Keerthana PDF Part2

Executive summary:
Stock market and inflation are the tools which measures the situation of an economy. There are various
factors that directly affects the stock market and inflation such as political stability, growth and
development of the country, changes in the interest rates, Industry and company performance, foriegn
exchange rates etc. Government ability to retain the value of money, interest rates of commercial banks,
flow of money in the economy, budgetary deficit and monetary and fiscal policy are the some variables
which affects the inflation rate in the country. This study tries to analyse the correlation between stock
price and inflation.
The study is done by considering some stock prices and inflation rates. This is done by using some
statistical tools such as augmented dickey fuller unit root test, granger causality test and granger co-
integration test.
From the study conducted shows clearly that there is negative relationship between stock return and
inflation, and suggests that investors cannot use common stock investments as a hedge against inflation.
It is evident from the overall results that the causality runs from inflation to stock return and vice versa.
Study topic: AN EMPIRICAL ANALYSIS ON RELATIONSHIP BETWEEN STOCK INDEX RETUEN
AND INFLATION:
Introduction:
Stock market performs a very important function in the Indian economy where this measures a growth
and development of the country. Even though there are many other tools to identify the growth level, it
is a vital barometer of the economy. It helps the public in savings and investment which leads to
employment of funds rather than ideal money with the public. A small savings of public money are
collected and employed in several companies to diversify the risk of loss, theft, fire etc. Since this
market is more liquid, where it can be easily converts the money from public to financial instruments
and from financial instruments to liquid cash whenever it requires.
Since the stock market is very sensitive to the macroeconomic variables like interest rates, inflation,
exchange rates, FII's etc. This study is focused on changes in inflation rates and its effect on stock
prices. It is very common for equities to hedge against inflation because the returns from equities
should not be affected by variations from inflation.
Relation between stock index returns & inflation:

There are several empirical explanations that say the negative correlation between stock returns &
inflation. Some attribute this inconsistency between the theory & empirical findings to market
inefficiency. Others attribute it to the negative correlation between real economic activity (fiscal &
monetary) and inflation known as proxy effect hypothesis. In the current changing situation of financial
system, it is supreme for market players, researchers, policy maker and practitioners to know the in
depth knowledge of economic and financial structure and learn the close movements of stock prices
and economic variables while preparing the financial policies and procedures.
The informational effectiveness of some foremost stock markets is widely examined from the research
report of causal relationship between stock price index and inflation. The result from the studies are
significant because informational ineffectiveness in stockmarket shown in one side, market players
capable of increase profit by trading rules and by this means can constantly receive in excess of
aggregate market returns and onthe another side, stock marketplace is not expected to show successful
role in channelling financial wealth to the mainly productive sectors of economy.
The Efficient Markets Hypothesis (EMH) assumes everybody have complete awareness of each and
every information accessible in market. As a result, present value of an individual stock ( market as
complete) depict all information available at time t. consequently, if real economic activities affect
stock prices, then well-organized stock market immediately digest and involves every existing
information regarding economic factors. The rational performance of market players ensure historical
and present information is wholly showed on present stock prices. So the impact is, investor are unable
to build up trading rules so, hence they need not always earn morethan usual returns. For that reason, it
can be concluded that, in an information ally well-organized market, historical (present) stage of
economic movement are not helpful in predicting present (future) stock prices.
During the study to identify the lagged values of stock index to an economic variables donot cause
informational effectiveness, this proves that almost the presence of effect from present values of index
prices to furure stage of economic factors. This provides an advice that the index prices lead the
macroeconomic factors and market makes logical forcasts of real sector.
Likewise some of the lagging factors in the economy affects the index prices and historical volatility in
index prices affects the volatility of economic factors, after that bi-directional causality is understood
among these two variables(stock index return and inflation) . This activity shows that stock market is
ineffective. In otherwards, if variations in the economic factors neither influence nor are influenced by
stock price fluctuation, so the two variables are not dependent on eachother hence we can say that the
market is effective.
Inflation rate is an significant factor in identifying stock index return because of the reality that at the
time when the inflation is very high, investor thinks that the market is in the position of high
complexity. People are terminated from the job, which in turn leads to reduction in the production
activity. Public do not want spend unnecessarily hence they purchase only the necessaries for daily
requirements. Therefore the production level is brought below the average level. The affect of these
activities in the economy affects the profits of the business, which further more affects the dividend
payout ratios of the company. When the dividend paid by the company decreases, the stocks return also
diminishes leads to depreciation in the value of stocks.
Inflation directly has impact on all the companies in different ways. This is basically an imbalance
involving a continuous twist in the return prices. These twists may be because of the happening of
events. A compulsion of money and credit inflation increases the price and wage rates at different
volume. Furthermore, when the different countries inflation rates differ that affects the exchange rates
of those countries which in turn have impact on prices of domestic products, changes relative price
even more. There are also institutional factors which affect relative prices, for example import controls,
unions, and regulation and deregulation of such things as oil and transport. Thus relative prices will
shift during a period of fluctuating inflation rates, affecting the growth and stability of earnings.
Common stock represents an ownership claim on the prospective after-tax earnings of the company.
Thus, an unexpected increase in the inflation rate would tend to depress the after tax earnings on capital,
thereby depressing the value of corporate assets to potential owners. Accordingly, real stock prices tend
to fall.
It has only been in periods of accelerating inflation and tight monetary policy that the market has really
been poor. The depressing effect of accelerating inflation on the stock market resulted from the
perceived risk by investors that the monetary authorities would tighten policy in order to control
inflation, and that this would work by depressing the economy as well as real earnings of the corporate
segment.
The entire level of stock market will be affected by cyclical movements of the economy. Prices will rise
at times of easy money and low interest rates, which provide a stimulus to economic growth. As
interest rates and money tightens, so the business environment will worsen, costs will rise, demand will
fall, profits will be squeezed from both sides, and stock prices will become depressed.
1.1 STATEMENT OF PROBLEM:

There are various studies conducted to find the relationship between inflation and stock return by using
different statistical tools and various indices. This study shows the evidence of relationship between
inflation rates and stock returns and also lead lag relationship between the two. And also find out
whether the market is efficient in impounding available information about future inflation into stock
prices.
1.2 NEED OF THE STUDY:
The study is conducted for the purpose to know the relationship among inflation rate & stock return.
This study clearly shows whether the stock returns are influenced by inflation rates or not this also
helps in finding out whether stocks can be hedge against inflation by the investor.
1.3 OBJECTIVES:
1. To know the relationship between stock return and inflation.

2. To find out whether the common stocks can hedge against inflation.
3. To analyse whether the relationship varies with the different stock indies.
4. To find out which variable is lagging and which variable is leading.
1.4 SCOPE OF STUDY:

The study is conducted for a period of 10weeks and collected the data available relating to nifty price,
bank nifty, Sensex, and inflation rates on websites. The data is limited only for a period of 3years.
1.5 RESEARCH METHODOLOGY:

