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“AN ANALYSIS OF ECONOMIC INDICATORS AND ITS IMPACT ON

STOCKS IN SENSEX”

CHAPTER-1
RESEARCH EXTRACT

Allied Management College, Ottappalam By: Shuhaib PP


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“AN ANALYSIS OF ECONOMIC INDICATORS AND ITS IMPACT ON
STOCKS IN SENSEX”

RESEARCH EXTRACT

The unusual rise and fall in of Bombay Stock Exchange (BSE) Sensitive
Index (SENSEX) has received a lot of media attention over last couple of decades
in India. Even some policy analyst has designated it as an “indicator” of India’s
inevitable growth and development. In this research, attempt has been made to
explore the relation especially the causal relation between BSE SENSEX and some
economic indicators. Annual data has been used from 2005 to 2009 for all the
variables like, SENSEX, gross domestic product (GDP), Money supply, Labor
report, inflation.
Efficiency of the stock markets is one of the most researched topics in
financial economics. This project attempts to empirically study the relationship
between economic indicators with the stock market.
Since all the firms operate in a macro economy, the influence of the
economic factor in determining the investment performance cannot be ignored. The
interaction among the economic variables and stock market activities has been a
busy area of research over a long period of time.
In the Indian context there is no dearth of studies regarding determinants of
share prices in terms of economic activities. This project in this regard tries to find
the possible nexus between market liquidity of Bombay Stock Exchange (BSE) with
some very important economic variables namely consumer price index(CPI),
inflation, GDP, money supply (MY).

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CHAPTER-2
INTRODUCTION

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INTRODUCTION

The stock market is something that is greatly influenced by the state of the
economy. After all, it acts as a gauge to the economy. When a nation’s economy is
doing well, its stock market usually mirrors its economic growth. With this in mind,
understandingg the economy, or at least the basics, is important.
An economic indicator is in
simple terms, the official statistical
data of a certain economic factor
that are published periodically by
the government agencies, which an
investor can use to gauge the
economic
conomic situation. It allows
investors to analyze the past and
current situation and to project the
future prospects of the economy.
During a recession, when there are
lots of unemployed workers and
idle manufacturing capacity,
inflation was less of a concern. Thus, measures such as the consumer price index,
which gauges inflation and the retail level, do not have the same impact on the
financial markets as they would if the economy were operating at full speed. During
recessionary periods, indicators that
that grab the headlines are housing starts,
automobile sales, and the major stock indices because they often provide the earliest
clues that an economic recovery is imminent. Once business activities is in full
swing, inflation measures like the CPI take centre
centre stage again while other indicators
receive a bit to the background.
background

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There are certain times when the release of certain economic indicators is
awaited with great anticipation. However, those same indicators barely get noticed
at some other conditions.

We have observed the relationship between stock markets and different


categories of economic indicators such as:

Inflation is an increase in the price of a basket of goods and services that is


representative of the economy as a whole.

GDP: It’s a measure of Total Income, Output and Spending of the economy.

Labor market: The unemployment rate as a percentage of the total labour


force will basically indicate the country’s economic state.

Money Supply: The money supply is the amount of money floating around
the economy and available for spending.

All these economic indicators are pro-cyclic or Counter cyclic economic


indicators. A counter cyclic (or countercyclical) economic indicator is one that
moves in the opposite direction as the economy. A pro-cyclic indicator is one that
moves in the same direction as the economy. So, if the economy is doing well, this
number is usually increasing, whereas if we’re in a recession, this indicator is
decreasing.

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PROFILE OF CAPITAL MARKET

The capital market is the market for securities, where companies and
governments can raise long term funds. Selling stock and selling bonds are two
ways to generate capital and long
term funds. Thus bond markets
and stock markets are considered
capital markets.. The capital
markets consist of the primary
market, where new issues are
distributed to investors, and the
secondary market, where existing
securities are traded. The Indian
Equity Markets and the Indian
Debt markets together form the
Indian Capital markets
ts Indian
Equity Market at present is a
lucrative field for investors. Indian stocks are profitable not only for long and
medium-term
term investors but also the position traders, short-term
short term swing traders and
also very short term intra-day
intra traders. In India as on December 30 2007, market
capitalisation (BSE 500) at US$ 1638 billion was 150 per cent of GDP, matching
well with other emerging economies and selected matured markets. For a
developing economy like India, debt markets are crucial sources of capital funds.
fun
The debt market in India is amongst the largest in Asia. It includes government
securities, public sector undertakings, other government bodies, financial
institutions, banks and companies.
The Indian Capital Market is one of the oldest capital markets in Asia
which evolved around 200 years ago.

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FEATURES OF CAPITAL MARKET

Channelization of Funds: The primal role of the capital market is to


channelize investments from investors who have surplus funds to the ones who are
running a deficit. The capital market offers both long term and overnight funds.

Trading Platform: The primary role of the capital market is to raise long-
term funds for governments, banks, and corporations while providing a platform for
the trading of securities.

Ready & Continuous Market: Fund-raising in the capital market is


regulated by the performance of the stock and bond markets within the capital
market. The member organizations of the capital market may issue stocks and bonds
in order to raise funds. Investors can then invest in the capital market by purchasing
those stocks and bonds.

Regulation of the Capital Market: Every capital market in the world is


monitored by financial regulators and their respective governance organization. The
purpose of such regulation is to protect investors from fraud and deception.
Financial regulatory bodies are also charged with minimizing financial losses,
issuing licenses to financial service providers, and enforcing applicable laws.

The Capital Market’s Influence on International Trade: Capital market


investment is no longer confined to the boundaries of a single nation. Today’s
corporations and individuals are able, under some regulation, to invest in the capital
market of any country in the world. Investment in foreign capital markets has
caused substantial enhancement to the business of international trade.

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RISK INVOLVED IN CAPITAL MARKET


MARK

The capital market, however, is not without


risk. It is important for investors to understand
market trends before fully investing in the capital
market. Any investor should consider the following
factors of risk while investing
nvesting in the Capital
Markets: -

1. VOLATILITY RISK AND RISK


OF CONTAGIONS: High volatility is the
characteristic of any capital market, especially in
emerging markets. They are immature and
sometimes vulnerable to scandal. They often lack legal and judicial infrastructure to
enforce the
he law. Accounting disclosure, trading and settlement practices may at
times seem overly arbitrary and naïve. Against this backdrop, many emerging
markets have had to cope with unprecedented inflows and outflows of capital. The
sudden withdrawal of highly speculative, short-term
term capital has the potential of
taking with it much of a market's price support. Such sudden flights of capital
triggered by events in one emerging market can spread instantly to other markets
through contagion effects even when those markets have quite different conditions.

2. LIQUIDITY RISK: Many emerging markets are small and illiquid.


Volumes of trade are quite low. This kind of thin trading often leads to higher costs
because large transactions have a significant impact on the market.
market. Thus, buyers of
large blocks of shares may have to pay more to complete the transaction, and sellers
may receive a lower price.

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3. CLEARANCE AND SETTLEMENT RISK: Inadequate settlement


procedures still exist in many of the emerging markets. They lead to high FAIL
rates. A Fail occurs when a trade fails to settle on the settlement date.

4. POLITICAL RISK: In most of the developing countries the political


systems are less stable comparative to the developed countries. This scenario does
not give the political system to concentrate more on the capital market happenings
and restrict any kind of malfunctions or practices.

5. CURRENCY RISK: The trade in capital markets will be highly


impacted by the fluctuations in the foreign exchange rates. The currencies of the
emerging countries are not stable enough to compete with those of the developed
countries. This leads towards unexpected losses for the investors in the markets.

6. LIMITED DISCLOSURE AND INSUFFICIENT LEGAL


INFRASTRUCTURE: As it is already mentioned earlier that disclosure levels
will not be up to the required extent in emerging markets, the investors will not
have a bright picture of the company in which they are investing, and this may lead
towards losses.

