money in risk but
also for students and people those who are thinnnking of investing in share market but having no
Presently, the movement in stock market in India is viewed and analysed carefully by large
number of global players. Understanding macro dynamics of Indian stock market may be useful
for policy makers, traders and investors. Results may reveal whether the movement of stock
prices is the outcome of something else or it is one of the causes of movement in other macro
The study also expects to explore whether the movement of stock market are associated with real
sector of the economy or financial sector or the external factors or all the above three. In this
context, the objective of this paper is to explore such causal relations for India as there is a little
work for this period. To the best of my knowledge no in-depth such analysis of macro dynamics
HYPOTHESIS
The Bombay stock exchanges (BSE) and the National Stock Exchange of India Ltd
(NSE) are the two primary exchange in India. In addition, there are 22Regional Stock
Exchanges However, the BSE and NSE have established themselves as the two leading
exchanges and account for about 90% of the equity volume traded in India.
The average daily turnover at the exchanges has increased from Rs. 851 crore in
1997-98 to Rs. 1,2804 crore in 1998-99 and further to Re. 2273 crore in 1999-2000
(April- August 1999). NSE has around 1500 shares listed with a total market
capitalization of around Rs. 921500 crore (Rs. 9215 Bln). The BSE has over 6000 stocks
listed and has a market capitalization of around Rs. 968000 crore (9680 Bln). Most key
stocks are traded on both the exchanges and hence the investor could buy them on either
exchange. Both exchanges have a different settlement cycle, which allows investors to
shift their positions on the bourse. The primary index of BSE is BSE Sensex comprising
30 stocks. NSE has the S&P NSE 50 index (Nifty) which consists of fifty stocks.
The BSE Sensex is the older and more widely followed index. Both these indices
are calculated on the basis of market capitalization and contain the heavily traded shares
from key sectors. The markets are closed on Saturdays and Sundays. Both the exchanges
have switched over from the open outcry trading system to a fully automated
computerized mode of trading known as BOLT (BSE On Line Trading) and NEAT
(National Exchange Automated Trading) System. It facilitates more efficient processing,
The Scripts traded on the BSE have been classified into ‘A’, ‘B1’, ‘B2’, ‘C’, ‘F’ and ‘Z’
groups. The ‘A’ group shares represent those, which are in the carry forward system
(Badla). The ‘F’ group represents the debt market (fixed income securities) segment. The
‘Z’ group scripts are the blacklisted companies. The ‘C’ group covers the odd lot
secutities in ‘A’, ‘B1’& ‘B2’ groups and Rights renunciations. The key regulator
Funds, FIIs and other participants in Indian secondary and primary market is the
The first organised stock exchange in India was started in Bombay in 1875 with the
formation of the ‘Native Share and Stock Broker’s Association’. Thus the Bombay Stock
Exchange in India is the oldest one in the country. With the growth of joint stock
companies, the stock exchanges also made a steady growth and at present these are 23
The Organization
The National Stock Exchange of India Limited has genesis in the report of the High
Institutions (FIs) to provide access to investors from all across the country on an equal
Institutions at the behest of the Government of India and was incorporated in November
On its recognition as a stock exchange under the Securities Contracts (Regulation) Act,
1956 in April 1993, NSE commenced operations in the Wholesale Debt Market (WDM)
segment in June 1994. The Capital Market (Equities) segment commenced operations in
Corporate Structure
NSE is one of the first de - mutualised stock exchanges in the country, where the
ownership and management of the Exchange is completely divorced from the right to
trade on it. Though the impetus for its establishment came from policy makers in the
country, it has been set up as a public limited company, owned by the leading
From day one, NSE has adopted the form of a demutualised exchange - the ownership,
management and trading is in the hands of three different sets of people. NSE is owned
by a set of leading financial institutions, banks, insurance companies and other financial
the Exchange. This has completely eliminated any conflict of interest and helped NSE in
The NSE model however, does not preclude, but in fact accommodates involvement,
support and contribution of trading members in a variety of ways. Its Board comprises of
senior executives from promoter institutions, eminent professionals in the fields of law,
While the Board deals with broad policy issues, decisions relating to market operations
are delegated by the Board to various committees constituted by it. Such committee
includes representatives from trading members, professionals, the public and the
Bombay Stock Exchange is the oldest stock exchange in Asia with a rich heritage, now
spanning three centuries in its 133 years of existence. What is now popularly known as
BSE was established as "The Native Share & Stock Brokers' Association" in 1875.