a. Data collection: Data which are used for this analysis is secondary data collected from website
i.e. money control. Data used from this website are financial statement, stock prices etc.
b. Study population: population is the indices of national stock exchange & 30 stocks ofBombay
stock exchange and consumer price index.
c. Sampling frame: Sampling Frame is the Indian stock market.
d. Sample: Sample chosen is continuously compounded monthly closing values of BSE Sensex,
Nifty, Bank Index, and the consumer price index for 3 years only.
e. Period of the study: Nifty is taken forthree years from January 2013 to Dec 2015, Bank Index
for threeyears from January, 2013 to March, 2015 and BSE Sensex fromJanuary 2013 to Dec
2015.
Hypothesis of the study
Hypothesis 1
H0: There is no significant relation between stock index returns and rates of inflation
H1: There is significant relation between stock index returns and rates of inflation
Hypothesis 2
H0: There is no significant lead and lag relationship between stock returns and rates of Inflation
H1: There is significant lead and lag relationship between stock returns and Inflation
1.6 LITERATURE REVIEW
Fama and schwert (1997) and Fama (1981) says there was negative relation among stock market
prices & inflation. But Hardouvelis (1988) found not much relation among stock price and inflation.
From the study of Fisher (1930) tells the expected rate of inflation is composed return and expected
inflation rate. The study indicates, there was no major relation among return and monetary sector. It
shows clear picture of inverse or negative relation among stock index return & rates of inflation.
Fama (1981) says from the proof in his study that increase in the real economic activity leads to
increase the stock price but decrease value of money and inflation due to the demand for money. This
shows the opposite way of his previous study that there is negative relation among stock price and
inflation rates and he suggesting that the income from real assets must be hedge against inflation.
Jiranyakul (2009) has done a study on stock market index and macro-economic variables. He used
few technique such as unit root test, granger co-integration test and co-integration test by using two-
step Engle method to do the study by taking into account multivariate time series regression analysis.
From this analysis they wanted to know the long and short term relation between macro variables and
stock index. Result from the research shows there is long term relation among this twovariables.
Robert (2008) conducted a study of relationship of macro variables and stock return of four different
economies such as Russia, India, China and. This study clearly explained that there is no relationship
between such past and present market return and macro-economic variables. Also, no relationship
between these variables, oil price and exchange rates.
Pearce and Roley (1985) while conducting study on variation of stock prices to the inflation rates
considered some more factors i.e., real economic activity, inflation rate and monitory policy. The result
showed a significant relation between monitory policy and stock price and very little amount of affect
by inflation on the stock price but no significant relation of real economic activity to variation in the
stock prices.
The industrial production moves in opposite direction with stock price but stock prices are moving
along with inflation rates, money supply and interest rates.
Naik and padhi (2012) in his study on relation among Indian stock index prices and macro-economic
factors such as wholesale price index, interest rates, money supply, industrial productions treasury bills
etc. for the data related from the year 1994 to 2011 reflected that the Indian stock index as well as
economic factors are inter related and also there is long term balanced relation exist.
The study explains that stock index market and macrovariables such as industrial production and
money supply are optimistically connected except the rate of inflation which is negatively related. The
interest rates and exchange rates are insignificant with the relation between stock price and macro
variables.
Sireesha (2013) says about movements of stock market index like nifty, silver and gold withmacro-
economic variables by using linear regression equation. Gold and silver are taken into consideration as
a sample for the analysis. The internal variable shows interdependence of gold, silver and stock with
these variables. The stock prices or returns are significantly influenced by inflation and GDP but money
supplies havean impact on the gold returns.
Durai and Bhaduri (2009) tested the relation among inflation, stock index price in India by using
wavelet methodology. The hypothesis is test by using the data from 1995 to 2006. The study of wavelet
method for expected and unexpected inflation showed equal result. In short run, expected inflation
shows insignificant relation on stock price but in long run, expected inflation has pessimistic relation
on stock index price and unexpected inflation showed insignificant relationship with stock.
Shanmugam and Misra (2008) conducted a study on emerging economy like India for the period of
1980 to 2004 about the relation among Indian stock market index and rates of inflation during the pre-
and post-reform phase. This study used ordinary least square method was used and also the study
showed whether Indian stock market be able to hedge against inflation or not. The single equation
treatment gives improper result so they used two step OLS method. The result from the study showed a
pessimistic relation among stock index price and rates of inflation in India. This study also agrees to
Fama's hypothesis but it is valid only for pre-reform phase and not for post-reform phase.
This study concluded that stock index returns are not dependent on inflation in post-reform period.
1.7 LIMITATIONS:
1. The time period of the study is limited.
2. The results are limited only to inflation than many other macroeconomics factors.
Chapter-2
INDUSTRY and COMPANY
PROFILE
Stock market is a location where the investors buy and/or sell securities. There are 2 types in stock
market i.e., Primary market and secondary market.
Primary market is located where organisations issue the shares to the public for first time. E.g.: IPO
(initial public offering).
Functions:
Main services of primary market are commencing, underwriting, and allotment. Commencing tells
about providing the issue of shares to the investors very first instant.
Underwriting contract ensures the organisation that the shares are subscribed by the public completely,
if not they agree to sell those shares from the process of underwriting.
Stock market participants are as follows:

 Lead manager
 Registrar & transfer agent
 Underwriter or Broker to the issue
 Adviser
 Banker to the issue
 Depository
 Depository participant
Secondary market is a market where the securities already listed can be traded. This is also called as
stock exchange. Currently in India there are 21 stock exchanges. The largest stock exchanges are
Bombay stock exchange and National stock exchange with respect to India.
Participants of stock exchange are as follows:
 Broker who must be a member of stock exchange – buyer’s broker and seller’s stockbroker
 Depository
 Investment advisor
 Share transfer agent
 Portfolio Manager
 Depository participants.
Types of issue:
 Public issue
 Right issue
 Private placement
Public issue:
In this system, the issue is release to general community at large & not for selected people.
Right issue: In this method, when the companies are issuing new equity shares for the purpose of
expansion, diversification it first issue the shares to the existing shareholders.
Private placement: In this method, companies issue the shares to the selected number of investors E.g.:
LIC and GIC.
TIMINGS OF STOCK MARKETS IN INDIA

Markets Exchanges Timings
Equity Market BSE/NSE 9:15AM to 3:30PM
Commodity Market MCX/NCDX 10:00AM to 11:30PM
Currency Market NCX 9:00AM to 5:00PM
Pre-market 9:00AM to 9:15AM

Post-market 3:40PM to 3:55PM
Major 2 stock exchanges in India are
National stock
Bombay Stock
Exchange ( BSE) exchange
( NSE )
B S E:
Bombay stock exchange is oldest and leading stock exchange located in Bombay, India. It was
originally started in the name of “The Native Stock and Share Brokers’ Association” in the year 1875.
It includes major 2 world’s top exchanges as its strategic partners , i.e .Deutsche Borse & Singapore
Exchange,. The SENSEX is index for B S E. Market capitalization of BSE is US$ 1.65 trillion.
The CEO and MD of BSE is Ashishkumar Chauhan. The numbers of listed companies are 5749.
index points for B S E is 100 as base value and base year as 1978-79. BSE SENSEX includes 30
largest & most aggressively stocks which are traded. The methodology for calculating SENSEX is
“Free float Market Capitalization”.
For every 15 seconds SENSEX has been determined. BSE stated screen based trading from 1995
which is called ad BOLT (BSE online trading).
NSE:
National stock exchange was established in the year 1992, located in Mumbai. The CEO and MD 0f
NSE is Chaitra Ramakrishna. The numbers of listed companies in NSE are 1696. The Market
capitalization of NSE is US$1.7 trillion.
It consists of two segments: the whole sale market and capital market segment. The capital market
segment consists equities, convertible debentures, and retail trade in non-convertible debentures. The
wholesale segment consists of high value transaction n government securities, commercial papers and
other debt instruments.
The index for NSE is NIFTY .The S&P CNX Nifty consists of top 50 stocks listed on the NSE. The
base year is and base point is 1000.
TRADING AND SETTLEMENT:

Each and every company who wants to trade on stock exchange must list their securities with it. Every
investor who wants to buy or sell the securities should place the buying or selling orders with their
broker who is registered with SEBI as per the SEBI’s regulation act of 1992.
Earlier the trader used to scream and resort to signals on trading ground of stock exchange which
includes of various ‘notional’ trading post for different securities. A trader who wishes to buy or sell the
securities reaches the trading posts where security is traded. The interested traders come to the contract
for transacting the security at mutually agrees upon prices.
Later the traditional open outcry system was replaced by screen based system. Here distant participants
and large number of traders can trade simultaneously at high speeds. The buyers and sellers can place
the orders on the computer. This order can be of different types i.e. Limit Order, Market Order
 .A limit Order is an order that limits the price. For example, a limit order to buy at a price of
Rs 98 means that the trader wants to buy at a price not greater than Rs 98.
 A Market Order is an order for broker to purchase or sell the securities for the superlative price
prevailing in the market.
SETTLEMENT
For the purpose of reducing the cost and risk involved in physical delivery, now the transactions are
carried through electronic delivery facilitated by depositories. A depository is an institution which
converts physical certificates into electronic book entries.
Currently, the settlement of trades happens in T+2 basis.
Listing:
Listing is nothing but registering the securities of the issuer company for the purpose of trading on the
floor of stock market in a professional manner. Main aim of registering for trading to ensure liquidity
along with marketability for thier securities as well as ensure better authority and regulation for trading.
Delisting:
Delisting means elimination of securities of the organisation completely which listed on trading floor of
stock exchange. From the result of delisting, securities of such organisations are totally eliminated from
stock market.
.DIVIDEND:
It is a part or a portion of profit of a company which are distributed to the equity shareholders of the
company as a return.
Even though the high disbursement of dividend to the shareholders increases value of the firm there is
an other way round of looking into the payment of dividend i.e.,If the profit is more than the cost of
investment in another project then the payment of dividend to shareholders is not worth. Otherwise, if
the cost of investment is more than the return from it then the payment of dividend is worthy.
Prospectus:
Prospectus are nothing but an invitation to public or investors to subscribe to shares issued by
company. This includes detailed information required for investors about company, promoters,
dividend, current position based on financial statement, sources of finance, cost of acquisition, volume
of issue, products and services, legal requirements etc which in turn helps the investors to understand
each and every movements of the company.
Market Capitalization:
It is a market value of the company’s share which can be determined by number of shares outstanding
multiplied with price per share.
 Small-cap:
They are those companies whose market capitalization varies between $300mn to $2bn.
 Mid-cap:
They are those companies whose market capitalization varies between $2bn to $10bn.
 Large-cap:
They are those companies whose market capitalization are $10bn and above.
BROKERAGE:
The brokerage charges has to be paid by investor to their broker as a fee for a transaction should not
exceed 2.5% stated in the buy or sell note.
.
Diversification:
Diversification is a tool or technique used for management of risk in the organisation by investing in
various sectors or securities. This helps in reduction of loss occurred to a specific securities by
preparing a well managed portfolio.
Depository:
Depository systems are those who hold securities in an electronic form which is safe.
There are two depositories Securities Depository Limited (NSDL) and Central Depository Services
(India) Limited (CDSL) in India which gives dematerialization ofsecurities.
Advantages to investors:
 Securities are transferred instantaneous
 No fees are for the transaction of securities i.e. stamp duty
 This removes all the problems related to paper certificates i.e. late delivery, forged securities etc.
 Elimination of paperwork related to transfer of securities
 Decrease in cost of transaction
 Nomination facilities are very comfortable.
 Securities are transferred directly from the DP without involving the company.
 easy way of consolidation of folios/accounts
 equities, government securities are kept in a singal account and automatic transfer to demat
accounts.
DEPOSITORY PARTICIPANTS:
Depository participants are agents appointed by depositories for the purpose of transactions with their
clients in according to regulations of SEBI. SEBI clearly indicates that thise who registered with
financial institutions, Banks and SEBI can act as DPs.
DERIVATIVES:
Derivatives are those securities whose values are determined by underlying assets.
Types:
1. Forwards: In case of forward contarcts, two parties i.e buyer and seller agrees to buy or
sell securities in future at a pre specified price where delivery of securities happens on a
future specified date.
 It happens in spot or cash market.
 To avoid price risk, forward or future exists.
 It is not standardized contract and no middlemen is involved.
2. Futures: In case of future contract, two parties agrees to purchase or sell the securities at a
specified prices today and delivery happens in future.
 This is a standardized contract since it is traded on stock exchange.
 There is a middlemen involved in transaction i.e. clearing corporation.
 It ensures liquidity
3. Options: An option provides rights and obligations to different people. It can be call or put
option.
Options are of two types - Calls and Puts options:

‘Calls’ provides the right to buy in long position but an obligation to sell in short position.
‘Puts’ provides obligation to sell in long position but rights to buy in short position.
COMMODITY MARKET:
Commodity market is a type of derivatives where the commodity is an underlying asset. Assets can be
rice, wheat, cotton etc or metals such as silver, gold etc.
COMPANY PROFILE
2.1 Indiabulls group is founded by MrSameer gahlaut in the year 1999 and are public company. They
are into housing finance, securities and real estate.
Its headquarters located in gargaon and main corporate office located in Mumbai. Its networth was Rs
15,332 cr as of 30 June, 2015. They are listed in both BSE and NSE.
The current market capitalization is Rs 32,540 cr as of 6 august, 2015. It is one of the top divided
paying group out of promoters owned group.
It consists of 7000 employees and website is www. Indiabulls.com.
2.2 MISSION:
Rapidly increase the number of client relationships by providing a broad array of product offering to
emerge as a clear market leader.
VISION:
To be a largest and most profitable financial service organization in Indian market and become one
stop shop for all non-banking financial products and services for the retail customer.
SLOGAN:
“Ease, convenience and reliability....... It all starts here.”
Organizational chart of Indiabulls:
CEO
(sameer Gahlaut)
VICE CHAIRMAN OF
THE BOARD VICE CHAIRMAN OF
THE BOARD
(Saurabh Mittal)
(Rajiv Rattan)
DIRACTOR DIRECTOR DIRECTOR DIRECTOR DIRECTOR

(Aishwarya Kotch) (Prem Mirdha) (Ajit Mittal) (Karan Singh) (Gurbans Singh)
PROMOTERS':
1. Sameer Gehlaut- owns 60% of stake in the Indiabulls group.

2. Rajiv Rattan - owns 20% of stake in the group.
3. Saurabh Mittal – owns 20% of stake in the group.
SOCIAL RESPONSIBILITY:
 Free Medical Clinics in background areas to provide health care facilities.
 Scholarships for meritorious students about 350 are provided to enable them for further
education.
2.3 AREA OF OPERATION:
The company is headquartered in gargaon and located in Mumbai, network spread over 526 cities and
comprising 1482 business locations.
Indiabulls housing finance limited:

It was incorporated in May2005 as a subsidiary of Indiabulls finance limited and registered as
Indiabulls Housing Finance limited regulated by National Housing Bank. It is the 2 nd largest Housing
Finance Company in India. Crediting rating agencies i.e., CRISIL and ICRA rated the Indiabulls
housing finance as AA+. It provides loans against property for the construction/purchase of House to
the corporates and to the individuals also.
Indiabulls Real Estate Limited:

It was incorporated for the major purpose of construction and development of commercial, residential,
and SEZ projects across the India in the year 2005. Its networth is Rs7218 cr being the 3rd largest real
estate company in India.
Indiabulls securities limited:

Indiabulls venture was incorporated on June 9th 1995 under the company’s act of 1995 as private
limited. Indiabulls venture in capital market provides Advisory services and Securities broking. They
also provide Equity research, commodities, advisory services, depository services, securities broking.
These services are available both in off-line and on-line. On Feb 16th, 2004 the name was changed as
Indiabulls securities limited.
Indiabulls venture is rated as BQ-1 by CRISIL.
Indiabull securities limited in the financial 2012-13 declared Rs 1/ equity share on the face value of
Rs2 per share.
2.4 PRODUCTS AND SERVICES:
1. power Indiabulls
2. IPO Online
3. currency derivatives
4. Indiabulls equity analysis
5. Indiabulls signature accounts
6. Depository services
2.5 COMPETITORS INFORMATION:
COMPARISION OF INDIABULLS BROKERAGE SERVICES

WITH OTHER COMPITITORS
ONLINE BROKERS BROKERAGE CHARGES BROKERAGE CHARGES

FOR INTRADAY FOR DELIVERY
Sharekhan 0.01% to 0.10% 0.03% to 0.50%
UTI securities 0.15% 0.80%
Indiabulls 0.05% to 0.10% 0.25% to 0.50%
IndiaInfoline 0.10% 0.50%
Motilal oswal 0.03% to 0.15% 0.30% to 0.50%

2.6 SWOT ANALYSIS:
This analysis shows the strength, weakness, threats and opportunities that the company having in the
market. This explains its worthiness among the other companies.
STRENGTH:
 Brokerage charge is very low when compare to others.
 It provides both online and offline services to customers.
 It offers well diversified investment portfolio.
 Various kind of products
 They are into various areas like real estate, securities, power, housing loan etc.
 Wide range of network with more branches in metropolitan cities.
WEAKNESS:
 Less awareness due to lack of advertisement.
 Risk in investment in the area of real estate is more.
OPPURTUNITIES:
 Reachingglobal with the help of more clients across the countries.
 Inorder to ease the operation they can provide ATM facility.
 High growth opportunities in terms of sales.
THREATS:
 Strict government rules and regulations.
 High competition by companies like IIFL, Sharekhan, kotak securities etc.
 Low brokerage charges from other local brokers.
2.7 INFRASTRUCTURE FACILITIES:
 The company offers both online and offline services to their customer.
 They established a friendly working environment to their employee which leads to motivation.
 Network facility: Indiabulls securities ltd is providing separate server to operate and to save the
data.
 Also enabled windows system and antivirus support.
 It offers Indus mobile i.e. mobile banking facility to place an order to or sell.
 The customers can put forth their problems for redressel.
2.8 FUTURE GROWTH AND PROSPECTS:

Indiabulls Securities Ltd are expected to grow at 15 to 20% in the FY 2016-17. Indiabulls upcoming
projects are Indiabulls Golf City, Savroli-Mumbai, Indiabulls Green in Mumbai, Centrum Park,
Gurgaon-NCR, Mega Mall-Varodara.
2.9 FINANCIAL STATEMENT:
BALANCE SHEET OF LAST 2YEARS
PARTICULARS Mar’ 2015 Mar’ 2014
Sources of Funds
Total share capital 52.24 46.22
Equity share capital 52.24 46.22
Share Application Money 11.15 18.92
Preference Share Capital - -
Init. Contribution Settler - -
Preference Share Application Money - -
Employee Stock Option - -
Reserves 266.48 171.47
Networth 329.87 236.61
Secured Loans 958.87 167.13
Unsecured Loans 725.00 200.00
Total Debt 1683.87 367.13
Minority Interest - -
Policy Holders Funds - -
Group Share in Joint Venture - -

Total Liabilities 2013.74 603.74
Application Of Funds
Gross Block 797.55 91.99
Less: Revaluation Reserves - -
Less: Accum. Depreciation 133.57 57.84
Net Block 663.98 34.15
Capital Work in Progress 11.46 -
Investments 69.36 32.39
Inventories - -
Sundry Debtors 248.15 138.04
Cash and Bank Balance 689.40 296.85
Total Current Assets 937.55 434.89
Loans and Advances 743.43 316.62
Fixed Deposits - -
Total CA, Loans & Advances 1680.98 751.51
Deferred Credit - -
Current Liabilities 398.32 169.78
Provisions 13.72 44.53
Total CL & Provisions 412.04 214.31
Net Current Assets 1268.94 537.2
Monitory Interest - -
Group Share in Joint Venture - -
Miscellaneous Expenses - -
Total Assets 2013.74 603.74
Contingent Liabilities 252.69 41.03
Book Value (Rs) 12.20 9.42
RATIOS:
1. Current Ratio
Current assets
=
Current liabilities
2. Quick Ratio
Current assets - inventories