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INDIAN CAPITAL MARKET

Financial regulators, such as the Reserve Bank of India & Securities &
Exchange Board of India {SEBI}, oversee the capital markets in their designated
jurisdictions to ensure that investors are protected against fraud, among other duties.
The Prime Minister of India Dr. Manmohan Singh, on the occasion of 125 years
celebrations of Bombay Stock Exchange {BSE} said, "Capital Markets are the
prerequisites to the health of the economy. Indian Capital Market has now begun to
transform rapidly in the past five years to offer world-class services to the
investors". A capital market can provide huge impetus to the development of any
economy, so it can be said that the growth and sustainability of capital markets
plays an important role towards the development of the economy. It is being
observed that huge fluctuations are happening in Indian Capital Market in recent
past, but with the help of proper mechanism, which is being observed in India and
after examining various risk factors involved in capital markets, we attempt to say
that the growth which has been observed in Indian Capital Market in recent past is a
realty, but not a myth. Right from the independence, thanks to steps initiated by the
Indian government especially after the post liberalization era. A huge growth has
been observed in the aspects of quality and quantity. Huge increase has been
observed in the volumes of trade. A steady and growing market size, reliable
business community, high levels of intellectual manpower, technological expertise
and a dedicated reform process that has brought about impressive economic
liberalization, has made India a very attractive destination for investments in capital
markets.

Emerging Capital Markets are financial markets that reside in the low or
middle income economies or where the ratio of investable market capitalization to
GNP is low. Such parameters to classify the financial market are set by the
International Finance Corporation.

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The emerging capital markets are characterized by derivative markets that


are small but organized.. There are organized exchanges where both options and
futures contracts are traded for agricultural products, metals, local foreign currency
and interest rate products.

The Emerging Capital Markets are segmented from the rest of the world.
This implies that different interest rates exist
exist for the same level of risk.

The net private capital flows to the emerging capital markets reached
r 3.5%
of GDP in 1995, remained strong till 1996 but witnessed a sharp fall by 1997.

Structure of Indian capital market

Equity market in India:-


India:

Stock is the type of equity security with which most people are familiar.
When investors (savers) buy stock, they become owners of a "share" of a company's
assets and earnings. If a company is successful, the price that investors are willing
to pay for its stock will often rise and shareholders who bought stock at a lower

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price then stand to make a capital profit. If a company does not do well, however,
its stock may decrease in value and shareholders can lose money. Stock prices are
also subject to both general economic and industry-specific market factors.

The equity market is classified as:-


(a) Primary market
(b) Secondary market

(a) Primary market:-

The primary market provides the channel for creation of new securities
through the issuance of financial instruments by public companies as well as
government companies, bodies and agencies.

(b) Secondary market:-

Secondary market is the market for buying and selling securities of the
existing companies. Under this, securities are traded after being initially offered to
the public in the primary market and/or listed on the stock exchange. The stock
exchanges are the exclusive centres for trading of securities. It is a sensitive
barometer and reflects the trends in the economy through fluctuations in the prices
of various securities. It been defined as, "a body of individuals, whether
incorporated or not, constituted for the purpose of assisting, regulating and
controlling the business of buying, selling and dealing in securities". There are 23
stock exchanges in India. Listing on stock exchanges enables the shareholders to
monitor the movement of the share prices in an effective manner. This assists those
to take prudent decisions on whether to retain their holdings or sell off or even
accumulate further. However, to list the securities on a stock exchange, the issuing
company has to go through set norms and procedures.

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Debt Market in India:-

For a developing economy like India, debt markets are crucial sources of
capital funds. The debt market in India is amongst the largest in Asia. It includes
government securities, public sector undertakings, other government bodies,
financial institutions, banks and companies. The debt market in India is divided into
three segments, viz., Government Securities, Public Sector Units (PSU) bonds, and
corporate securities. The market for Government Securities comprises the Centre,
State and State-sponsored securities. Government securities (G-secs) or gilts are
sovereign securities, which are issued by the Reserve Bank of India (RBI) on behalf
of the Government of India (GOI). The GOI uses these funds to meet its
expenditure commitments. The PSU bonds are generally treated as surrogates of
sovereign paper, sometimes due to explicit guarantee and often due to the comfort
of public ownership. Some of the PSU bonds are tax free, while most bonds
including government securities are not tax free. The RBI also issues tax-free
bonds, called the 6.5% RBI relief bonds, which is a popular category of tax-free
bonds in the market. Corporate bond markets comprise of commercial paper and
bonds. These bonds typically are structured to suit the requirements of investors and
the issuing corporate, and include a variety of tailor- made features with respect to
interest payments and redemption.

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List of Stock Exchanges in India

 Bombay Stock Exchange


 National Stock Exchange

Regional Stock Exchanges

 Ahmadabad Stock Exchange


 Bangalore Stock Exchange
 Bhubaneswar Stock Exchange
 Calcutta Stock Exchange
 Cochin Stock Exchange
 Coimbatore Stock Exchange
 Delhi Stock Exchange
 Guwahati Stock Exchange
 Hyderabad Stock Exchange
 Jaipur Stock Exchange
 Ludhiana Stock Exchange
 Madhya Pradesh Stock Exchange
 Madras Stock Exchange
 Magadh Stock Exchange
 Mangalore Stock Exchange
 Meerut Stock Exchange
 OTC Exchange Of India
 Pune Stock Exchange
 Saurashtra Kutch Stock Exchange
 Uttar Pradesh Stock Exchange
 Vadodara Stock Exchange

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Thus in a nutshell the following diagram explains what all is discussed above

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Chronology of the Indian capital markets

1830s: Trading of corporate shares and stocks in Bank and cotton Presses in
Bombay.

1850s: Sharp increase in the capital market brokers owing to the rapid
development of commercial enterprise.

1860-61: Outbreak of the American Civil War and ' Share Mania ' in
India.

1894: Formation of the Ahmadabad Shares and Stock Brokers


Association.

1908: Formation of the Calcutta Stock Exchange Association.

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The pattern of growth in the Indian capital markets in the post independence
regime can be analyzed from the following graphs.

Trend in the No: of Stock Exchanges in India


25

20
No: of Stock Exchanges

15

10

0
1946 1961 1971 1976 1981 1986 1991 1996

Years
From the above graph we find that the number of stock exchanges in India
increased at a crawling pace till 1980 but witnessed a sharp rise thereafter till 1995.

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The following diagram shows the trend in the no. of listed companies participating
in the Indian Capital Market. Here again we register a sharp rise after 1980.

Trend in the No: of Listed Companies in the Indian Capital Market


9000

8000

7000
No: of listed Companies

6000

5000

4000

3000

2000

1000

0
1951 1961 1971 1975 1980 1985 1991 1995

Years

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Trading Pattern in the Indian Capital Market

There are mainly two types of transactions that are carried out in the Indian
Capital Market, one is the spot delivery transactions and the other is the forward
delivery transactions. The role of the broker in the Indian Capital Market is to
facilitate the purchase or sale of securities and earn commission on each transaction.
(a) spot delivery transactions

For delivery and payment within the time or on the date stipulated when
entering into the contract which shall not be more than 14 days following the date of
the contract.

(b) Forward delivery transactions

Delivery and payment can be extended by further period of 14 days each so


that the overall period does not exceed 90 days from the date of the contract. The
latter is permitted only in the case of specified shares. The brokers who carry over
the outstanding pay carry over charges which are usually determined by the rates of
interest prevailing.

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The National Stock Exchange

To inject an international
standard to the Indian Stock Market the
National Stock Exchange was started in
1992 by the Industrial Development
Bank of India, Industrial Credit and
Investment Corporation of India,
Industrial Finance Corporation in
India, all Insurance Corporations and the selected commercial banks. The trading
members and the participants constitute the players in the national Stock Exchange.

The following are the advantages of the National Stock Exchange over the
traditional exchanges:
• The NSE basically integrates the stock market trading network across the nation.
• The investors have the freedom to trade from any part of the nation at the same
price.
• Greater operational efficiency and informational efficiency can wipe out the delays
in communication, late payments and the malpractices that are common in the
traditional trading grounds.

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The Bombay Stock Exchange Limited

It is the oldest stock exchange in Asia


and has the third largest number of listed
companies in the world, with 4700 listed as of
August 2007. It is located at Dalal Street,
Mumbai, India. On 31 December 2007, the
equity market capitalization of the companies
listed on the BSE was US$ 1.79 trillion,
making it the largest stock exchange in South
Asia and the 12th largest in the world.

With over 4700 Indian companies listed


& over 7700 scripts on the stock exchange, it
has a significant trading volume. The BSE SENSEX (SENSitive indEX), also called
the "BSE 30", is a widely used market index in India and Asia. Though many other
exchanges exist, BSE and the National Stock Exchange of India account for most of
the trading in shares in India.

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Hours of operation
Session Timing

Beginning of the Day Session 8:00 - 9:00

Trading Session 9:00 - 15:30

Position Transfer Session 15:30 - 15:50

Closing Session 15:50 - 16:05

Option Exercise Session 16:05 - 16:35

Margin Session 16:35 - 16:50

Query Session 16:50 - 17:35

End of Day Session 17:30

The hours of operation for the BSE quoted above are stated in terms of the
local time (i.e. GMT +5:30) in Mumbai (Bombay), India. BSE's normal trading
sessions are on all days of the week except Saturdays, Sundays and holidays
declared by the Exchange in advance.

