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Study of volatility_and_its_factors_on_indian_stock_market


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Study of volatility_and_its_factors_on_indian_stock_market

  1. 1. MBA Volatility & Affecting Factors in Indian Stock MarketAn investor with a heavy concentration of stocks in an investment portfolio mightbe feeling some unease these days. The market is behaving a lot different now thenover recent years.Stock market volatility is all about uncertainty. How macroeconomic events andtrends will affect the future profitability (dividends, cash flows) of listed companiesand hence their market valuations?. Typical examples of such variables in thecurrent environment are: geo-political tensions, energy prices, inflationexpectations, interest rate policies, instability of exchange rates, p-notes, RBI andGovernment policies, sub prime crises, investors sentiment etc. These uncertaintiesin some form or another are always present and some times it is much higher than inother periods. Furthermore, volatility increases with the financial leverage (debt) ofcompanies. In addition, volatility is correlated with interest rate movements andincreases during economic recessions.Stock markets in general have treated investors well over the past few years with nomajor setbacks. In general markets followed one direction only, namely upwards(in the long run). However, during this year (FY 2007-2008) volatility once againhas come to the fore as more investors and traders were piling into the markets.The main objective of this study is to analyse the causes ofstock market volatility. This report approaches to study: • the various causes that results in volatility in stock market • the reactions of stock market to these causes • using the above information to manage the future volatility in the stock marketThis study makes a detailed analysis of various issues causing volatility in stockmarket there by reflecting it on the market movements i.e., response and behaviourof market. 1TMU New Satara College of Engg. & Mgmt. Pandharpur
  2. 2. MBA Volatility & Affecting Factors in Indian Stock MarketDuring the past years, Indian Capital Market has undergone metamorphic reforms.Every segment of Indian Capital Market viz primary and secondary markets,derivatives, institutional investment and market intermediation has experiencedimpact of these changes. Our market, today, is being recognized as one of the mosttransparent, efficient and clean markets. Several techniques /instruments are used byacademicians, policy makers, practitioners and investors to test the extent ofefficiency of the market. An attempt has been made to analyse characteristics ofstock indices in India and compare them with some of the mature as well asemerging capital markets around the globe.In the recent past there have been perceptions that volatility in the market has goneup; Inter and Intra-day volatility. News items and some clinical research papers alsoprovided figures to evidence this argument. SEBI undertook a comprehensive anddeep analysis of volatility by using several statistical techniques to measure andanalyse it. 18 countries covering almost all continents- developed as well asemerging markets and young and old markets- have been analysed. The resultsshow that the volatility has gone up in the recent past as it has been perceived.Indian stock market provides a very high rate of return and comparatively highvolatility. Efficiency of Indian market appear to have improved in the past fewyears owing to contraction in settlement cycles, introduction of derivative products,improvement in corporate governance practices etc.Financial markets play an important role in the process of economic growth anddevelopment by facilitating savings and channeling funds from savers to investors.While there have been numerous attempts to develop the financial sector, growingeconomies are also facing the problem of high volatility in numerous frontsincluding volatility of its financial sector. 2TMU New Satara College of Engg. & Mgmt. Pandharpur
  3. 3. MBA Volatility & Affecting Factors in Indian Stock MarketVolatility may impair the smooth functioning of the financial system and adverselyaffect economic performance. Similarly, stock market volatility also has a numberof negative implications. One of the ways in which it affects the economy isthrough its effect on consumer spending. The impact of stock market volatility onconsumer spending is related via the wealth effect. Increased wealth will drive upconsumer spending. However, a fall in stock market will weaken consumerconfidence and thus drive down consumer spending. Stock market volatility mayalso affect business investment and economic growth directly. A rise in stockmarket volatility can be interpreted as a rise in risk of equity investment and thus ashift of funds to less risky assets. This move could lead to a rise in cost of funds tofirms and thus new firms might bear this effect as investors will turn to purchase ofstock in larger, well known firms.While there is a general consensus on what constitutes stock market volatility and,to a lesser extent, on how to measure it, there is far less agreement on the causes ofchanges in stock market volatility. Some economists see the causes of volatility inthe arrival of new, unanticipated information that alters expected returns on a stock .Thus, changes in market volatility would merely reflect changes in the local orglobal economic environment. Others claim that volatility is caused mainly bychanges in trading volume, practices or patterns, which in turn are driven by factorssuch as modifications in macroeconomic policies, shifts in investor tolerance of riskand increased uncertainty.The causes and the degree of stock market volatility can help forecasters predict thepath of an economy’s growth and the structure of volatility can imply that“investors now need to hold more stocks in their portfolio to achievediversification” there by minimizing risk with maximum returns. 3TMU New Satara College of Engg. & Mgmt. Pandharpur