=
Current liabilities
3. Debt - Equity Ratio
Total Debt
=
Total Equity
4. Debt - Asset Ratio
Total Debt
=
Total Assets
Particulars 2014-15 2013-14
Current Ratio 4.0797 3.5066
Quick Ratio 4.0797 3.5066
Debt-Equity Ratio 32.233 7.9431
Debt-Asset Ratio 0.6941 0.4487
Interpretation:
1. Current ratio:
‘Current ratio’ indicates liquidity position of a company in order to satisfy thier liabilities. The
company is said to be more liquid if “current assets are more than current liabilities”. It should be in the
ratio of 2:1.
Here the company is said to be more liquid since the current assets are more than current liabilities
i.e.4.07:1 and 3.50066 in the year 2014-15 and 2013-14 respectively.
2. Quick ratio:
Quick ratio also measures the liquidity position by analysing whether any funds are locked up.
Quick assets are calculated by deducting the inventories from the current assets. If the quick assets are
more than quick liabilities then the company is more liquid by not locked up its funds in any form like
inventory.
Here the company is more liquid since it does not locked up its funds in any form of inventories i.e.
4.07:1 and 3.50066 in the year 2015 and 2014 respectively.
3. Debt - Equity Ratio:
Debt - Equity ratio measures solvency position of a company. It shows loans made by the company to
meet its investment activity. It should be in the ratio of 1:2 says that for every 1rupee of debt the
company has 2rupees of equity to make a payments.
Here the company has more debt than equity to finance the project i.e. 32.2:1 and 7.9:1 in the year
2015 and 2014 respectively. It shows that the company is aggressive in its future growth by financing
through debts.
4. Debt-Asset Ratio:
Debt-asset ratio indicates that company's leverage i.e. how much of assetsareacquired by using debt. It
can be short and long term debt.
Here, the company used 0.64 and 0.48(in the year 2015 and 2015 respectively) of debt is less than
assets hence the company's risk level is less compared to others who have debts more than assets.
CHAPTER-3
THEORETICAL
BACKGROUND OF THE
STUDY
3.1 INFLATION:
Inflation means increase in general price level for commodities and services. Inflation is identified in terms of
purchasing power for each dollar. When inflation increases, purchasing power of people will come down. For
example, when inflation rate is 3% annually, then $1 pack of coffee powder cost $1.03 per pack.
Deflation is opposite to inflation, which means general price level for commodities and services decreases.
Types of inflation:
1. Demand pull inflation: It happens when the demand for commodities and services increases
higer than its supply. It can be identified in growing economies.
2. Cost push inflation: it happens when the cost of producing goods and services increases the
companies must increases the prices of their products in order maintain the profits margin and
breakeven point.
When there is inflation, money supply in the country will be more. In order to control the inflation, RBI
increases the interest rate in banks so that money supply in the economy decreases.
 Inflation leads to more employment to the people.

 Inflation increases standard of living in the economy.
 Inflation shows growth in the economy.
Measures of Inflation
Two most widely used price indices are “consumer price index“ and “wholesale price index”.
Consumer price index: It is a yearly percentage change in the cost of acquiring a set of basket of
commodities and services. There are four different types of consumer price index released for different
levels of working class in the country viz. consumer price index to metropolitan non manual employee,
consumer price inflation to agriculture labourers, consumer price index to a industrial workers, and
consumer price inflation to a rural labourers. Different governmental & monitoring agencies use these
indices for their purpose. These indices also form the basis of decisions regarding the dearness
allowance for the government employees.
Wholesale price index: In this type, index is to identify the variations in price level relating to
commodities in bulk. This method is most popular amongst all which consider 435 commodities into
consideration.
Calculation of inflation rate: Rate for Inflation for year

T = PIN t – PIN t-1 * 100
PIN t-1
Where, PIN t is index for the year “ t “
PIN t- 1 is index for the previous year.
3.2 Statistical Models:

In this study, a co-integration approach using the “Engle - Granger methodology” is used to take into
account together long term and short term dynamics of stock returns & inflation rates. prior doing
“co-integration testing”, it is essential to check whether the time sequence are fixed at all stages by
running “Augmented Dickey fuller ( A D F ) test” in the sequence. For the reason, most of time series
are non-stationary in stages, & first hand figures require to be altered to get stationary series. “the
granger causality test” is done to findout causal relation among stock index returns and inflation.
Stationarity
“According to Engle and Granger, a time series canbe identified as to be fixed only if interruption over
time does not change the features of series it means that chance of variations being left invariable
ultimately. Or else, mean, variance and co-variance of the series must be stable over a period of time. A
non stationary time series will havea time varying mean or a variance or else both or they are auto-
correlated.The extent of co-integration is closely linked with stationary.
It is evident that time-series, if that the standard evaluation and statistical test procedures are improper,
and also unacceptable, when variables drawn in are non-stationary.
The empirical works assumes that underlying time sequence are static based on available time sequence
data. While regression of variables are done on each of them, results show that there is a high residuals
(R2) even though relation among these two variables doesn’t exist. This kind of outcome shows the
improper regression when non-stationary data exists..
A sequence of data are assumes to be integrated of order 1 {I ( 1 )} when it has to once differentiated
prior to be a stationary data. Likewise, it has to be order 2 {I ( 2 )} when it has to show difference twice
prior to be a stationary.
“Theory of Stationarity”:
Various ways for determining whether the series of time variables i.e ‘X’ are “stationary” or “unit root
exists” are as follows:
• In the AR (1) model, if Φ=1, then X has a unit root. If |Φ| <1 then X is stationary.
• If X has a unit root then the series will exhibit trend behaviour.
• If X has a unit root, then ΔX will be stationary. For this cause, series having unit root are usually
called as there is variation in stationary series
• Series is stationary if durbin Watson values lies between 1.5 to 2.5, which indicates that there is no
autocorrelation
Determination of Stationarity:
commonly the process begins with that whether the factors Y is in stage of stationary. If hypothesis is
abundant, later the sequence are changed for initial difference of variables & examined for the purpose
of stationarity.
When the initial difference of series are stationary, then it express that Y is I(1).
H0: Series has Unit root: Non Stationary
H1: Series does not have Unit root : Stationary
Unit Root Test [Dickey Fuller Test]:
“Dickey Fuller test” includes identifying equation for regression and testing of hypothesis is executed.
The AR (1) process is…. Yt = C + ρYt-1+ εt Where c and ρ are parametrs and is to be white noise. If
-1 <ρ < 1, then Y is stationary series. While ρ if = 1, y is non-stationary series. hence, foe what simply
regress Yt on its lagged value yt-1 and identify if calculated ρ is statistically equal to 1? If it is, then Yt
is non-stationary this shows usual phenomenon following the unit root test of stationarity.
The test is conducted by analysing an equation with Yt-1 subtracted from both the angle of equation.
Δyt = C + γt-1 + εt
Where δ = (ρ-1), and the null and alternative hypothesis are
Ho: δ = 0 …..Non Stationary

H1: δ < 0 …..Stationary
Dickey and fuller replicated the critical values for some opted sample size. In recent times, Mackinnon
(1991) has put into practice a most generously proportioned set of simulations than those which are
estimated by Dickey and Fuller.
Unit root test [ “Augmented dickey fuller test” ]

Unit root test is applicable only if series is AR (1) Process. If the series are related to each other
at an increasing order lags, the belief of white noise disturbances is violated. [In other words, in D F
test, itwas believed that error term was notcorrelated. But incase error terms are miss correlated, Dickey
and Fuller has came out with improved test, known as “Augmented Dickey Fuller test”]. The A D F
regulates for increased- order correlation by totalling lagged difference terms of the dependent variable
to the right-hand side of regression
ΔYt = C + γt-1 + δ1Δ yt-1 + δ2Δ y t-2 + …..+ δpΔ y t-p + εt
This augmented condition is then verified
H0: δ = 0 Non Stationary
H1: δ < 0 Stationary
unit root test is on the basis of 3 regression forms are as follows:
1. Without intercept and trend (random walk) ΔYt = δYt-1 + εt
2. With intercept (random walk with drift) ΔYt = α + δYt-1 +it
3. with intercept and trend ( with drift around a stochastic trend) ΔYt = α βT + δYt-1 +εt Where, α is
the intercept/constant, T is trend, β is the slope i.e. level of dependency and integration, δ is drift
parameter i.e. Change from Yt to Yt-1 and εt is the error term.
Commonly, the process begins with if variable X and Y at all stages from none, intercept and trend
and intercept is fixed. when the hypothesis is abundant, later series are changed for initial difference of
variables along with examination of immovable series. when the initial dissimilarity of series are stable,
then we can say that X and Y are I( 1 ).
Granger’s co-integration Test