History of BSE

The Bombay Stock Exchange is known as the oldest exchange in Asia. It


traces its history to the 1850s, when stockbrokers would gather under banyan trees
in front of Mumbai's Town Hall. The location of these meetings changed many
times, as the number of brokers constantly increased. The group eventually moved
to Dalal Street in 1874 and in 1875 became an official organization known as 'The
Native Share & Stock Brokers Association'. In 1956, the BSE became the first stock
exchange to be recognized by the Indian Government under the Securities Contracts
Regulation Act.

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The Bombay Stock Exchange developed the BSE Sensex in 1986, giving the
BSE a means to measure overall performance of the exchange. In 2000 the BSE
used this index to open its derivatives market, trading Sensex futures contracts. The
development of Sensex options along with equity derivatives followed in 2001 and
2002, expanding the BSE's trading platform. Historically an open-cry floor trading
exchange, the Bombay Stock Exchange switched to an electronic trading system in
1995. It took the exchange only fifty days to make this transition.

BSE indices

For the premier stock exchange that pioneered the securities transaction
business in India, over a century of experience is a proud achievement. A lot has
changed since 1875 when 318 persons by paying a then princely amount of Re. 1,
became members of what today is called Bombay Stock Exchange Limited (BSE).

Over the decades, the stock market in the country has passed through good
and bad periods. The journey in the 20th century has not been an easy one. Till the
decade of eighties, there was no measure or scale that could precisely measure the
various ups and downs in the Indian stock market. BSE, in 1986, came out with a
Stock Index-SENSEX- that subsequently became the barometer of the Indian stock
market.

The launch of SENSEX in 1986 was later followed up in January 1989 by


introduction of BSE National Index (Base: 1983-84 = 100). It comprised 100 stocks
listed at five major stock exchanges in India - Mumbai, Calcutta, Delhi, Ahmadabad
and Madras. The BSE National Index was renamed BSE-100 Index from October
14, 1996 and since then, it is being calculated taking into consideration only the
prices of stocks listed at BSE. BSE launched the dollar-linked version of BSE-100
index on May 22, 2006.

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With a view to provide a better representation of the increasing number of


listed companies, larger market capitalization and the new industry sectors, BSE
launched on 27th May, 1994 two new index series viz., the 'BSE-200' and the
'DOLLEX-200'. Since then, BSE has come a long way in attuning itself to the
varied needs of investors and market participants. In order to fulfil the need for still
broader, segment-specific and sector-specific indices, BSE has continuously been
increasing the range of its indices. BSE-500 Index and 5 sectorial indices were
launched in 1999. In 2001, BSE launched BSE-PSU Index, DOLLEX-30 and the
country's first free-float based index - the BSE TECk Index. Over the years, BSE
shifted all its indices to the free-float methodology (except BSE-PSU index).

BSE disseminates information on the Price-Earnings Ratio, the Price to Book


Value Ratio and the Dividend Yield Percentage on day-to-day basis of all its major
indices.

The values of all BSE indices are updated on real time basis during market
hours and displayed through the BOLT system, BSE website and news wire
agencies.

All BSE Indices are reviewed periodically by the BSE Index Committee.
This Committee which comprises eminent independent finance professionals frames
the broad policy guidelines for the development and maintenance of all BSE
indices. The BSE Index Cell carries out the day-to-day maintenance of all indices
and conducts research on development of new indices.

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Awards

• The World Council of Corporate Governance has awarded the Golden


Peacock Global CSR Award for BSE's initiatives in Corporate Social
Responsibility (CSR).
• The Annual Reports and Accounts of BSE for the year ended March 31,
2006 and March 31 2007 have been awarded the ICAI awards for excellence
in financial reporting.
• The Human Resource Management at BSE has won the Asia - Pacific HRM
awards for its efforts in employer branding through talent management at
work, health management at work and excellence in HR through technology

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SENSEX

The Sensex is supposed to be an indicator of the stocks in the BSE. Sensex is


calculated taking into consideration stock prices of 30 different companies quoted in
BSE. It is calculated using the “free-float market capitalization” method.

SENSEX Launched on full market capitalization method and September 01,


2003, calculation method shifted to free-float market capitalization.

Market capitalization

Market cap or market capitalization is simply the worth of a company in


terms of its shares! To put it in a simple way, if you were to buy all the shares of a
particular company, what is the amount you would have to pay? That amount is
called the “market capitalization”.

To calculate the market cap of a particular company, simply multiply the


“current share price” by the “number of shares issued by the company”! Just to give
an idea, ONGC, has a market cap of “Rs: 252386.96 Cr” (11/06/2010)

Depending on the value of the market cap, the company will either be a
“mid-cap” or “large-cap” or “small-cap” company
Free-float market capitalization

Many different types of investors hold the shares of a company. The Govt.
may hold some of the shares. Some of the shares may be held by the “founders” or
“directors” of the company. Some of the shares may be held by the FDI’s etc. only
the “open market” shares that are free for trading by anyone; these are called the
“free-float” shares. When we are calculating the Sensex, we are interested in these
“free-float” shares. A particular company may have certain shares in the open
market and certain shares that are not available for trading in the open market.

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According the BSE, any shares that DO NOT fall under the following
criteria, can be considered to be open market shares:

• Holdings by founders/directors/ acquirers which has control element


• Holdings by persons/ bodies with "controlling interest"
• Government holding as promoter/acquirer
• Holdings through the FDI Route
• Strategic stakes by private corporate bodies/ individuals
• Equity held by associate/group companies (cross-holdings)
• Equity held by employee welfare trusts
• Locked-in shares and shares which would not be sold in the open market
in normal course.

A company has to submit a complete report about “who has how many of the
company’s shares” to the BSE. On the basis of this, the BSE will decide the “free-
float factor” of the company. The “free-float factor” is a very valuable number! If
you multiply the "free-float factor" with the “market cap” of that company, you will
get the “free-float market cap” which is the value of the shares of the company in
the open market.

Steps to calculate the SENSEX

First: Find out the “free-float market cap” of all the 30 companies that make
up the Sensex.

Second: Add all the free-float market caps’ of all the 30 companies.

Third: Make all this relative to the Sensex base. The value you get is the
Sensex value.

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Suppose, for a “free-float market cap” of Rs.100,000 Cr... The Sensex point
is 4000…

Then, for a “free-float market cap” of Rs.150,000 Cr... The Sensex value will be...

100,000 ܿ‫ ݎ‬150,000 cr
=
4000 6000

So, the Sensex point will be 6000 if the “free-float market cap” comes to
Rs.150,000 Cr. The Sensex was 17064.95point when free-float market
capitalization 1,329,153.10 Cr (11/06/2010).

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The table showing five years Opening, High, Low, Closing


SENSEX Points
Year Open High Low Closing
2005 5,872.48 6,617.15 4,227.50 6,602.69
2006 9,422.49 14,035.30 8,799.01 13,786.91
2007 13,827.77 20,498.11 12,316.10 20,286.99
2008 20,325.27 21,206.77 7,697.39 9,647.31
2009 9,720.55 17,493.17 8047.17 17,464. 81

Graph showing that movements of Sensex in five years period

Candle Stick Chart


25,000.00

20,000.00

15,000.00
SENSEX Points

10,000.00

5,000.00

0.00
2005 2006 2007 2008 2009
Open 5,872.48 9,422.49 13,827.77 20,325.27 9,720.55
High 6,617.15 14,035.30 20,498.11 21,206.77 17,493
Low 4,227.50 8,799.01 12,316.10 7,697.39 8047.17
Closing 6,602.69 13,786.91 20,286.99 9,647.31 14493.84

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The SENSEX includes the following 30 companies. Beta and Returns of


SENSEX (May 2010)