BSE is the first stock exchange in the country which obtained permanent recognition (in
1956) from the Government of India under the Securities Contracts (Regulation) Act
1956. BSE's pivotal and pre-eminent role in the development of the Indian capital market
is widely recognized. It migrated from the open outcry system to an online screen-based
order driven trading system in 1995. Earlier an Association Of Persons (AOP), BSE is
now a corporatized and demutualized entity incorporated under the provisions of the
Scheme, 2005 notified by the Securities and Exchange Board of India (SEBI). With
demutualization, BSE has two of world's best exchanges, Deutsche Börse and Singapore
Over the past 133 years, BSE has facilitated the growth of the Indian corporate sector by
India which has not sourced BSE's services in raising resources from the capital market.
Today, BSE is the world's number 1 exchange in terms of the number of listed companies
and the world's 5th in transaction numbers. The market capitalization as on December 31,
2007 stood at USD 1.79 trillion. An investor can choose from more than 4,700 listed
companies, which for easy reference, are classified into A, B, S, T and Z groups.
The BSE Index, SENSEX, is India's first stock market index that enjoys an iconic
market sentiments and market realities. Apart from the SENSEX, BSE offers 21 indices,
including 12 sectoral indices. BSE has entered into an index cooperation agreement with
Deutsche Börse. This agreement has made SENSEX and other BSE indices available to
investors in Europe and America. Moreover, Barclays Global Investors (BGI), the global
leader in ETFs through its iShares® brand, has created the 'iShares® BSE SENSEX India
Tracker' which tracks the SENSEX. The ETF enables investors in Hong Kong to take an
BSE has tied up with U.S. Futures Exchange (USFE) for U.S. dollar-denominated futures
trading of SENSEX in the U.S. The tie-up enables eligible U.S. investors to directly
participate in India's equity markets for the first time, without requiring American
Depository Receipt (ADR) authorization. The first Exchange Traded Fund (ETF) on
SENSEX, called "SPIcE" is listed on BSE. It brings to the investors a trading tool that
can be easily used for the purposes of investment, trading, hedging and arbitrage. SPIcE
BSE continues to innovate. In recent times, it has become the first national level stock
exchange to launch its website in Gujarati and Hindi to reach out to a larger number of
investors. It has successfully launched a reporting platform for corporate bonds in India
christened the ICDM or Indian Corporate Debt Market and a unique ticker-cum-screen
aptly named 'BSE Broadcast' which enables information dissemination to the common
Reporting System) to facilitate information flow and increase transparency in the Indian
information on the boards of directors of listed companies, the ICERS facilitates the
FUNDAMENTAL ANALYSIS
Economic Analysis:
GDP:
GDP is the market value of all the final goods and services provided in the domestic
economy during a year. It includes income earned by foreigners minus income earned by
the national abroad. GDP at factor cost at current prices in the year 2008-09 is estimated
at Rs. 43,03,654 crore, showing a growth rate of 13.6 per cent over the Quick Estimates
of GDP for the year 2007-08 of Rs. 43,03,654 crore, released on 31st January 2008.
Total GNP of a country divided by the population. The per capita income is often used as
economic indicator of the levels of living and development. It however, can be biased
index because it takes no account of income distribution. The per capita income at current
Quick Estimates for the year 2007-08 of Rs.29,642, showing a rise of 12.3 per cent.
Industrial Growth :
Industry registered a growth of 7% in the month of April 2008 as compared to 11%
growth registered in the same month of the previous year. In March 2008 industrial
growth recorded was 3.9% lowest in 6 years. In April 2008 growth slipped sharply in the
manufacturing and electricity sector to 7.5% and 1.4% respectively from a high 12.4%
and 8.7% respectively clocked in April 2007 (barring the mining sector that accelerated
in April 2008).
In the light of development taken place in the recent past, particularly the tightening of
monetary policy by the RBI and incessant increase in the raw material prices including
the prices of oil and oil products. GDP growth is likely to moderate in the present fiscal.