Primary goal of co integration analysis is to find general stochastic trends in price data and to apply
these general trends for a energetic examination of relationship of returns. Correlation is on the basis of
on return figures only, but complete co integration study is based on the raw prices, rate or earnings as
well as return data.
According to co integration assumption, two variables which are stable in variations are co integration
when linear combination of them at levels are stable. Thus, changes in the prices are taken for running
the test.
Granger developed the theory of co-integration when he explains that two variables can move
collectively even if they are separately non-stationary. Co-integration based on very long period
relation among the variables. The thought came from incorporating equilibrium relation, where
equilibrium is stable at the direct character from the forces which leads to increase the factors normal
to equality.
commonly, when Yt and Xt are both integrated of order I (d), later linear combination of two series
will be I (d)... i.e, the residuals obtained on regressing Yt on Xt are I (d).
when two or more series are cointegrated later despite the fact that the series themselves may be not
stable, they will progress collectively over a time and the stable variations can be identified. Their long
term relation is balanced for which structure converge over a time and interruption term Et can be
treated as imbalanced error or space system is very far from balance at time t.
The “Engle granger test” has 2 procedures:

• initial estimating an ordinary least square (O L S) regression on the data. A regression of one
integrated variable on the other integrated variables (x on y and y on x).
Yt = a + bx t + e t X & y will be co-integrated if and only if e is stationary.
• Then test the residuals from regression for stationarity using a unit root test such as ADF.
Grangers Causality Test

This technique helps in identifying the relation among stock index return and rates of inflation by
evaluating that whether one variable cause or based on another variable only if these variables are inter-
related.
Even though regression analysis is mainly about the dependence of one variable on another variable, it
does not essentially say causation. In other words, the survival of relation among variables that does
not verify causality or trend of influence. Generally, since future cannot predict the past, if variable X
causes variable Y, then changes in X should precede changes in Y.
It identifies the importance of historical values of variable X in illuminating variable Y, taking into
consideration of consequence of historical values of variable Y itself. typically causal relations are
examined in both method, from X to Y and from Y to X.
CHAPTER-4
EMPIRICAL ANALYSIS
UNIT ROOT TEST:
TABLE NO.4.1: ADF TEST FOR TABLE NO.4.1 ADF TEST FOR NIFTY:
Constraints ADF Value Mackinnon critical value

(Lag 0)
None -5.643683* 1%( -2.632688)

(level) 5%( -1.950687)
10%( -1.611059)
Intercept -5.786764* 1% ( -3.632900)

(level) 5% (-2.948404)
10% (-2.612874)
Trend and Intercept -5.732739* 1% ( -4.243644)

(level) 5% (-3.544284)
10% ( -3.204699)
None -6.596060* 1% ( -2.641672)

(1st difference) 5% ( -1.952066)
10% ( -1.610400)
**Indicates acceptance of null hypothesis

*Indicates rejection of null hypothesis
*reference no.1
Hypothesis:
H0 = A D F > critical values -- reject null hypothesis i.e., unit root does not exists.
H1 = A D F < critical values – not reject null hypothesis i.es. unit root exist
Interpretation:
Nifty results from the table shows no unit root problem, so they are stationary at their none, intercept,
trend & intercept and 1stdifference i.e. ADF is less than Mackinnon critical values of 1%, 5% and 10%
level of significance. Hence null hypothesis is rejected for all level of significance.
TABLENO.4.2: SHOWING PRICES AND RETURN NIFTY
Date NSE Nifty
closing Return
price
02/01/2013 6,034.75 0.87
01/02/2013 5,693.05 -5.83
01/03/2013 5,682.55 -0.18
01/04/2013 5,930.20 4.27
02/05/2013 5,985.95 0.94
03/06/2013 5,842.20 -2.43
01/07/2013 5,742.00 -1.73
01/08/2013 5,471.80 -4.82
02/09/2013 5,735.30 4.7
01/10/2013 6,299.15 9.38
01/11/2013 6,176.10 -1.97
02/12/2013 6,304.00 2.05
01/01/2014 6,089.50 -3.46
03/02/2014 6,276.95 3.03
03/03/2014 6,704.20 6.58
01/04/2014 6,696.40 -0.12
02/05/2014 7,229.95 7.67
02/06/2014 7,611.35 5.14
01/07/2014 7,721.30 1.43

01/08/2014 7,954.35 2.97
01/09/2014 7,964.80 0.13
01/10/2014 8,322.20 4.39
03/11/2014 8,588.25 3.15
01/12/2014 8,282.70 -3.62
02/01/2015 8,808.90 6.16
02/02/2015 8,844.60 0.4
02/03/2015 8,491.00 -4.08
01/04/2015 8,181.50 -3.71
01/05/2015 8,433.65 3.04
01/06/2015 8,368.50 -0.78
01/07/2015 8,532.85 1.94
03/08/2015 7,971.30 -6.81
01/09/2015 7,948.90 -0.28
01/10/2015 8,065.80 1.46
02/11/2015 7,935.25 -1.63
01/12/2015 7,946.35 0.14

GRAPH4.1: GRAPH SHOWING NIFTY MOVEMENT FOR 3 YEARS
movements of NSE nifty

10000
8000
NIFTY INDEX
6000
4000
2000
NSE
0
No. of observation
Interpretation:
The graph above speaks about the stationary of the series. It indicates whether a time series is
stationary or not. Nifty movements from January 2013 to December 2015, showing upwardtrend. Thus
the series seems as a stationary data since it is moving upward as time changes.
TABLE NO.4.3: ADF TEST FOR SENSEX
(Lag 0)
None -5.648387* 1% ( -2.632688)

(level) 5% ( -1.950687)
10% ( -1.611059)
Intercept -5.812535* 1% ( -3.632900)

(level) 5% (-2.948404)
10% (-2.612874)

(level) 5% (-3.544284)
10% ( -3.204699)
None -6.412881* 1% ( -2.641672)

(1st difference) 5% ( -1.952066)
10% ( -1.610400)

*reference no.2
Hypothesis:
H0 = A D F > critical values -- reject null hypothesis i.e., unit root does not exist.
H1 = A D F < critical values –not reject null hypothesis i.e. unit root exist.
Interpretation:
The BSE Sensex results from the table shows no unit root problem, so they are stationary at their none,
intercept, trend & intercept and 1st difference i.e. ADF is less than Mackinnon critical values of 1%, 5%
and 10% level of significance. Hence null hypothesis is rejected for all level of significance.
TABLE NO.4.4: SHOWING PRICE AND RETURN OF BSE SENSEX for last 3years
BSE Sensex
Date Sensex return
02/01/2013 19,894.98 1.02
01/02/2013 18,861.54 -5.33
01/03/2013 18,835.77 -0.14
01/04/2013 19,504.18 3.49
02/05/2013 19,760.30 1.3
03/06/2013 19,395.81 -1.86
01/07/2013 19,345.70 -0.26
01/08/2013 18,619.72 -3.82
02/09/2013 19,379.77 4
01/10/2013 21,164.52 8.81
01/11/2013 20,791.93 -1.78
02/12/2013 21,170.68 1.81
01/01/2014 20,513.85 -3.15
03/02/2014 21,120.12 2.91
03/03/2014 22,386.27 5.82
01/04/2014 22,417.80 0.14
02/05/2014 24,217.34 7.72
02/06/2014 25,413.78 4.82
01/07/2014 25,894.97 1.88
01/08/2014 26,638.11 2.83
01/09/2014 26,630.51 -0.03

01/10/2014 27,865.83 4.53
03/11/2014 28,693.99 2.93
01/12/2014 27,499.42 -4.25
02/01/2015 29,182.95 5.94
02/02/2015 29,220.12 0.13
02/03/2015 27,957.49 -4.42
01/04/2015 27,011.31 -3.44
01/05/2015 27,828.44 2.98
01/06/2015 27,780.83 -0.17
01/07/2015 28,114.56 1.19
03/08/2015 26,283.09 -6.74
01/09/2015 26,154.83 -0.49
01/10/2015 26,656.83 1.9
02/11/2015 26,145.67 -1.94
01/12/2015 26,117.54 -0.11

GRAPH 4. 2: GRAPH SHOWING MOVEMENT OF SENSEX FOR 3 YEARS
movements of BSE Sensex

32000
30000
28000
BSE Sensex INDEX
26000
24000
22000
20000
BSE
18000
16000
14000
01/01/13
03/01/13
05/01/13
07/01/13
09/01/13
11/01/13
01/01/14
03/01/14
05/01/14
07/01/14
09/01/14
11/01/14
01/01/15
03/01/15
05/01/15
07/01/15
09/01/15
11/01/15
No. of observation
Interpretation:
The above graph of BSE Sensex is moving in an upward direction from January 2013 to March 2015,
indicating the stationary of the series.
TABLE NO.4.5: ADF TEST FOR BANK NIFTY

(Lag 0)
None -4.883377* 1% ( -2.632688)

(level) 5% ( -1.950687)
10% ( -1.611059)
Intercept -4.856500* 1% ( -3.632900)