Free-float
Sl Beta Market Value as Adj.Factor as
No: Company Values on 22/06/2010 on 31/05/10
1 JAIPRAKASH ASSOCIATES LIMITED 1.84 130.4 0.55
2 HINDALCO INDUSTRIES LTD 1.74 151.35 0.7
3 DLF LIMITED 1.72 287.85 0.25
4 TATA STEEL LIMITED. 1.68 494.25 0.7
5 RELIANCE INFRASTRUCTURE LTD 1.48 1,173.65 0.6
6 STERLITE INDUSTRIES. 1.47 178.75 0.45
7 TATA MOTORS LTD. 1.47 798.05 0.65
8 ICICI BANK LTD. 1.43 893.15 1
9 RELIANCE COMMUNICATIONS LTD. 1.29 186 0.35
10 MAHINDRA & MAHINDRA LTD 1.22 632.9 0.75
11 JINDAL STEEL & POWER LTD 1.16 671.95 0.45
12 STATE BANK OF INDIA 1.16 2,354.85 0.45
13 LARSEN & TOUBRO LTD. 1.14 1,821.20 0.9
14 RELIANCE INDUSTRIES LTD. 1.1 1,063.65 0.55
HOUSING DEVELOPMENT FIN.
15 CORPN. LTD 0.98 2,981.70 0.9
16 ACC LTD. 0.92 860.8 0.55
BHARAT HEAVY ELECTRICALS
17 LTD. 0.8 2,433.95 0.35
18 TATA POWER CO. LTD. 0.8 1,319.60 0.7
19 MARUTI SUZUKI INDIA LIMITED 0.79 1,369.35 0.5
TATA CONSULTANCY SERVICES
20 LIMITED 0.78 779.8 0.3
21 WIPRO LTD. 0.77 407.1 0.2
22 ONGC CORPN 0.7 1,197.90 0.2
23 HDFC BANK LTD 0.69 1,987.70 0.8
24 ITC LTD. 0.68 301.95 0.7
25 INFOSYS TECHNOLOGIES LTD. 0.67 2,768.10 0.85
26 HERO HONDA MOTORS LTD. 0.66 2,019.80 0.5
27 NTPC LTD. 0.61 199.5 0.2
28 BHARTI AIRTEL LTD. 0.6 261.95 0.35
29 HINDUSTAN UNILEVER LTD. 0.42 262 0.5
30 CIPLA LTD 0.4 336.45 0.65

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Profile of Economic Indicators


An economic indicator is a statistic about the economy. Economic indicators
allow analysis of economic performance and predictions of future performance. One
application of economic indicator is the study of business cycle.
Economic indicators include various
indices, earnings reports, and economic
summaries. Examples: unemployment
rate, quits rate, housing starts, Consumer
Price Index (a measure for inflation),
Consumer Leverage Ratio, industrial
production, bankruptcies, Gross Domestic
Product, broadband internet penetration,
retail sales, stock market prices, money
supply changes.
An economic indicator is simply any economic statistic, such as the unemployment
rate, GDP, or the inflation rate, which indicate how well the economy is doing and
how well the economy is going to do in the future. "How Markets Use Information
to Set Prices?" investors use all the information at their disposal to make decisions.
If a set of economic indicators suggest that the economy is going to do better or
worse in the future than they had previously expected, they may decide to change
their investing strategy.
An economic indicator is in simple terms, the official statistical data of a certain
economic factor that are published periodically by the government agencies, which
an investor can use to gauge the economic situation. It allows investors to analyze
the past and current situation and to project the future prospects of the economy.

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Three Attributes of Economic Indicators


1. Relation to the Business Cycle / Economy
Economic Indicators can have one of three different relationships to the
economy:
1. Pro cyclic: A pro-cyclic (or pro-cyclical) economic indicator is one
that moves in the same direction as the economy. So if the economy is
doing well, this number is usually increasing, whereas if we're in a
recession this indicator is decreasing. The Gross Domestic Product
(GDP) is an example of a pro-cyclic economic indicator.
2. Counter cyclic: A counter-cyclic (or countercyclical) economic
indicator is one that moves in the opposite direction as the economy.
The unemployment rate gets larger as the economy gets worse so it is
a counter-cyclic economic indicator.
3. Acyclic: These indicators are those with little or no correlation to the
business cycle: they may rise or fall when the general economy is
doing well, and may rise or fall when it is not doing well. The number
of home runs the Montreal Expos hit in a year generally has no
relationship to the health of the economy, so we could say it is an
acyclic economic indicator.
2. Frequency of the Data
In most countries GDP figures are released quarterly (every three months) while the
unemployment rate is released monthly. Some economic indicators, such as the
Dow Jones Index, are available immediately and change every minute.
3. Timing
Economic Indicators can be leading, lagging, or coincident which indicates the
timing of their changes relative to how the economy as a whole changes.

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Three Timing Types of Economic Indicators

• Leading indicators are indicators that usually change before the economy as
a whole changes. They are therefore useful as short-term predictors of the
economy. Stock market returns are a leading indicator: the stock market
usually begins to decline before the economy as a whole declines and usually
begins to improve before the general economy begins to recover from a
slump.
• Lagging indicators are indicators that usually change after the economy as a
whole does. Typically the lag is a few quarters of a year. The unemployment
rate is a lagging indicator: employment tends to increase two or three
quarters after an upturn in the general economy.
• Coincident indicators are those which change at approximately the same
time as the whole economy, thereby providing information about the current
state of the economy. Personal income, GDP, industrial production and retail
sales are coincident indicators. A coincident index may be used to identify,
after the fact, the dates of peaks and troughs in the business cycle.
Economic indicators can have a huge impact on the market;
therefore, knowing how to interpret and analyze them is important for all investors.
India economic indicators are important as they provide an accurate account of state
Indian economy at various points of time. There are various types of Indian
economic indicators that deal with different periods of time and there are others that
deal with separate administrative divisions like states for example. They are
important in context of analyzing Indian economy.

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ECONOMIC INDICATORS
Gross Domestic Product of India
The growth of an economy is measured in terms of an increase in the size of
a nation’s economy. A broad measure of an economy’s size is its output. The most
widely-used measure of economic output is the Gross Domestic Product,
abbreviated GDP.
GDP is generally defined as the market value of the goods and services
produced by a country. It is one of the primary indicators used to gauge the health
of a country’s economy. Strictly defined, GDP is the sum of the market values, or
prices, of all final goods and services produced in an economy during a period of
time. In short, everything produced by all the companies and all the people in a
given country

There are three important concepts to note with regard to this definition:

• GDP is a number that expresses the worth of the output of a country in local
currency.

• GDP tries to capture all final goods and services as long as they are produced
within the country, thereby assuring that the final monetary value of everything that
is created in the country is represented in the GDP.

• GDP is calculated for a specific period of time, usually a year or a quarter of a


year.

While there are many ways to calculate GDP, the most common approach to
measuring and understanding GDP is the expenditure method:

GDP = consumption + investment + (government spending) + (exports –


imports)

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Usually, GDP is expressed as a comparison to the previous quarter or year.


For example, if the year-to-year GDP is up 3%, this is thought to mean that the
economy has grown by 3% over the last year.

As you can imagine, economic production and growth, what GDP represents,
has a large impact on nearly everyone within that economy. For example, when the
economy is healthy, you will typically see low unemployment and wage increases
as businesses demand labor to meet the growing economy. A significant change in
GDP, whether up or down, usually has a significant effect on the stock market: a
bad economy usually means lower profits for companies, which in turn means lower
stock prices. Investors really worry about negative GDP growth, which is one of the
factors economists use to determine whether an economy is in a recession.

When compared to the previous year's reading, the difference between these
two readings indicates whether a country's economy is growing or contracting. GDP
is usually published quarterly. It is measured by either adding all of the income
earned in an economy, or by all the spending in an economy. Both measures should
be roughly equal.

When the GDP is positive, the overall stock market will react positively as
there will be a boost in investor confidence, encouraging them to invest more in the
stock market. This will in turn boost the performances of companies.

When the GDP contracts, consumers tread cautiously and reduce their
spending. This in turn will affect the performance of companies negatively, thus
exerting more downward pressure on the stock market.

Gross domestic income includes wages and salaries, corporate profits,


interest collected by lenders, and taxes collected by governments. GDP domestic
expenditures includes consumer spending, housing investment, government

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spending, business spending (investment in factories, equipment, and inventory), as


well as foreign spending on our exports minus our spending on their imports. With
so many individual components affecting GDP (and through the output gap,
inflation) you can see how easy it is for the number of economic reports to
mushroom.

GDP affects the stock market through its effect on inflation, as well as
through its use a key indicator of economic activity and future economic prospects
by investors. Any significant change in the GDP, either up or down, can have a
major effect on investing sentiment. If investors believe the economy is improving
(and corporate earnings along with it) they are more likely to pay more for a given
stock. If there is a decline in GDP (or investors expect a decline) they would be
willing to pay less for a given stock, leading to a decline in the stock market.