  4. 4. MBA Volatility & Affecting Factors in Indian Stock Market Indian Stock Market: The ever-growing and fast-maturing India Market is a lucrative businessdestination for developed countries. With 7-8% of GDP growth, huge analytical,young and English speaking work force the pull for opportunities are luring. Thebandwidth of India Market is enviably wide and very deep. Markets in India are well protected by legal guidelines and efficientadministrators. With a liberal and proactive government at the center the road aheadfor Markets of India is very rosy. Market India has witnessed exponential growthover past one and half decade. Liberal and transparent financial policies haseffected free-in-flow of FII and as a result of which India Market has grown to acolossal monster in the international market. Foreseeing sure and substantial returnson investments (ROI) companies are pro- actively listing on the stock marketindexes. Government agencies once much hated for red tape and bribes has shed itsimage. Professionalism is their new mantra. Public Enterprises like IOC, ONGC,BHEL, NTPC, SAIL, MTNL, BPCL, HPCL and GAIL, SBI, LIC, HindustanAntibiotics Limited, Air India etc. to name a few, are giving Private Indiancompanies a good run for their money. Private giants like Reliance IndustriesLimited, Infosys, Tata, Birla Corporation, Jet Airways, Ranbaxy, Biocon, BajajAuto, ICICI are breaking their own records every financial years. Markets in India has witnessed meteorite rise of the Indian Software,Telecommunication and Banking Industry. This has propelled growth of UrbanIndian class which, in turnas increased consumerism. Today, each and every type ofindustry of Market India like Infrastructure, Pharmaceutical & Biotechnology,Banking & Insurance, Electronics, FMCG etc. has tremendous growth potential.Retail Industry along with Agriculture & Food industry are yet to contribute theirshare to the growth story of Market India. 4TMU New Satara College of Engg. & Mgmt. Pandharpur
  5. 5. MBA Volatility & Affecting Factors in Indian Stock MarketThe unpredictable behavior of the market gave it a tag – ‘a volatile market.’ Thefactors that affected the market in the past were good monsoon, Bharatiya JanathaParty’s rise to power etc. The result of a cricket match between India and Pakistanalso affected the movements in Indian stock market. The National DemocraticAlliance led by BJP, during 2004 public elections unsuccessfully tried to ride on themarket sentiments to power. NDA was voted out of power and the sensex recordedthe biggest fall in a day amidst fears that the Congress-Communist coalition wouldstall economic reforms. Later prime minister Man Mohan Singh’s assurance of‘reforms with a human face’ cast off the fears and market reacted sharply to touchthe highest ever mark of 8500.India, after United States hosts the largest number of listed companies. Globalinvestors now ardently seek India as their preferred location for investment. Onceviewed with skepticism, stock market now appeals to middle class Indians also.Many Indians working in foreign countries now divert their savings to stocks. Thisrecent phenomenon is the result of opening up of online trading and diminishedinterest rates from banks. The stockbrokers based in India are opening offices indifferent countries mainly to cater the needs of Non Resident Indians. The timefactor also works for the NRIs. They can buy or sell stock online after returningfrom their work places.The recent incidents that led to growing interest among Indian middle class are theinitial public offers announced by Tata Consultancy Services, Maruti UdyogLimited, ONGC and big names like that. Good monsoons always raise the marketsentiments. A good monsoon means improved agricultural produce and morespending capacity among rural folk.The bullish run of the stock market can be associated with a steady growth ofaround 6% in GDP, the growth of Indian companies to MNCs, large potential ofgrowth in the fields of telecommunication, mass media, education, tourism and ITsectors backed by economic reforms ensure that Indian stock market continues itsbull run. 5TMU New Satara College of Engg. & Mgmt. Pandharpur