(level) 5% (-2.948404)
10% (-2.612874)

(level) 5% (-3.544284)
10% ( -3.204699)
None -7.994439* 1% ( -2.641672)

(1st difference) 5% ( -1.952066)
10% ( -1.610400)
*indicates rejection of null hypothesis

*reference 3
Hypothesis:
H0 = A D F > critical values -- reject null hypothesis i.e., unit root does notexist.
H1 = A D F < critical values – not reject null hypothesis i.e. unit root exist.
Interpretation:
BANK nifty results from the table shows no unit root problem, so they are stationary at their none,
intercept, trend & intercept and 1st difference i.e. ADF is less than Mackinnon critical values of 1%, 5%
and 10% level of significance. Hence null hypothesis is rejected for all level of significance.
TABLE NO.4.6: SHOWING PRICE AND RETURN OF BANK NIFTY for last 3years
BANK bank nifty

Date NIFTY return
2013-01-02 12,708.60 1.26
2013-02-01 11,487.35 -10.1
2013-03-01 11,361.85 -1.1
2013-04-01 12,561.55 10.04
2013-05-02 12,475.65 -0.69
2013-06-03 11,617.25 -7.13
2013-07-01 10,015.75 -14.83
2013-08-01 9,049.20 -10.15
2013-09-02 9,617.80 6.09
2013-10-01 11,473.15 17.64
2013-11-01 11,153.95 -2.82
2013-12-02 11,385.25 2.05
2014-01-01 10,237.75 -10.62
2014-02-03 10,764.70 5.02
2014-03-03 12,742.05 16.86
2014-04-01 12,855.85 0.89
2014-05-02 14,793.40 14.04
2014-06-02 15,241.90 2.99
2014-07-01 15,267.60 0.17
2014-08-01 15,740.40 3.05
2014-09-01 15,392.25 -2.24

2014-10-01 17,045.05 10.2
2014-11-03 18,513.15 8.26
2014-12-01 18,736.65 1.2
2015-01-02 19,843.75 5.74
2015-02-02 19,691.20 -0.77
2015-03-02 18,206.65 -7.84
2015-04-01 18,338.10 0.72
2015-05-01 18,721.35 2.07
2015-06-01 18,296.10 -2.3
2015-07-01 18,729.85 2.34
2015-08-03 17,146.55 -8.83
2015-09-01 17,216.30 0.41
2015-10-01 17,354.50 0.8
2015-11-02 17,430.40 0.44
2015-12-01 16,922.20 -2.96

GRAPH 4. 3: GRAPH SHOWING MOVEMENT OF BANK NIFTY FOR 3 YEARS
movements of BANK NIFTY index

25000
20000
BANK NIFTY INDEX
15000
10000
5000
0
01/01/13
03/01/13
05/01/13
07/01/13
09/01/13
11/01/13
01/01/14
03/01/14
05/01/14
07/01/14
09/01/14
11/01/14
01/01/15
03/01/15
05/01/15
07/01/15
09/01/15
11/01/15
No. of obsrevation
Interpretation:
Bank index movement are moving in an upward direction as time changes, indicating the stationary
nature of series. Thus it can be concluded from the graph that the bank index series are stationary.
TABLE NO.4.7: ADF FOR INFLATION (CPI):

(Lag 0)
None -2.382255* 1% ( -2.632688)

(level) 5% ( -1.950687)
10% ( -1.611059)
Intercept -4.352775* 1% ( -3.632900)

(level) 5% (-2.948404)
10% (-2.612874)

(level) 5% (-3.544284)
10% ( -3.204699)
None -8.502447* 1% ( -2.641672)
(1st difference) 5% ( -1.952066)
10% ( -1.610400)

*reference no.4
Hypothesis:
H0 = A D F > critical values -- reject null hypothesis i.e., unit root does not exist.
H1 = A D F < critical values –not reject null hypothesis i.e. unit root exist.
Interpretation
Inflation rate results from the table shows unit root problem, so they are non-stationaryonly at
none i.e. ADF is greater than Mackinnon critical values of 1% level of significance. However,
their intercept, trend and intercept and 1st difference is stationary as ADF is lesser than critical
value. The null hypothesis is accepted for (-2.382255) at none of 1% level of significance.
TABLE NO.4.8: SHOWING INFLATION RATES
Date Inflation rate
2013-01-02 -1.65%
2013-02-01 0.83%
2013-03-01 1.26%
2013-04-01 0.42%
2013-05-02 0.85%
2013-06-03 1.73%
2013-07-01 1.32%
2013-08-01 0.88%
2013-09-02 0.89%
2013-10-01 0.45%
2013-11-01 0.90%
2013-12-02 0.91%
2014-01-01 0.00%
2014-02-03 0.00%
2014-03-03 0.00%
2014-04-01 0.00%
2014-05-02 0.00%
2014-06-02 2.44%
2014-07-01 0.82%
2014-08-01 0.83%
2014-09-01 1.26%
2014-10-01 0.42%
2014-11-03 0.42%
2014-12-01 -0.84%
2015-01-02 0.00%
2015-02-02 0.37%
2015-03-02 1.13%
2015-04-01 0.76%
2015-05-01 0.38%
2015-06-01 0.77%
2015-07-01 1.16%
2015-08-03 0.78%
2015-09-01 0.79%
2015-10-01 0.40%
2015-11-02 -0.39%
2015-12-01 0.40%
GRAPH4.4: SHOWING MOVEMENTS OF INFLATION RATES
movements of INFLATION rates

3.00%
2.50%
2.00%
1.50%
Inflation rates
1.00%
0.50% INFLATION
0.00%
-0.50%
-1.00%
-1.50%
-2.00%
No. of observation
Interpretation:
The above graph indicates that the time series are stationary or not. The series seems as a non-
stationary since there is a drastic change in CPI price as time changes. Hence the CPI price are non-
stationary as it moves invariably.
Grangers Co integration Test:
Co integration between Nifty and consumer price index

• An ordinary least square (OLS) regression is done on the data.
1. NIFTY and CPI Regression Result

Parameter Co-efficient
Nifty -0.000167
• Residuals e=y-y^ Results

The residuals of both the regression equations are
Table No.4.9: NIFTY and CPI Co-integration Test:

Constraints ADF value Mackinnon
(log 0) Critical value
None (level) -0.524780 1% (-2.632688)
5% (-1.950687)
10%(-1.61105)
Reference:5
Interpretation:
Unit root test is stationarity of residuals from the co integration equation shows that the null
hypothesis is rejected at 1%,5% and 10% level of significance implying Nifty and CPI are co
integrated, but as the coefficients are statistically significant with a negative sign. This indicates
the negative relationship between Nifty and CPI.
2. Sensex and CPI Regression Result
Sensex -0.000136

Table No.4.10: Sensex and CPI Co-integration Test:

Constraints ADF value Mackinnon Critical value
(log 0)
None (level) -0.405241 1% (-2.632688)
5% (-1.950687)
10% (-1.61105)
Reference 6
Interpretation:
Unit root test for stationarity of residuals from the co integration equation shows that the null
hypothesis is rejected at 1%,5% and 10% level of significance implying Sensex and CPI are co
integrated, but as the coefficients are statistically significant with a negative sign. This indicates
the negative relationship between Sensex and CPI.
4. Bank Nifty and CPI Regression Result
Bank Nifty -302.539

Table No.4.11: Bank Nifty and CPI Co-integration Test:

Constraints ADF value Mackinnon Critical value
(log 0)
None (level) -1.774783 1% (-2.632688)
5% (-1.950687)
10% (-1.61105)
Reference No:7
Interpretation:
Unit root test for stationarity of residuals from the co integration equation shows that the null
hypothesis is rejected at 1%,5% and 10% level of significance implying Bank Nifty and CPI are
co integrated, but as the coefficients are statistically significant with a negative sign. This
indicates the negative relationship between Bank Nifty and CPI.
Grangers Causality Test:
The causality results for the two variables are:
Table no.4.12: BANK Nifty and Consumer price index
Lags Hypothesis No. of F-statistic Probability

observations
2 Bank nifty does not cause CPI 34 0.06227 0.9398

CPI does not cause bank nifty
1.12704 0.3378

0.76479 0.5590

0.36160 0.8931
Reference No:8
H0 =BANK NIFTY does not causes CPI
H1 = BANK NIFTY causes CPI
H0 =CPI does not causes BANK NIFTY

H1 = CPI causesBANK NIFTY
Interpretation:
The calculated F values from lag 2 to 6 are greater than the F statistics, which rejects the null
hypothesis. And the P value is also close to zero. Thus there is bidirectional causality at every lag
between BANK Nifty and CPI.
Table No.4.13: BSE Sensex and Consumer price index

observations
2 BSE Sensex does not cause CPI 34 0.24091 0.7875

CPI does not cause BSE Sensex
0.80466 0.4570
4 BSE Sensexdoes not cause CPI 36 0.51805 0.7233