The stock market itself exerts a reverse effect on economic activity, the so-
called “wealth effect”. This theory says that a fall in the stock market makes
individual’s personal wealth (or perceived wealth) fall. They consequently stop
spending as much, and since consumer spending represents around two-thirds of
GDP, a small change in consumption exerts a significant effect on GDP. This
means that as the stock market falls, GDP also falls, which just further intensifies
the downward pressure on the stock market.

According to official information of financial year 2007, gross domestic


product of India, with regard to purchasing power parity, was $2.996 trillion and,
with regard to official exchange rate, it was $1.099 trillion. In financial year 2007,
gross domestic product of India had experienced a real growth rate of 9 percent.

In financial year 2007, per capita gross domestic product of India, with
respect to purchasing power parity, was $2,600. As of financial year 2007, 17.8
percent of India's gross domestic product was contributed by agricultural sector and

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29.4 percent came from industrial sector. Services sector made maximum
contribution of 52.8 percent in that financial year.

Strengths:

• GDP is considered the broadest indicator of economic output and growth.

• Real GDP takes inflation into account, allowing for comparisons against other
historical time periods.

• The Bureau of Economic Analysis issues its own analysis document with each
GDP release, which is a great investor tool for analyzing figures and trends, and
reading highlights of the very lengthy full release.

Weaknesses:

• Data is not very timely - it is only released quarterly.

• Revisions can change historical figures measurably (the difference between 3%


and 3.5% GDP growth is a big one in terms of monetary policy)

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Inflation

Inflation is an increase in the price of a basket of goods and services that is


representative of the economy as a whole.

Inflation is important for all investments, simply because it determines the


real rate of return that you get from your investment. For instance, if the inflation
rate is 5 per cent and the nominal return is 8 per cent, this means that your real rate
of return is 3 per cent as the 5 per cent has been eaten by inflation.

Inflation's impact on the stock market is even more complicated. A


company's profit will be affected by higher inflation. Its input cost will increase and
the impact of the increase will depend on how much of the incremental cost the
company is able to pass on to its consumers. The amount that the company will
have to absorb will reduce its profits, assuming all else being equal.

The stock market will suffer further negative impact if it is accompanied by


increased interest rates as the bond market is seen as a cheaper investment vehicle
compared to stocks. When this happens, investors will sell off their stocks to invest
in bonds instead.

The most commonly used indicator for the measurement of inflation is


consumer price index (CPI). It consists of a basket of goods and services commonly
purchased by consumers, such as food, housing, clothes, transportation, medical
care and entertainment.

The total value of this basket of goods and services will be compared with
the value of the previous year and the percentage increase will be the inflation rate.
On the other hand, where the value drops, it will be a deflation rate. A steady or
decreasing trend will be favorable to the overall stock market performance.

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Inflation is a significant indicator for securities markets because it


determines how much of the real value of an investment is being lost, and the rate of
return you need to compensate for that erosion. For example, if inflation is at 3%
this year, and your investment also increases by 3%, in real terms you have just
managed to stay even. And to take on market risk, most individuals require a “risk
premium” above and beyond the inflation rate. So investors who buy stocks do so
expecting they will get a return equal to (or better than) that risk premium adjusted
by the inflation rate. So the higher the inflation rate, the higher nominal return is
needed for a stock price to remain the same.

But the effect inflation has on the stock market is even more complicated
than that. The main impact of inflation on stock prices actually comes from the
effect it has on a company’s earnings. Low inflation keeps a company’s costs
down, and increases profits. So all other things being equal, (a favorite phrase of all
economists), low inflation is better for the market than high inflation.

There are many causes of inflation. From a supply-demand standpoint, it can


be due to increased demand for a particular product, from an increase in a
company’s cost of supplies, or from limited supplies (like OPEC members
restricting oil supplies), or even just due to fear that supplies might be limited at
some point in the future. But the single most important determinant of inflation is
the output gap, which is the balance between supply and demand in the economy.

The output gap measures the difference between the economy’s potential,
where all capital and labor resources are in use, and the actual level of output.
When actual output is below its potential, inflation should be low because excess
workers and unused plant and equipment are available. The actual level of output is
easy to get, and is measured by GDP. But potential output is harder to get,
requiring estimates to determine its value. So while the output gap is important to

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always keep in mind when interpreting economic data, its exact amount is never
known. For that reason it is not a realistic indicator for investors to use, and why a
proxy is required, with the Consumer Price Index (CPI) the most widely followed
measure of inflation.

The Labor Department issues a CPI figure every month, measuring the
increase in the price of a given "basket" of goods and services purchased by the
average consumer.

That basket supposedly includes a number of items commonly purchased by


all or most consumers, such as food, housing, clothes, transportation, medical care,
and entertainment. The total value of that basket is then compared to the same
basket of goods a year later. The percentage increase in the price for these goods in
one year is the inflation rate (or if the value drops, like in Japan recently, the
deflation rate). That measured percentage, for instance 3%, means that in general
the basic necessities of life cost 3% more today than they did last year.

There are of course some problems with this measure as well. For one thing,
the products rarely remain exactly the same, and it is difficult to strip out how much
of an increase is due to inflation, and how much is due to other factors such as
improvements in quality. Also, the composition of what people buy changes over
time. In fact, many of the goods now included were not even invented 20 or 30
years ago. Still, it is the best proxy currently available, and at least in the short- to
medium-term, is the number that investors focus on when making their decisions.

Rate of inflation in India is an important economic indicator. As of financial


year 2008, projected rate of inflation in India is lower than financial year 2007,
when an inflation rate of 5.77 percent had been predicted. As per wholesale price
index, rate of inflation in India was 8.75 percent in 2007.

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Inflation: The Real Culprit… and Its Effect on the Stock Market

There have been many times in the past when strong economic performance
propelled higher stock prices. The 1920s, the 1950s and the 1980s are classic
examples. In the Reagan years, stocks and bonds rallied sharply in response to
higher economic growth rates and job creation.

In principle, the stock market should do well under conditions of strong


economic growth and low inflation.
Ah, and there’s the rub: inflation!

If inflation is a growing problem, investment analysts become suspicious of


high economic growth or good job reports. Why? Because they fear that it reflects
an inflationary boom, an artificial recovery created primarily by “easy credit” by the
government, due to high federal deficits and an expanding money supply.

Under inflationary conditions, analysts do not think strong job creation and
economic growth are sustainable, and the stock market falls in price because they
think that the Fed will need to tighten in the future.

Or if economic growth falls, they think the Fed will ease in the future, and
stocks rally.

To a large extent, the issue hinges on the relevance of the Fed in the
economy, whether the Federal Reserve engages in “easy” or “tight” money.

Strengths:

• Gives most insight into future Fed rate moves

• Highly watched and analyzed in the media

• Good regional and industry breakdowns for investor research

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Weaknesses:

• Volatile month to month

• Fixed CPI has certain biases (new product, substitution), which can distort
results

• Exclusion of food and energy is only good for so long - these costs should
be considered when assessing inflation

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Labor market

The unemployment rate as a percentage of the total labor force will basically
indicate the country’s economic state. During an economic meltdown, most
companies will either freeze hiring or, in more severe cases downsize, by alleviating
cost and reducing capacity. When this happens, the unemployment rate will
increase, which in turn, creates a negative impact on the market sentiment.

The final major factor influencing the economy is the labor market. The key
indicators most investors focus on are total employment and the unemployment
rate. US citizens who are already working represent the employed, while those who
are actively looking for work, but haven’t found it yet, are the unemployed. The
unemployment rate does not include people without jobs who are not looking for
jobs, such a retirees or just people who are discouraged and have given up trying to
find a job.

The Employment Report provides both the employment and unemployment


numbers. There is always some unemployment. As the allocation of resources
change in the economy, based on what people are buying, some companies go out
of business while others that produce the things now in demand will be expanding.
This causes a flow of labor from losing to winning industries, and it is not an
instantaneous process. Others may leave their jobs by choice. This means there is
always some amount of unemployment built into our economic structure, what is
often termed the “natural” level of unemployment.

The natural level of unemployment is that point where any drop below that
figure creates conditions that will drive up inflation. There is always some
disagreement as to what the “natural” level of unemployment is for the US
economy. For one thing, it changes over time as the nature of the economy

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changes. For most of the 1980’s, it was often estimated at about 6%, although most
economists now feel it is probably around 5%, or even the high 4’s.