The overall infrastructure industry grew at 3.6% in April 2008 as against 5.9% growth
posted in the corresponding month of the previous year. Production of crude oil,
petroleum refinery and electricity sector has slowed the overall infrastructure industries
growth. Growth in the remaining set of infrastructure industries namely coal, cement and
Inflation:
India’s 2008 Economic Survey Report targeted a drop in India’s Inflation Rate – but with
food, oil and commodity price rises worldwide, the opposite is happening. According to
the 2008 Economic Survey Report, India’s inflation rate was targeted by the Reserve
Bank of India (RBI) to be 4.1%, down from a rate of 5.77% in 2007. Inflation rates for
many investment goods have decreased dramatically in recent years. The price of basic
goods such as lentils, vegetables, fruits and poultry were expected to slow their rise. The
price of various manufactured goods also fell in 2007, and this contributed to a reduced
inflation rate. However, the beginning of 2008 has seen a dramatic rise in the price of rice
and other basic food stuffs. There has also been a no-less alarming rise in the price of oil
and gas. When coupled with rises in the price of the majority of commodities, higher
inflation was the only likely outcome. Indeed, by July 2008, the key Indian Inflation
Rate, the Wholesale Price Index, has risen above 11%, its highest rate in 13 years. This is
more than 6% higher than a year earlier and almost three times the RBI’s target of
4.1%.Inflation has climbed steadily during the year, reaching 8.75% at the end of May.
There was an alarming increase in June, when the figure jumped to 11%. This was driven
in part by a reduction in government fuel subsidies, which have lifted gasoline prices by
an average 10%.
The Indian method for calculating inflation, the Wholesale Price Index, is different to the
rest of world. Each week, the wholesale price of a set of 435 goods is calculated by the
Indian Government. Since these are wholesale prices, the actual prices paid by consumers
are far higher. In times of rising inflation this also means that cost of living increases are
much higher for the populace. Cooking gas prices, for example, have increased by around
20% in 2008. With most of India’s vast population living close to – or below – the
poverty line, inflation acts as a ‘Poor Man’s Tax’. This effect is amplified when food
prices rise, since food represents more than half of the expenditure of this group.
The dramatic increase in inflation will have both economic and political implications for
the government, with an election due within the year.The effect of the price spurt was
seen on the bourses on Friday. The BSE sensitive index (Sensex) tanked over 350 points
in intra-day trading and sank further to close 517 points lower at 14,571. Average
inflation recorded during 2007-08 was 4.66% lower than the average inflation rate
computed for 2006-07. In the year 2007-08 dearer food articles mainly contributed to
high inflation. The government later imposed ban on few essential commodities and
employed fiscal measures to check high inflation caused due to manufactured items.
Increase in the price of petroleum products, inflation crossed the double-digit level and
was high at 12.01 % for the week ending Aug 26 2008. The recent fiscal and
0.26% on the week ending 28th of March 2009. The bumper agri production in 2007-08
and its repeat performance in 2008-09 has significant role in bringing inflation low. Apart
from performance of agricultural sector the measures taken by RBI of reducing interest
rate also played an important role and reduction in the price of crude oil in international
market brought down cost pull inflation significantly. As the year progresses it is
expected that average inflation for the year 2009-10 would be in the range of 2-5%.
Monetary Indicators:
The recent policy measures taken by the RBI to control inflation and to compete with
global recession includes decreasing the CRR and repo rate (rate at which commercial
banks borrow from the central bank). The step has been taken due to worries over high
inflation.
RBI decreased the repo rate from 8.5% to 5% and CRR decreased from 8.5% to 5%.The
Fiscal Trends:
Government provisional accounts for the last fiscal show total expenditure slightly in
excess of the targeted amount, mainly due to the non-plan category. However, total
receipts surpassed the targeted receipts for 2007-08 keeping the fiscal deficit at 90.4 % of
the targeted figure for the year and thereby showing an improvement in the fiscal
Foreign Trade:
Merchandise exports of USD 200 billion for the 2008-09 have been targeted. Last year
mainly saw Rupee’s battle against the USD, where Rupee turned in a manner that was
disadvantage the exporters. Since April 2008 Rupee against USD recoiled in favor of
exports however it also raised the import bill concerns at a time when oil prices are at its
peak.
During the April – May period of this fiscal merchandise exports recorded a growth of
21.7% in USD terms over the 20.3% rise recorded in the same period of previous year.
Imports however slowed to 31.7% during the two month period against the 33.0% growth
Total foreign exchange reserves have declined since May 2008 by about USD 45 billion.