0.68941 0.6067
6 BSE Sensex does not cause CPI 30 0.68495 0.6644

0.85244 0.5480
Reference No: 9
H0 =BSE Sensex does not causes CPI
H1 = BSE Sensex causes CPI
H0 =CPI does not causes BSE Sensex

H1 = CPI causes BSE Sensex
Interpretation:
between BSE Sensex and CPI.
Table No.4.14: NIFTY and Consumer price index

observations
2 NIFTY does not cause CPI 34 0.16609 0.8478

CPI does not cause NIFTY
1.13338 0.3358

0.87300 0.4951

0.79776 0.5847
Reference No: 10
Interpretation:
between Nifty and CPI.
CHAPTER-5
SUMMARY OF FINDINGS,
CONCLUSION AND
SUGGESTIONS
FINDINGS:
 There is no unit root for the return of common stock and expected inflation rates as it
shown in ADF test for intercept i.e. Nifty is -5.68, Sensex is -5.69, Bank nifty is -4.85 and
inflation is -4.35 hence there null hypothesis is rejected and proved that there is relation
among stock index return and inflation.
Also proved that relation between stock index return and inflation does not change with
indices.
 The causality test proves that inflation can cause stock return and stock return can cause
where F value is greater than F statistic i.e. This rejects null hypothesis. Hence there is
bidirectional cause between stock returns and inflation.
 Since the Stocks can be hedged against inflation.
SUGGESTIONS/ RECOMMENDATIONS:
 The investors should hedge against inflation before investing in any stocks.
 By analysing the stocks using moving averages, resistance and support, one can ascertain
their position i.e. to buy or sell.
 Before investing, the investors have to analyse other external factors like interest rate,
inflation rates, political stability, and exchange rates etc. which have an effect on stock
returns.
CONCLUSION:
The Fisher hypothesis says return of general stocks and inflation rates are interdependent. In case of
effective market information’s are a accessible to all investors that helps in finding the variations in rate
of return and rate of inflation.
since index is not anything but weighted average of share prices of numerous organisation from various
sectors, Sensex have considered as the effect of rate on inflation on that. Sensex, Nifty and Bank index
are treated to identify the movements of these variables at similar me direction or not. The “co-
integration test” proves that the relation among these two factors are positive hence they are
interrelated.
The results of the three indices are:
• CNX Nifty:
The nifty is considered for a period of 10 years. The series is stationary at I(1), but it is negatively
related to inflation as the coefficients statistically significant with negative sign (-0.000167) & (-
0.524780) and there exists a bidirectional causal relationship between nifty and inflation.
• Bank Index:
The bank index is considered for 5 years. The series is stationary at I(1). And its coefficient is also
statistically significant with a negative sign (-302.539) & (-1.77478). Thus showing the negative
relation between the two. Its causal relationship is in both directions.
• BSE Sensex:
The results of BSE are also same as nifty and bank. Study is done for a period of 9 years. It is
stationary at I (1) and its coefficients are (-0.000136) & (-0.405241) showing the negative relation. And
the causality runs from the both direction.
Thus, the relationship between stock returns and inflation does not change with indices. It is evident
from the overall results that the causality runs from inflation to stock returns and also in the reverse
order with a negative sign in both directions. The coefficients are statistically important with a negative
nature.
The negatve relationship can be interpreted several ways: for example the unexpected inflation is
generally considered to be positively correlated with inflation uncertainty and greater level of inflation
uncertainty does not encourages investment in most risky assets and grades in mitigated nominal
returns. Another interpreted is that the negative relation is due to the fact that changes in expected
inflation are most likely to be positively correlated with unexpected inflation.
The market informational effectiveness hypothesis can be rejected, as there exists a bidirectional
relationship between stock returns and inflation. Market is informational incompetent from the point of
view of inflation rate. Market participants can create gainful trading procedures and so constantly
receive greate than average market returns, as future inflation can be predicted.
It can be concluded that the stocks can be hedge against inflation. This does not mean that equities are
hazardous to investors’ health. Stocks are priced today to yield very lucrative returns. The prospective
returns have to be good; however, to compensate stockholders for the risk they bear because equities
are a good for inflation hedge. When the rate of inflation unexpected increases, real stock prices will
fall. Conversely, when the rate of inflation unexpectedly drops, real stock prices will raise.
So if one does not mind bearing some risk especially the risk that the inflation rate may be higher than
stocks. If one seeks an inflation hedge, stocks are generally good investments. My conclusion rests on
the observation that rising inflation rates tend to depress corporate earnings and thereby stock prices,
which has been proved by the Grangers co integration test.
Bibliography
TEXT BOOKS:
• Basic Econometrics - DamodarN.Gujarati, (fourth edition)
•Security analysis and portfolio management -Punithavatipandian(Second edition)
REFERENCE:
Robert, D.G (2008). Effect of macroeconomics variables on stock market returns for four emerging economics:
Brazil, Russia, India and ChinaInt.Bus. Econ.Res.j..7(3).
Pearce.D.k. andRoley.v.v (1985), stock prices and Economic News, The Journsl of Business vol. 58(1) pp.49-67.
Fama, E. (1981), Stock returns, Real activity, Inflation, and Money. The American Economics Review,
vol.71(4), pp. 545-565.
Sireesha, Bhanu.p. (2013) “Effect of select Macroeconomics Variables on Stock Returns in India” International
Journal of Marketing, Financial Servicea& Management Research. Vol. 2 (6): 197-209 Retrived April 19,2014
from http;//indianresearchjournals.com/pdf.
Jiranyakaul.K. (2009). Economics Forces & the Thai stock market, 1993-2007. Journal of financial Research.
Durai S R S &Bhaduri S N (2009), “Stock prices, inflation & output” Evidence from Wavelet Analysis”,
Economics Modelling, vol.26, pp. 1089-1092.
Shanmugam K R &Misra S R (2005). “Stock Returns inflation relation in India”, working paper, Madras school
of economics, Chennai.
WEB SITES:
• www.nseindia.com
• www.financeyahoo.com
• www.inflationdata.com
• www.google.com
• www.investorpedia.com
• www.bseindia.com
Reference 1:
UNIT ROOT TEST FOR NIFTY:
1)level with intercept
Null Hypothesis: SERIES04 has a unit root

Exogenous: Constant
Lag Length: 0 (Automatic - based on SIC, maxlag=9)
t-Statistic Prob.*
Augmented Dickey-Fuller test statistic -5.786764 0.0000

Test critical values: 1% level -3.632900
5% level -2.948404
10% level -2.612874
*MacKinnon (1996) one-sided p-values.
Augmented Dickey-Fuller Test Equation

Dependent Variable: D(SERIES04)
Method: Least Squares
Date: 02/19/16 Time: 22:44
Sample (adjusted): 2013M02 2015M12
Included observations: 35 after adjustments
Variable Coefficient Std. Error t-Statistic Prob.
SERIES04(-1) -1.005985 0.173842 -5.786764 0.0000

C 0.791277 0.685612 1.154118 0.2567
R-squared 0.503660 Mean dependent var -0.058058

Adjusted R-squared 0.488619 S.D. dependent var 5.540558
S.E. of regression 3.962103 Akaike info criterion 5.646872
Sum squared resid 518.0426 Schwarz criterion 5.735749
Log likelihood -96.82027 Hannan-Quinn criter. 5.677553
F-statistic 33.48664 Durbin-Watson stat 1.880754
Prob(F-statistic) 0.000002
2) level with intercept and trend

Exogenous: Constant, Linear Trend
t-Statistic Prob.*

5% level -3.544284
10% level -3.204699

Date: 02/19/16 Time: 22:45
SERIES04(-1) -1.012701 0.176652 -5.732739 0.0000

C 1.333910 1.408607 0.946971 0.3508
@TREND("2013M01") -0.029831 0.067384 -0.442708 0.6610

3)level with none

Exogenous: None
t-Statistic Prob.*

5% level -1.950687
10% level -1.611059

Date: 02/19/16 Time: 22:45
SERIES04(-1) -0.963035 0.170639 -5.643683 0.0000

Durbin-Watson stat 1.884373
4) 1 level difference and none
Null Hypothesis: D(SERIES04) has a unit root

Exogenous: None
t-Statistic Prob.*

5% level -1.952066
10% level -1.610400

Dependent Variable: D(SERIES04,2)
Date: 02/19/16 Time: 22:46
D(SERIES04(-1)) -3.806492 0.577086 -6.596060 0.0000

D(SERIES04(-1),2) 1.940810 0.474192 4.092879 0.0003
D(SERIES04(-2),2) 1.110599 0.321676 3.452535 0.0018
D(SERIES04(-3),2) 0.514676 0.161436 3.188112 0.0036
R-squared 0.846211 Mean dependent var 0.164570