What might cause this kind of change? A paper a couple years ago from the
Brookings Institute cited some factors that they estimated have reduced the natural
rate by about 1%. Accounting for about 0.4% is the aging of the population; older
people tend to be more fully employed. The growth of temporary staffing firms that
rapidly match job-seekers with employers could account for 0.2-0.4%. Finally, the
doubling of the prison population probably accounts for about 0.2%, by removing
from the labor force people who are less likely to be employed.

Strengths

As one of the most widely watched reports, the Employment Situation Report
gets a lot of press and can move the markets.

• Summary analysis provided by the BLS (top link on the site) on the top-
level release of an already detail-rich report.

• Relates to investors on a personal level; everyone understands having a job


or looking for work.

• Services industries are covered here - it is hard to find good indicator


coverage of service-based businesses.

Weaknesses

• Summer and other seasonal employment tends to skew the results.

• Only measures whether people are working; it does not take into account
whether these are jobs the people wish to have, or whether they are well-suited to
workers' skills.

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• Volatile; revisions can be quite large, and updates should always be viewed
in the most recent report.

• Unemployment and payroll figures can seem to be out of alignment, as they


are derived from two different surveys.

• Compensation costs portion is considered inferior to the Employment Cost


Index.

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Money supply

The Reserve Bank of India defines the monetary aggregates as:

• Reserve Money (M0): Currency in circulation + Bankers’ deposits with the


RBI + ‘Other’ deposits with the RBI = Net RBI credit to the Government +
RBI credit to the commercial sector + RBI’s claims on banks + RBI’s net
foreign assets + Government’s currency liabilities to the public – RBI’s net
non-monetary liabilities.
• M1: Currency with the public + Deposit money of the public (Demand
deposits with the banking system + ‘Other’ deposits with the RBI).
• M2: M1 + Savings deposits with Post office savings banks.
• M3: M1+ Time deposits with the banking system = Net bank credit to the
Government + Bank credit to the commercial sector + Net foreign exchange
assets of the banking sector + Government’s currency liabilities to the public
– Net non-monetary liabilities of the banking sector (Other than Time
Deposits).
• M4: M3 + All deposits with post office savings banks (excluding National
Savings Certificates).

Businesses are prone to the forces of the economy and business cycles are
unavoidable. However, as our understanding of economics improves the severity of
business cycles has been reduced by taking steps to counter the downturn in the
economy. Of the many steps taken the one that is of the most interest to the stock
markets is the change in monetary policy. In this project we look at the impact of
the change in money supply (as a proxy for change in monetary policy) on the stock
markets.

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Few basics

The central bank’s job in a country is to ensure the stability of the currency
and ensure the right kind of an environment for economic growth. For example, the

Reserve Bank of India’s objective is:

"…to regulate the issue of Bank Notes and keeping of reserves with a view to
securing monetary stability in India and generally to operate the currency and
credit system of the country to its advantage." Source: RBI website.

Households keep their saving with a bank and this money is made available
to the industry through a banking system of a country, with the central bank at the
helm. Thus, the banks act as financial intermediaries. A part of the money that is
deposited has to be kept as a reserve with the central bank, RBI in India’s case. The
remaining part is given out as loans or is parked in other financial instruments.

The central bank using the reserves as input prints currency notes i.e.
supplies money. The process of creation of money using the deposits is known as
multiple expansions of bank deposits. Suppose an investor deposits Rs 100 in a
savings account. Of this Rs 10 (10%) has to be kept as reserve with the central bank
and the remaining Rs 90 can be given out as loans. The bank loans the amount to a
company wanting to start an industrial venture. The company receiving the loan
puts the money into another bank account. The second bank has to keep Rs 9 as
reserve and give out Rs 91. This process continues. Thus, we find that at a reserve
requirement of 10% every rupee deposited can support demand deposits of Rs 10.
The ratio of the new deposit to the increase in reserve is known as the money supply
multiplier. The central banks print currency accordingly. If a deposit creates money,
withdrawal of deposits has the reverse effect that is to remove money from the
system.

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The central banks control the flow of money in the financial system through
the monetary policy. The tools used for implementing the monetary policy are:
a. Open market operations
b. Interest rates
c. Reserve ratio

The higher the reserve ratio, higher amount of money, the commercial banks
will have to hold with the central bank and thus, the money available to the industry
will be lower. Also, the central bank buys and sells government securities (G-secs),
which are known as the open market operations. If the central bank sells G-secs,
deposits will be withdrawn from the banking system to buy these instruments and
this will in turn reduce the liquidity. On the other hand, if it buys back G-secs, it
will increase the liquidity in the system. Finally the banks borrow from the central
bank when they face shortage of reserves. By altering the rate at which the central
bank lends out the liquidity in the systems can be controlled.

If banks can borrow at lower rates then they can lend out to industries at
lower rates also. Thus, the cost of capital becomes cheaper. Depending on the
economic environment central banks follow tight money or cheap money policy.
When the economy is growing a multiplier effect comes into play. Expectations of
future growth propel investments, which in turn drive employment and higher
employment results into increased spending. However, increased spending could
cause the risk of inflation. Thus, by limiting the availability of money or making it
dearer, the central bank steers the economy away from inflation.

The central bank of a country tries to counter the weak economy by reducing
the cost of one of the most important inputs for business - money. By effectively
increasing the money supply into a country’s financial system, the availability of

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capital is made cheaper with the hope that investments in business becomes more
lucrative and investments begin to take place.

Strengths:

• A timely and consistent indicator, released weekly and with a long operating
history.

• It is often misunderstood by investors, creating opportunities for those who


know how to use it.

• There is a lot of existing research on the relationship between money supply


and GDP growth as well as inflation.

Weaknesses:

• Rarely a mover of the markets in the short term.

• Limited breakdowns available in the weekly release; the quarterly Flow of


Funds report provides a broader view.

• Lack of economic consensus on how to best compare money supply levels to


inflationary outlook and future spending patterns

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Chapter 3

Statement of the Problem

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Statement of the problem

This study is carried primarily to find the impact of economic indicators on


BSE. The investor’s perception towards investments in stock markets is in
increasing trend and to understand the role of economic indicators on the variables
of stock market, the study is being carried out.

Review of literature

A study conducted by Chen (1986) finds that industrial production changes


in risk premium, etc., are positively related to the expected stock return while
inflation is negatively related to the same.

Solnic (1983) and Marshall (1992) report a significant positive relationship


between share prices and some money variables. Several researches have been
carried out in this context in different stock exchanges all over the world. These
studies reveal a mixed bag of results.

In another study, Omran (2003) investigates the relationship between real


interest rate and stock market activity and finds a positive linkage between real
interest rate and stock market liquidity.

Need and importance of the study

The stock market in India existed for a well over a century now; its
importance in the mobilization, allocation and efficient use of scarce investment
recourses has not been recognized until the last decade. Volatility of security price
has important implications for firm’s investment and financial decisions, valuations
and investors sentiments. This fluctuation is caused by many factors of them are
economic indicators. Hence analysis of economic indicators and its impact on stock
market is the topic of this dissertation.

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Objectives

Primary objectives

• Analysis of the economic indicators and relating its impact on Sensex.

Secondary objectives

 To analyze the performance of shares in SENSEX.

 To understand the various types of economic indicators.

 To measure the popularity of leading stocks.

 To get in depth, to know how the economic indicators impact on BSE.

 To summarize and conclude on the study.

Limitations of the study

The following are the limitations of the study.

• The study covers only few economic indicators and their impact on BSE.
• The data available for the study may be subject to changes in future.
• The study is limited only to BSE.
• The study is considered only the yearly closing indexes from BSE.

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CHAPTER-4
METHODOLOGY

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RESEARCH METHODOLOGY
Title of the study:
“An analysis of economic indicators and its impact on stock market”
Methodology

Methodology refers to the systematic procedure carried out in any work or


research study. It shows the suitable classifications and sequence of the different
stages of the study.

This study is basically an exploratory research. Exploratory research is a


study undertaken to define nature of problem and opportunity and to gain a better
understanding of the environment within which the problem and opportunity has
occurred.

Type of research

The respondents forming the part of the primary data are the agents who
work in the company. The research plan calls for gathering secondary data, primary
data or both

Secondary data

Secondary data consists of information that already exists somewhere having


been collected for other purpose. on the other hand include those data, which are
collected for some earlier research work and are used in the study researcher was
presently undertaken sources of secondary data.

Sources of secondary data


 Magazines
 News Papers
 Journals
 Website

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 Text books
 Other articles

Research design:

“A research design is the arrangements of conditions for collection and


analysis of data in a manner that aims to combine relevance to the research purpose
with economy in procedure.”