In June country’s forex stood at USD 295.92 billion. The alterations observed in reserves
are due to dollar selling by the central bank and revaluation in the currencies. However
no change was observed in the GDR/ SDR, value of gold and reserve tranche position in
the IMF.
Exchange Rates:
The value of Rupee depreciated against US dollar, Pound Sterling, Euro and Japanese
U.S. RECESSION
A recession is a decline in a country's gross domestic product (GDP) growth for two or
slowing down.
An economy which grows over a period of time tends to slow down the growth as a part
of the normal economic cycle. An economy typically expands for 6-10 years and tends to
go into a recession for about six months to 2 years. A recession normally takes place
when consumers lose confidence in the growth of the economy and spend less. This leads
to a decreased demand for goods and services, which in turn leads to a decrease in
production, lay-offs and a sharp rise in unemployment. Investors spend less as they fear
stocks values will fall and thus stock markets fall on negative sentiment. The economy
and the stock market are closely related. The stock markets reflect the buoyancy of the
Analysis, but investors are a worried lot. The Indian stock markets also crashed due to a
The Sensex crashed by nearly 13 per cent in just two trading sessions in January. The
markets bounced back after the US Fed cut interest rates. However, stock prices are now
A slowdown in the US economy is bad news for India. Indian companies have major
outsourcing deals from the US. India's exports to the US have also grown substantially
over the years. The India economy is likely to lose between 1 to 2 percentage points in
GDP growth in the next fiscal year. Indian companies with big tickets deals in the US
would see their profit margins shrinking. The worries for exporters will grow as rupee
strengthens further against the dollar. But experts note that the long-term prospects for
India are stable. A weak dollar could bring more foreign money to Indian markets. Oil
may get cheaper brining down inflation. A recession could bring down oil prices to $70.
Between January 2001 and December 2002, the Dow Jones Industrial Average went
down by 22.7 per cent, while the Sensex fell by 14.6 per cent. If the fall from the record
highs reached is taken, the DJIA was down 30 per cent in December 2002 from the highs
it hit in January 2000. In contrast, the Sensex was down 45 per cent.
The whole of Asia would be hit by a recession as it depends on the US economy. Asia is
yet to totally decouple itself (or be independent) from the rest of the world, says experts.
Fears about a possible U.S. recession are also stoking the uncertainty in the Indian
markets. "If the U.S. is headed for a recession, then of course a lot of growing firms in
India, particularly those in the IT sector, are going to take a bit of a hit because they are
2) Indian MFs are sitting on huge cash and waiting with patience to enter once the market
stabilizes.
So now even though FIIs get out of the market now, the market becomes the trading
ground for Indian investors. The current Stock values can go more down maximum of
10% till March end of 2008 . The Indian Mutual funds cant keep the cash surplus without
earning penny from it and they would start investing in those company stocks who have
given good FY results. This will lead in true investments and actual stock evaluations.
The retailers will then return to the market as the Sensex will slowly start moving
positive. Now, if the FIIs return back to Indian Markets, it’s a win-win situation for all
Indian investors as they are already in market before the FIIs and they can book good
But what about the current inflation rate that could hamper the industrial growth? Mr.
Chidambaram has requested the Reserve Bank of India to take monetary steps to
FII's have a major role in the Indian stock markets and there is no way denying this .That
becomes crystal clear from this figures. FII's have a share of around $300 billion in the
Indian equity market which has a size of around $1,500 billion. So, that is cool 20%
share. And when this is tampered it's obvious that it will reflect in the indices.
Foreign institutional investors have pulled out over 5,307 crore (Rs 53.07 billion) from
the stock market in the six days in year 2008, amid the Bombay Stock Exchange's
benchmark index Sensex's continuous downward journey during that period. With
economic integration with the world economy over the past 17 years, Indian economy
cannot remain immune to this crisis. Already the Indian stock markets have been affected
adversely by the sudden pullout by the FIIs. However, the impact on the real economy is
Furthermore, a substantial geographical diversification has taken place over the past
decade with East Asian economies emerging as our important trade partners. India’s
services exports especially of software and Bpo's are still dominated by the US. But a US
recession may actually increase the need for the US companies to cut costs to stay
competitive and may actually increase the outsourcing of business processes thus
Secondly, the effect of the US slowdown may be limited to FII inflows rather than FDI
inflows. In so far as the former type of flows bring volatility on the stock markets and
tend to put an upward pressure on the rupee’s exchange rate, their decline may not be a
matter of concern. What may affect the growth prospects is whether the flow of FDI is
affected. Emergence of India as a fast growing large economy is attracting the attention
of MNCs from all around and hence this type of flows may not be affected significantly.