Reference 2:
UNIT ROOT TEST FOR BSE SENSEX
1) level and intercept

Exogenous: Constant
t-Statistic Prob.*

5% level -2.948404
10% level -2.612874

Date: 02/19/16 Time: 23:06
SERIES04(-1) -1.010025 0.173767 -5.812535 0.0000

C 0.786049 0.650280 1.208786 0.2353


t-Statistic Prob.*

5% level -3.544284
10% level -3.204699

Date: 02/19/16 Time: 23:18
SERIES04(-1) -1.024052 0.176599 -5.798743 0.0000

C 1.548451 1.337316 1.157880 0.2555
@TREND("2013M01") -0.041694 0.063732 -0.654214 0.5176

3) level and none

Exogenous: None
t-Statistic Prob.*

5% level -1.950687
10% level -1.611059

Date: 02/19/16 Time: 23:19
SERIES04(-1) -0.962390 0.170383 -5.648387 0.0000

4) 1 difference with none

Exogenous: None
t-Statistic Prob.*

5% level -1.952066
10% level -1.610400

Date: 02/19/16 Time: 23:21
D(SERIES04(-1)) -3.868072 0.603172 -6.412881 0.0000

D(SERIES04(-1),2) 1.973232 0.496678 3.972864 0.0005
D(SERIES04(-2),2) 1.089865 0.335714 3.246407 0.0031
D(SERIES04(-3),2) 0.490172 0.166336 2.946882 0.0065

Reference 3:
UNIT ROOT TEST FOR BANK NIFTY
1) level with intercept

Exogenous: Constant
t-Statistic Prob.*

5% level -2.948404
10% level -2.612874

Date: 02/19/16 Time: 23:24
SERIES06(-1) -0.837220 0.172392 -4.856500 0.0000

C 0.662541 1.286471 0.515007 0.6100


t-Statistic Prob.*

5% level -3.544284
10% level -3.204699

Date: 02/19/16 Time: 23:24
SERIES06(-1) -0.838360 0.175238 -4.784117 0.0000

C 0.363282 2.647665 0.137208 0.8917
@TREND("2013M01") 0.016686 0.128416 0.129937 0.8974

3) level with none

Exogenous: None
t-Statistic Prob.*

5% level -1.950687
10% level -1.611059

Date: 02/19/16 Time: 23:25
SERIES06(-1) -0.825848 0.169114 -4.883377 0.0000

4) 1 difference with none

Exogenous: None
t-Statistic Prob.*

5% level -1.952066
10% level -1.610400

Date: 02/19/16 Time: 23:25
D(SERIES06(-1)) -3.299656 0.412744 -7.994439 0.0000

D(SERIES06(-1),2) 1.708718 0.334594 5.106834 0.0000
D(SERIES06(-2),2) 1.176767 0.237602 4.952687 0.0000
D(SERIES06(-3),2) 0.649963 0.134661 4.826659 0.0000

Reference 4:
UNIT ROOT TEST FOR INFLATION
1) adf with level & intercept

Exogenous: Constant
t-Statistic Prob.*

5% level -2.948404
10% level -2.612874

Date: 02/19/16 Time: 22:34
SERIES01(-1) -0.755291 0.173519 -4.352775 0.0001

C 0.005448 0.001601 3.403669 0.0018

S.E. of regression 0.005430 Akaike info criterion -7.538439
Sum squared resid 0.000973 Schwarz criterion -7.449562
Log likelihood 133.9227 Hannan-Quinn criter. -7.507759
2) adf level with intercept and trend

t-Statistic Prob.*

5% level -3.544284
10% level -3.204699

Date: 02/19/16 Time: 22:36
SERIES01(-1) -0.830395 0.176282 -4.710605 0.0000

C 0.008637 0.002557 3.377933 0.0019
@TREND("2011M01") -0.000146 9.23E-05 -1.577645 0.1245

3) adf level with none

Exogenous: None
t-Statistic Prob.*

5% level -1.950687
10% level -1.611059

Date: 02/19/16 Time: 22:37
SERIES01(-1) -0.271426 0.113937 -2.382255 0.0229

4) adf 1 level with none

Exogenous: None
t-Statistic Prob.*

5% level -1.951000
10% level -1.610907

Date: 02/19/16 Time: 22:37
D(SERIES01(-1)) -1.377654 0.162030 -8.502447 0.0000

Reference 5:
Grangers co-integration test : Inflation and Nifty
Dependent Variable: INFLATION_RATE

Date: 02/23/16 Time: 12:52
Sample: 2013M01 2015M12
Included observations: 36
NSE_RETURN -0.000167 0.000317 -0.524780 0.6031

C 0.005879 0.001230 4.780075 0.0000
Inflation and bank nifty cointigrated but negatively cointegrated as coefficient (-0.000167)
Reference 6:
Grangers co-integration test : Inflation and Sensex
Dependent Variable: INFLATION_RATE

Date: 02/23/16 Time: 12:51
Sample: 2013M01 2015M12
BSE_RETURN -0.000136 0.000336 -0.405241 0.6878

C 0.005854 0.001235 4.742029 0.0000
Reference 7:
Grangers co-integration test : Inflation and Bank nifty
Dependent Variable: BANK_NIFTY_RETURN

Date: 02/23/16 Time: 12:45
Sample: 2013M01 2015M12
INFLATION_RATE -302.5390 170.4654 -1.774783 0.0849

C 2.569064 1.550415 1.657017 0.1067
Reference 8:
Grangers Causality Test: Inflation and Bank nifty
Lags: 2
Null Hypothesis: Obs F-Statistic Prob.
BANK_NIFTY does not Granger Cause INFLATION_RATE 34 0.06227 0.9398

INFLATION_RATE does not Granger Cause BANK_NIFTY 1.12704 0.3378
Lags: 4

Lags: 6

F value (5%) > F stat

Reference 9:
Grangers Causality Test: Inflation and Sensex
Lags: 2
BSE_RETURN does not Granger Cause INFLATION_RATE 34 0.24091 0.7875

INFLATION_RATE does not Granger Cause BSE_RETURN 0.80466 0.4570
Lags: 4

Pairwise Granger Causality Tests

Date: 02/23/16 Time: 15:06
Sample: 2013M01 2015M12
Lags: 6

Reference 10:
Grangers Causality Test: Inflation and Nifty
Lags: 2
NSE_RETURN does not Granger Cause INFLATION_RATE 34 0.16609 0.8478

INFLATION_RATE does not Granger Cause NSE_RETURN 1.13338 0.3358
Lags: 4

Lags: 6


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Executive summary:

Relation between stock index returns & inflation:

1.1 STATEMENT OF PROBLEM:

1. To know the relationship between stock return and inflation.

1.4 SCOPE OF STUDY:

1.5 RESEARCH METHODOLOGY:

c. Sampling frame: Sampling Frame is the Indian stock market.

1.6 LITERATURE REVIEW

Stock market participants are as follows:

TIMINGS OF STOCK MARKETS IN INDIA

Pre-market 9:00AM to 9:15AM

TRADING AND SETTLEMENT:

Options are of two types - Calls and Puts options:

It consists of 7000 employees and website is www. Indiabulls.com.

DIRACTOR DIRECTOR DIRECTOR DIRECTOR DIRECTOR

1. Sameer Gehlaut- owns 60% of stake in the Indiabulls group.

Indiabulls housing finance limited:

Indiabulls Real Estate Limited:

Indiabulls securities limited:

2.5 COMPETITORS INFORMATION:

COMPARISION OF INDIABULLS BROKERAGE SERVICES

ONLINE BROKERS BROKERAGE CHARGES BROKERAGE CHARGES

Sharekhan 0.01% to 0.10% 0.03% to 0.50%

UTI securities 0.15% 0.80%

Indiabulls 0.05% to 0.10% 0.25% to 0.50%

IndiaInfoline 0.10% 0.50%

Motilal oswal 0.03% to 0.15% 0.30% to 0.50%

2.8 FUTURE GROWTH AND PROSPECTS:

BALANCE SHEET OF LAST 2YEARS

PARTICULARS Mar’ 2015 Mar’ 2014

Total share capital 52.24 46.22

Equity share capital 52.24 46.22

Share Application Money 11.15 18.92

Preference Share Capital - -

Init. Contribution Settler - -

Preference Share Application Money - -

Employee Stock Option - -

Reserves 266.48 171.47

Networth 329.87 236.61

Secured Loans 958.87 167.13

Unsecured Loans 725.00 200.00

Total Debt 1683.87 367.13

Policy Holders Funds - -

Group Share in Joint Venture - -

Gross Block 797.55 91.99

Less: Revaluation Reserves - -

Less: Accum. Depreciation 133.57 57.84

Net Block 663.98 34.15

Capital Work in Progress 11.46 -

Investments 69.36 32.39

Sundry Debtors 248.15 138.04

Cash and Bank Balance 689.40 296.85

Total Current Assets 937.55 434.89

Loans and Advances 743.43 316.62

Total CA, Loans & Advances 1680.98 751.51

Current Liabilities 398.32 169.78

Provisions 13.72 44.53

Total CL & Provisions 412.04 214.31

Net Current Assets 1268.94 537.2

Total Assets 2013.74 603.74

Contingent Liabilities 252.69 41.03

Book Value (Rs) 12.20 9.42

Current assets - inventories

3. Debt - Equity Ratio