  6. 6. MBA Volatility & Affecting Factors in Indian Stock MarketBull and Bear Markets:Bull market refers to a market that is on the rise, it has sustained increase in marketshare prices.In such times, participants have faith that the uptrend will continue inthe long term.Typically,countrys economy is strong and employment levels arehigh. Bear market is one that is in decline,share prices are continuouslydropping,resulting in a downward trend that participants believe will continue in thelong run,having a spiraling effect. During a bear market,the economy typicallyslows down and unemployment may rise as companies begin laying off workers.Bear and Bull markets are named after the way in which each animal attacks itsvictims. It is characteristic of the Bull to drive its horns UPWARDS into theair,therefore upward moving markets are termed Bull Markets. Bear on the otherhand,swipes its paws DOWNWARDS upon its unfortunate prey,thereforedownward moving markets are termed Bear Markets.Exchanges are an organised marketplace, either corporation or mutual organisation,where members of the organisation gather to trade company stocks and othersecurities. The members may act either as agents for their customers, or asprincipals for their own accounts.Stock exchanges also facilitates for the issue and redemption of securities and otherfinancial instruments including the payment of income and dividends. The recordkeeping is central but trade is linked to such physical place because modern marketsare computerised. The trade on an exchange is only by members and stock brokerdo have a seat on the exchange. 6TMU New Satara College of Engg. & Mgmt. Pandharpur
  7. 7. MBA Volatility & Affecting Factors in Indian Stock MarketList of Stock Exchanges In India: • Bombay Stock Exchange • National Stock Exchange • Regional Stock Exchanges  Ahmedabad Stock Exchange  Bangalore Stock Exchange  Bhubaneshwar 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 ExchangeThe working of stock exchanges in India started in 1875. BSE is the oldest stockmarket in India. The history of Indian stock trading starts with 318 persons takingmembership in Native Share and Stock Brokers Association, which we now know 7TMU New Satara College of Engg. & Mgmt. Pandharpur
  8. 8. MBA Volatility & Affecting Factors in Indian Stock Marketby the name Bombay Stock Exchange or BSE in short. In 1965, BSE got permanentrecognition from the Government of India. National Stock Exchange comes secondto BSE in terms of popularity. BSE and NSE represent themselves as synonyms ofIndian stock market. The history of Indian stock market is almost the same as thehistory of BSE.The 30 stock sensitive index or Sensex was first compiled in 1986. The Sensex iscompiled based on the performance of the stocks of 30 financially sound benchmarkcompanies. In 1990 the BSE crossed the 1000 mark for the first time. It crossed2000, 3000 and 4000 figures in 1992. The reason for such huge surge in the stockmarket was the liberal financial policies announced by the then financial ministerDr. Man Mohan Singh.The up-beat mood of the market was suddenly lost with Harshad Mehta scam. Itcame to public knowledge that Mr. Mehta, also known as the big-bull of Indianstock market diverted huge funds from banks through fraudulent means. He playedwith 270 million shares of about 90 companies. Millions of small-scale investorsbecame victims to the fraud as the Sensex fell flat shedding 570 points.To prevent such frauds, the Government formed The Securities and ExchangeBoard of India, through an Act in 1992. SEBI is the statutory body that controls andregulates the functioning of stock exchanges, brokers, sub-brokers, portfoliomanagers investment advisors etc. SEBI oblige several rigid measures to protect theinterest of investors. Now with the inception of online trading and daily settlementsthe chances for a fraud is nil, says top officials of SEBI.Sensex crossed the 5000 mark in 1999 and the 6000 mark in 2000. The 7000 markwas crossed in June and the 8000 mark on September 8 in 2005. Many foreigninstitutional investors (FII) are investing in Indian stock markets on a very largescale. The liberal economic policies pursued by successive Governments attractedforeign institutional investors to a large scale. Experts now believe the sensex cansoar past 14000 mark before 2010. 8TMU New Satara College of Engg. & Mgmt. Pandharpur
  9. 9. MBA Volatility & Affecting Factors in Indian Stock MarketBombay Stock Exchange (BSE):Bombay Stock Exchange is the oldest stock exchange in Asia with a rich heritage,now spanning three centuries in its 133 years of existence. What is now popularlyknown as BSE was established as "The Native Share & Stock Brokers Association"in 1875.BSE is the first stock exchange in the country which obtained permanentrecognition (in 1956) from the Government of India under the Securities Contracts(Regulation) Act 1956. BSEs pivotal and pre-eminent role in the development ofthe Indian capital market is widely recognized. It migrated from the open outcrysystem to an online screen-based order driven trading system in 1995. Earlier anAssociation Of Persons (AOP), BSE is now a corporatised and demutualised entityincorporated under the provisions of the Companies Act, 1956, pursuant to the BSE(Corporatisation and Demutualisation) Scheme, 2005 notified by the Securities andExchange Board of India (SEBI). With demutualisation, BSE has two of worldsbest exchanges, Deutsche Börse and Singapore Exchange, as its strategic partners.Over the past 133 years, BSE has facilitated the growth of the Indian corporatesector by providing it with an efficient access to resources. There is perhaps nomajor corporate in India which has not sourced BSEs services in raising resourcesfrom the capital market.Today, BSE is the worlds number 1 exchange in terms of the number of listedcompanies and the worlds 5th in transaction numbers. The market capitalization ason December 31, 2007 stood at USD 1.79 trillion . An investor can choose frommore than 4,700 listed companies, which for easy reference, are classified into A, B,S, T and Z groups.The BSE Index, SENSEX, is Indias first stock market index that enjoys an iconicstature , and is tracked worldwide. It is an index of 30 stocks representing 12 major 9TMU New Satara College of Engg. & Mgmt. Pandharpur