Thirdly, a major driver of India’s growth rates is domestic consumption and investment.
These two variables are unlikely to be adversely affected by the financial turmoil in the
US.
Crude oil prices will significantly disrupt world stock markets in recent days. Countries
struggled a lot in inflation rate due to rising crude prices. US Federal Reserve decides to
slash interest rates with responsibility to made dollar strong. According to OPEC
chairman, crude oil price may touch $ 200 in year 2008 and came down to $ 23 per barrel
in recent months which is a surprise package for the most of the countries facing
inflation.
Rising inflation due to high crude oil prices decreased spending power of people. There
will be a significant slowdown in economy due to reduced growth rates and rising
inflation but the global fall in crude oil prices will help countries to hit back the recession
First, I collected the Sensex data from 2000-2009 and I also collected the data of foreign
exchange rate, inflation and iip (index of industrial production).Keeping Sensex data
dependent and other three independent I did regression analysis to find out cause and
effect relationship between stock performance and economic variables. I used SPSS to
derive the relationship.
Regression model was used to derive the relationship and formula to compute the
relationship is given below.
α= intercept.
β1 =slope of inflation
β2 =slope of forex.
β3 =slope of iip.
X1= inflation
X2= forex
X3= iip
The monthly returns of economic variables (in percentage) are determined as:
( P1 − P0 )
Rt= ∗100
P0
Where:
FINDINGS
Output which I got is different than the earlier findings. Earlier study shows
that there is great degree of association between performance of sensex and the economic
variables. But in the research work carried by me a different result came which shows
that the degree of association is quite low as the value of R2 (coefficient of determination)
is quite low i.e. 0.123 which shows that the interdependence between these two variables
is quite low which contradicts the previous economic literature and the research paper
findings. On the basis of my finding I can say that only 12.3% of relationship can be
established between the two and the rest is driven by some other factor.
Output Summary:
2
Inflation IIP Forex ( R )
( α ) ( β1 ) ( β2 ) ( β3 )
1.378 -0.08 -0.049 -1.698 0.123
T value 2.159* -1.652 -1.32 -3.054*
Note-* significant at 5 percent level of significance.
Inflation and stock exchange performance.
– Demand Prices
– EFFECT - prices rise => money buys less =>Decrease in the standard of
living
We take W.P.I to calculate the Inflation, Which includes 435 commodities prices. To
calculate inflation we use 1993-94 as a base year and by comparing current price with
economy rises, stock starts showing bearish trend and if inflation in the economy remains
low the between 2%-4% the stock market shows the bullish trend.
STOCK PERFORMANCE
INFLATION (VALUE OF STOCK)
From the output of SPSS I analyzed that inflation has inverse relationship with the stock
market or performance of the stock. When inflation in the economy rises it directly
influences the performance of the stock. Stock market starts showing the bearish trend.
When inflation in the economy comes down and remains stable between 2%-5% that is
considered as the best situation in the economy and stock starts showing bullish trend.\
development for the measurement of trend in the behavior of the Industrial Production
STOCK PERFORMANCE
IIP (VALUE OF STOCK)
After analysis of data with the help of SPSS I found that iip has inverse relation with the
performance of the stock. When value of iip will rise the stock will show bearish trend
and when the value of iip will decrease stocks will show bullish trend.
Data Source
1. The annual IIP and summary results are prepared on the basis of Annual Survey of
2. For preparation of Monthly IIP, the department collects monthly production data
directly from selected industrial units in the State through its District Statistical Officers.
1. State level
(a) Used by the Government and Planners at different level for different Policy decisions
(b) Used by the department for preparation of state income estimates of manufacturing
sector.
2. Central Government
(a) Used by the Government and Planners at different level for different Policy decisions
To capture the changes in the industrial sector, the State series of IIP is revised
from time to time by dropping obsolete items, including the new items in the
basket and also shifting the base year to a more recent one.
The State is now revising the current series of State IIP by shifting its base year
o Weighting Diagram
Statistical methods are applied to arrive at IIP after finalization of items basket,
weighting diagram and collecting production data from the selected industrial
units.