A Research design is a method and procedure for acquiring information is


needed to solve the problem. A research design is the basic plan that helps in the
data collection or analysis. It specifies the type of information to be collected the
sources and data collection procedure.

It is similar to architect’s blue print to build a house.


Data collection

Information has been collected in an unstructured manner. Data collection


was done through interviews of the expert opinion, educationists, stock broker
dealers and other related persons.

Plan of analysis
Analysis will be conducted on the five years data of the economic indicators
namely
 consumer price index
 gross domestic product
 unemployment rate
 money supply
 Stock market price (Sensex).
We use graphic method to analyze the impact of above indicators on capital
market

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CHAPTER-5
Presentation, Analysis of Data and
Interpretation

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Presentation, Analysis of data and Interpretation

Hypothesis

There is a positive relationship between the economic indicators and the


stock markets.

Analysis

Gross Domestic Product (GDP)

The gross domestic product (GDP) is the godfather of the indicator world. As
an aggregate measure of total economic production for a country, GDP represents
the market value of all goods and services produced by the economy during the
period measured, including personal consumption, government purchases, private
inventories, paid-in construction costs and the foreign trade balance (exports are
added, imports are subtracted). Presented only quarterly, GDP is most often
presented on an annualized percent basis. Most of the individual data sets will also
be given in real terms, meaning that the data is adjusted for price changes, and is
therefore net of inflation. The GDP is an extremely comprehensive and detailed
report. As GDP incorporates many of them, retail sales, personal consumption and
wholesale inventories are all used to help calculate the gross domestic product.

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Table showing Index of BSE and the GDP of six years

YEAR SENSEX GDP (%)

2004--2005 6,602.69 7.5

2005--2006 9,397.93 9.5

2006--2007 13,786.91 9.6

2007--2008 20,286.99 9.0

2008--2009 9,647.31 6.7

2009--2010 14493.84 6.8


(Table 5.1)

Sensex: it consists of the closing prices of the every year end


GDP: this consists of the GDP @ factor cost at constant price.

Graph showing the relationship of the stock prices of BSE and GDP 5.1
25,000.00

20,000.00

15,000.00

10,000.00 BSE
GDP
5,000.00

0.00

There is a positive relationship between the GDP and the stock market
prices. Whenever there is an
a increase in the GDP there is an increase in the stock
prices.

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Impact on the market

If we trace the period between 1995 -2004, the CAGR (Compounded Annual
Growth Rate) of real GDP and the BSE sensex shows a high degree of correlation,
while real GDP has grown at 6.1 per cent, sensex has also posted similar gains.
However, if we analyze the data more deeply, year-on-year examination gives a
different picture. The outcome of this examination shows that though real GDP has
shown a steady growth under the period of study, BSE sensex has been very volatile
during the entire period. On year-on-year basis there seems to be no sync between
the two factors.

However, if one tends to consider growth in nominal GDP and corporate


performance at the top-level, there it seems to be high degree of correlation. This is
on account of the fact that GDP is aggregate of output of agriculture, industrial and
services sector.

If we look at the trend, stock markets are not always guided by fundamentals
but also by sentiments. For instance, lowering of interest rates by the RBI (like until
2004) typically has an impact on the economy with a lag. But the signal that the
RBI is reducing interest rates may prop up stock markets immediately and stock
prices may react much faster.

However, in the present period there is a change in the trend, due to the fact
that Indian economy is now more integrated with global world than before. At
worldwide level capital markets evince attributes of perfect market with no or
acceptable entry barriers, large number of buyers and sellers, absence of, or very
low, transaction costs, tax parity and free trading.

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Labor Report

The Employment Situation Report, also known as the Labor Report, is an


extremely broad-based indicator released by the Bureau of Labor Statistics (BLS). It
is made up two separate and equally important surveys. The first, the "establishment
survey", is a sampling of more than 400,000 businesses across the country. It is the
most comprehensive labor report available, covering about one-third of all non-farm
workers nationwide, and presents final statistics including non-farm payrolls, hours
worked and hourly earnings. The data sample is both large and deep, with breakouts
covering more than 500 industries and hundreds of metropolitan areas. The second
survey, referred to as the "household survey", measures results from more than
60,000 households and produces a figure representing the total number of
individuals out of work, and from that the national unemployment rate. Both sets of
survey results will show the change from the previous month, and also year over
year, as tendencies are very important with this often volatile statistic.

The payroll figures from the establishment report are considered a coincident
indicator. The establishment report is larger, and theoretically more accurate, but
excludes private households, the self-employed and the agricultural, as people tend
to be out of work when problems in the economy have already manifested
themselves in falling economic output (less workers, less GDP) sector. The
household report runs on a smaller sample and may be more subjective, but the
inclusion of self-employed workers, for example, can make this figure more
valuable in a time when many people are starting their own business (as often
happens in the beginning of a new business cycle) Average weekly hours for the
manufacturing sector, as presented in the establishment report, is a leading
indicator. The unemployment figures from the household report (which is probably
the most watched metric of the release after non-farm payrolls) are considered a
lagging indicator.

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Table
le showing the SENSEX and the Unemployment
employment rate of six years

Year SENSEX UNEMPLOMENT RATE (%)

2004-2005 6,602.69 9.5

2005-2006 9,397.93 9.2

2006-2007 13,786.91 8.9

2007-2008 20,286.99 7.8

2008-2009 9,647.31 7.2

2009-2010 14493.84 6.8


(Table 5.2)

BSE: it consists of the closing prices of the every year end


Unemployment Rate: this consists of the unemployment rate in the each year

Graph showing the relationship of the stock prices of BSE and Unemployment rate
of six years 5.2
25,000.00

20,000.00

15,000.00

10,000.00 BSE

5,000.00
UNEMPLOMENT RATE

0.00

There is an inverse relationship between the two variables. Whenever the


unemployment is decrease there is an
a increase in the stock prices.

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Impact on the markets:


Interest Rates: Larger-than-expected monthly fall in the unemployment
rate is considered inflationary causing interest rates to rise. The bond market views
an increase unemployment rate favorably especially when the economy is close to
full capacity and the unemployment rate is close to its "natural rate". A falling
unemployment rate also makes it more likely that the Fed will increase the Fed
Funds rate that is also bearish for the bond market.

Stock Prices: Ambiguous. First, lower unemployment rate signals a strong


economy, higher potential profits and that's good for the stock market. Second,
lower unemployment may increase expected inflation and lead to higher interest
rates that are bad for the stock market. Third, lower unemployment rate may lead to
higher wage inflation that is bearish for the stock market. The first effect dominates
in recessions and early stages of economic recovery while the second and third
dominate when the economy is close to full capacity and the unemployment rate is
low

Exchange Rates: Lower than expected unemployment rate will tend to


appreciate the exchange rate as it is expected to lead to higher interest rates.

Ability to Affect Markets: Moderate. Unlike the payroll jobs data, which
is a coincident indicator of economic activity (it changes direction at the same time
as the economy); the unemployment rate is a lagging indicator. Consequently, it is
less likely to move the market than the employment number. However, as the
economy get close to the "natural rate of unemployment" unexpected change in the
unemployment rate may become bigger market movers.

A strong jobs report signifies accelerating inflation, as now more people


have money to spend. However the impact of the report also depends at which
phase of the business cycle the economy happens to be in. If the US economy has
just managed to climb out of recession, a jump in employment report will only have
modest effect on the commodity markets.

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Money Supply

The money supply is just that: the amount of money floating around the
economy and available for spending. In economics, money supply or money stock
is the total amount of money available in an economy at a particular point in time.
There are several ways to define "money," but standard measures usually include
currency in circulation and demand deposits.

Money supply data are recorded and published, usually by the government or
the central bank of the country. Public and private-sector analysts have long
monitored changes in money supply because of its possible effects on the price
level, inflation and the business cycle.

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Table showing the BSE Index andd the MONEY SUPPLY of six years

YEAR SENSEX M3 (%)


2004-2005
2005 6,602.69 12.00

2005-2006
2006 9,397.93 16.90

2006-2007
2007 13,786.91 21.70

2007-2008
2008 20,286.99 21.40

2008-2009
2009 9,647.31 18.60

2009-2010
2010 14493.84 16.50
(Table 5.3)

BSE: it consists of the closing prices of the every year end


M3: it consists of the percentage change over the years.

Graph showing the relationship of the stock prices of BSE and MONEY
SUPPLY of six years 5.3
.3
25,000.00

20,000.00

15,000.00

10,000.00 BSE
M3
5,000.00

0.00

There is a direct relationship between the two variables. Whenever there is


an increase in the money supply there is an increase in the stock prices.

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Impact on the market

Lower interest rates are good for the stock markets. This is due to the fact
that lower interest rates make the other asset classes that compete with equities like
fixed deposits become relatively less attractive. Also, lower interest rates mean that
the interest burden on corporate’ that have a raised a significant part of their capital
through debt reduces. Consequently, earnings tend to grow at a faster pace and
therefore, stock markets are again benefited in the long run.

There seems to be not much of a correlation, the stock market indices seem
to mirror the growth in money supply with a lag effect. Higher growth rates have
been followed by stock market indices gaining significantly in subsequent years.
However, more prominent is the fact that a lower growth rate in money supply has
caused index to decline more often than not.

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Inflation

Inflation pared down to the essentials means a rise in an index consisting of


many goods that have weights attached to them. The index always has a base year.
If a particular item has a higher weight and its price rises, it will have a greater
effect on the inflation rate. At the end of the day it depends on how much weight a
particular item is assigned. Most countries use a consumer price index (CPI) while
India has a wholesale price index (WPI). As their names suggest, the CPI pertains to
a set of items that a consumer consumes while the WPI is a basket particular to the
wholesale market. Therefore, if the inflation for a particular week is, say, 10 per
cent, it means the index is 10 per cent higher than it was the same week the previous
year. Then there is core-inflation, which means the inflation rate without taking into
account food and fuel.

Milton Friedman once said: "Inflation is always and everywhere a monetary


phenomenon." It essentially means that inflation is always caused because of too
much money in the system. In other words, inflation in a country is always caused
because the supply of money is much greater than the demand for it.

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Table is showing the stock prices of BSE and the Inflation


nflation rate of six years.

YEAR SENSEX INFLATION (%)

2004-2005
2005 6,602.69 6.5

2005-2006
2006 9,397.93 4.4

2006-2007
2007 13,786.91 5.4

2007-2008
2008 20,286.99 4.7

2008-2009
2009 9,647.31 8.4

2009-2010
2010 14493.84 1.6

(Table 5.4)
BSE: it consists of the closing prices of the every year end
Inflation: this consists of the WPI 52 week average percentage change over the
years.
Graph showing the stock prices of BSE and the INFLATION RATE of six years.
25,000.00

20,000.00

15,000.00

10,000.00 BSE
INFLATION
5,000.00

0.00

There is an inverse relationship between the inflation between the two


variables. Whenever there is an increase in the inflation there is decrease in the
stock prices and vice versa.

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Impact on market

The stock market has steadily increased over the years, with minor setbacks
during economic downturns. One reason that people invest in the stock market is
that over a longer period, stocks outpace the increase in costs due to inflation. This
isn't necessarily true every year, particularly in a poor economy.

Supply and Demand


1. During inflationary times, the economy is normally healthy. In these times,
people have expendable income, which they either invest or purchase goods
with. If they invest, it tends to drive stock prices upward.

Size
2. The amount of growth a stock exhibits due primarily to inflationary factors is
proportionate to the cost of the stock.

Benefits
3. Because the stock market increases with inflation, stocks tend to be better for
long-term investments when you consider buying power.

Dividends
4. During times of inflation, dividends increase because the costs of goods and
services increase. This causes undue optimism in the market.

Warning
5. Even though the stock you own might increase because of inflation, it doesn't
mean that the increase keeps up with buying power. You need to calculate the
growth percentage and see if it keeps up with inflation.

CONCLUSION
It is proved that the indicators like Gross Domestic Product (GDP), Labor
Market, Inflation; Money supply has a positive impact on the stock market
movement.

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CHAPTER-6
SUMMARY AND CONCLUSION

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SUMMARY AND CONCLUSION

Summary of the study


The study is being carried out to understand the impact of economic
indicators on BSE.
FINDINGS
Gross domestic product
Real GDP is the one indicator that says the most about the health of the
economy and the advance release will almost always move markets.
The "corporate profits" and "inventory" data in the GDP report are a great
resource for equity investors, as both categories show total growth during the
period; corporate profits data also displays pre-tax profits, operating cash flows and
breakdowns for all major sectors of the economy.

INFLATION

When the CPI AND WPI release arrives, many questions will be answered in
the markets. This report will often move equity and fixed-income markets, both the
day of the release and on an ongoing basis. It may even set a new course in the
markets for upcoming months.

Labor report

Economists have settled on the number of 150,000 jobs as the level that
defines economic growth. Gains of roughly 150,000 jobs or more indicate
expansion of the labor force, while anything below indicates a weak job market.

Investors study the labor report to look for trends in disposable income, wage
inflation and employment statistics, many studying industries of personal interest to
them. If payrolls are increasing and wages are rising, that personal consumption

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stats like retail sales will advance as well, as more money will be in the pockets of
consumers.

A key to look for is whether wages are keeping pace with inflation; if not,
the real purchasing power of consumers will drop.

MONEY SUPPLY

The changes in monetary policy strongly influence the changes in security


prices. Supply of money affects industrial security prices through several ways.

The demand to hold money varies according to the variations in the money
supply. Imbalance in portfolio is caused due to an increase in money supply. Since
investors like to retain the proportion of money constant in their portfolio, they
allocate their excess money balances to other uses, such as buying more
commodities or to acquire more financial assets.

Thus, when demand for stocks increases, the stock prices will raise. Interest
rates, also, have an impact on stock prices. If commercial banks' rate of interest on
deposit accounts (time deposits) or lending rate is lower, implying a loose money
policy, then money supply will raise which, in turn, will give rise to increase in
stock prices and vice versa. Thus, interest rates and stock prices have an inverse
relationship.

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Conclusion

While quarter-to-quarter figures can show some volatility, long-term trends


in GDP growth remain the single most conclusive piece of information on the
economy as a whole. This indicator is a must-know for investors in all asset classes.

The Employment Situation Report is a very powerful indicator that is able to


move the markets dramatically. Heavily analyzed, the report is the single best way
to understand the state of the labor force at any point in time.

The lesser the unemployment rate, the more workers earn, the more they buy
and propel the economy forward. If fewer people are working, spending drops off
and business suffers. Because household spending accounts for two thirds of the
economy’s total output, the investment community pays close attention to the
employment report.

The evaluation of money supply figures has become a progressive story, one
that savvy investors will take into consideration when contemplating future levels of
economic growth as well as inflation.

Investors who put their money mainly into fixed income investments have to
make a conscious attempt to seek out those that offer high double-digit returns. Or
they should add riskier investments to beat inflation.

Financial planners usually assume a 5 per cent inflation rate (based on the
WPI) to compute targets for long-term financial goals in Indian context. But the
recent CPI-WPI divergence suggests that they should actually be assuming a much
higher number.

As mentioned above, CPI in India over the last five years has grown by
nearly 7 per cent annually. An investor may also need to have some margin of
safety against factors that may drive inflation up by one or two percentage points in
a particular year.

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Suggestions

The above study has inadvertently proved that there is a positive relationship
between the economic indicators the BSE. It is a known fact that no one can time
the market. Hence a practical suggestion to maximize your returns would be:

 Depending on the risk profile, 50% of portfolio should constitute equities.


"To make the most, invest in banking and infrastructure sectors as also gold
mining funds”.
 Note that at least 10% of portfolio should constitute debt in order to cushion
the ups and downs of the market.
 Fixed-income investors should always be aware of the rate of inflation
against which they judge their investments; it is imperative to keep current
yields ahead of inflation, or real wealth will fall.

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BIBLIOGRAPHY

Economic surveys

1. Economic surveys of 2004-2005


2. Economic surveys of 2005-2006
3. Economic surveys of 2006-2007
4. Economic surveys of 2007-2008
5. Economic surveys of 2008-2009
6. Economic surveys of 2009-2010

Journals

1. Som Sankar Sen and Santanu Kumar Ghosh (2008), “Association Between
Stock Market Liquidity and Some Selected Macroeconomic variables”, Icfai
University Journal of Economics, Vol.VI, No.3, pp53-70
2. Securities and portfolio management (2009-2010) Sikkim Manipal
University.
3. Anver Sadath and B Kamaiah (2009), “Liquidity Effect of Single Stock
Futures on the Underlying Stock”, Icfai University Journal of Applied
Economics, Vol.VIII, No.5, pp142.

Websites
www.bseindia.com
www.nseindia.com
www.scribd.com
www.altavista.com
www.indianeconomy.com
www.wikipedia.com
www.indiahowto.com

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