This also compiles district wise and group wise various characteristics of ASI returns i.e
output, input, depreciation, net value added and number of workers on annual basis.
Foreign Exchange (Forex):
The foreign exchange (currency, forex or FX) market is where currency trading takes
place. FX transactions typically involve one party purchasing a quantity of one currency
in exchange for paying a quantity of another. The FX market is one of the largest and
most liquid financial markets in the world, and includes trading between large banks,
The average daily volume in the global forex and related markets is continuously
growing. Traditional turnover was reported to be over US$ 3.2 trillion in April 2007 by
the Bank for International Settlement. Since then, the market has continued to grow.
According to Euro money’s annual FX Poll, volumes grew a further 41% between 2007
and 2008.
FOREX
STOCK PERFORMANCE
(VALUE OF STOCK)
After analyzing the output what I got from SPSS I came to know that the forex and stock
performance has inverse relationship. Rise in exchange rate will have negative impact
over the stock market, whereas decrease in exchange rate with respect to domestic
As such, it has been referred to as the market closest to the ideal perfect competition,
estimated at $3.98 trillion. Trading in the world's main financial markets accounted for
$3.21 trillion of this. This approximately $3.21 trillion in main foreign exchange market
SENTIMENTS
Factors:
Sentiment indicator is constructed using the following variables.
A high dividend to bond yield ratio implies that the stocks are over valued
Extent to which the stocks are overvalued - Positive and high market sentiments
Turnover
Implies higher liquidity in the market and positive and high sentiment.
This is the ratio of stock return index to bond return index. A large number will
imply that the returns on stocks are much higher then bonds and the market
sentiment is positive.
Implied volatility
This is the ratio of number of put order to number of call orders. In instances
when the ratio is large positive number, it implies that investors expect the market
to tumble in the future and hence are short selling. This indicative of low or
negative sentiments.
Open Interest
Is the number of positions in the options market that are still open i.e. number
weaken.
,Mexico, Phillippines, Singapore and US are the most localized markets, i.e., they
are not affected by global sentiments. The results also show that UK is the most
Sentiment Scale:
Source:
Research paper by:
E mail –vrinda.gupta@watsonwyatt.com
• SMALL CAPITALISATION.
SENTIMENTAL
What does all this mean for the Indian capital market? This will reduce the flow of capital
coming to the Indian stock market. India was always considered one of the robust
emerging markets, but definitely with certain political and economic risks.
These risks, in recent times, were not priced into equity valuations as the excess liquidity
was chasing emerging market exposures and India became the investor's darling, after
China. Now, with the sub-prime crisis, excess liquidity will vanish and the market will
correct for the price of risks. Now let us look at domestic fundamentals. Indian markets
will see a correction because of high oil prices, high interest rates, slowing down of
exports because of the slowing down of the US economy and rupee appreciation. This
almost completely ignored the local issues. With liquidity drying up, the market will now
focus on local issues, including political uncertainties and corporate earnings. It is natural
to expect that, finally, fundamentals will rule over technicals, and the market will look at
ground realities. A slowdown can be observed in the automobile sector, some slowing
down is already being witnessed in the real-estate segment and, with exports coming
down, and it will not be too long before we see the same in textiles, jewelry and other
areas as well. Perhaps a similar story will unfold in the next couple of months for these
lenders who have lent big money into the sub-prime markets and one or more banks will
fold, just like Enron did, resulting in a huge crisis of confidence. It would be naive to
wish away this major problem inflicting global markets and to presume that the Indian
market is decoupled. If the global super-tanker, the US, which has a 25 per cent share of
global GDP, slows down, it will definitely have an impact on the Indian economy.
The next couple of months are definitely going to be crucial and the best course of action
For Investors & Speculators: It is recommended to them to keep away from stock market
completely and deposit their money in other investment arena which are safe and secure
during tough market conditions. If one want to do an investment for a year or longer then
one particular time when they feel that market is down enough. But if the speculation is
because of the decreased volumes of shares. In such a scenario, they can generally advice
to take risk on certain scripts which is not a healthy way of getting profits. This can
damage the loyalty of valuable clients. But instead of doing this, they should be advised
to remain cautious and not develop any new positions in the market. This can give
brokers the better returns when market will be stable. This can give brokers the better
returns when the market conditions improved. This is the time to gain loyalty by giving
safe calls.
REFERENCES