  10. 10. MBA Volatility & Affecting Factors in Indian Stock Marketsectors. The SENSEX is constructed on a free-float methodology, and is sensitiveto market sentiments and market realities. Apart from the SENSEX, BSE offers 21indices, including 12 sectoral indices. BSE has entered into an index cooperationagreement with Deutsche Börse. This agreement has made SENSEX and other BSEindices available to investors in Europe and America. Moreover, Barclays GlobalInvestors (BGI), the global leader in ETFs through its iShares® brand, has createdthe iShares® BSE SENSEX India Tracker which tracks the SENSEX. The ETFenables investors in Hong Kong to take an exposure to the Indian equity market.BSE has tied up with U.S. Futures Exchange (USFE) for U.S. dollar-denominatedfutures trading of SENSEX in the U.S. The tie-up enables eligible U.S. investors todirectly participate in Indias equity markets for the first time, without requiringAmerican Depository Receipt (ADR) authorization. The first Exchange TradedFund (ETF) on SENSEX, called "SPIcE" is listed on BSE. It brings to the investorsa trading tool that can be easily used for the purposes of investment, trading,hedging and arbitrage. SPIcE allows small investors to take a long-term view of themarket.BSE provides an efficient and transparent market for trading in equity, debtinstruments and derivatives. It has a nation-wide reach with a presence in more than450 cities and towns of India. BSE has always been at par with the internationalstandards. The systems and processes are designed to safeguard market integrityand enhance transparency in operations. BSE is the first exchange in India and thesecond in the world to obtain an ISO 9001:2000 certification. It is also the firstexchange in the country and second in the world to receive Information SecurityManagement System Standard BS 7799-2-2002 certification for its BSE On-lineTrading System (BOLT).BSE continues to innovate. In recent times, it has become the first national levelstock exchange to launch its website in Gujarati and Hindi to reach out to a largernumber of investors. It has successfully launched a reporting platform for corporate 10TMU New Satara College of Engg. & Mgmt. Pandharpur
  11. 11. MBA Volatility & Affecting Factors in Indian Stock Marketbonds in India christened the ICDM or Indian Corporate Debt Market and a uniqueticker-cum-screen aptly named BSE Broadcast which enables informationdissemination to the common man on the street.In 2006, BSE launched the Directors Database and ICERS (Indian CorporateElectronic Reporting System) to facilitate information flow and increasetransparency in the Indian capital market. While the Directors Database provides asingle-point access to information on the boards of directors of listed companies,the ICERS facilitates the corporates in sharing with BSE their corporateannouncements. 11TMU New Satara College of Engg. & Mgmt. Pandharpur
  12. 12. MBA Volatility & Affecting Factors in Indian Stock MarketBSE also has a wide range of services to empower investors and facilitate smoothtransactions: Investor Services: The Department of Investor Services redresses grievances of investors. BSE was the first exchange in the country to provide an amount of Rs.1 million towards the investor protection fund; it is an amount higher than that of any exchange in the country. BSE launched a nationwide investor awareness programme- Safe Investing in the Stock Market under which 264 programmes were held in more than 200 cities. The BSE On-line Trading (BOLT): BSE On-line Trading (BOLT) facilitates on-line screen based trading in securities. BOLT is currently operating in 25,000 Trader Workstations located across over 450 cities in India. In February 2001, BSE introduced the worlds first centralized exchange-based Internet trading system, This initiative enables investors anywhere in the world to trade on the BSE platform. Surveillance: BSEs On-Line Surveillance System (BOSS) monitors on a real- time basis the price movements, volume positions and members positions and real-time measurement of default risk, market reconstruction and generation of cross market alerts. BSE Training Institute: BTI imparts capital market training and certification, in collaboration with reputed management institutes and universities. It offers over 40 courses on various aspects of the capital market and financial sector. More than 20,000 people have attended the BTI programmesAwards: 12TMU New Satara College of Engg. & Mgmt. Pandharpur
  13. 13. MBA Volatility & Affecting Factors in Indian Stock Market • The World Council of Corporate Governance has awarded the Golden Peacock Global CSR Award for BSEs 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 • Drawing from its rich past and its equally robust performance in the recent times, BSE will continue to remain an icon in the Indian capital market.National Stock Exchange (NSE): 13TMU New Satara College of Engg. & Mgmt. Pandharpur
  14. 14. MBA Volatility & Affecting Factors in Indian Stock MarketThe National Stock Exchange of India Limited has genesis in the report of the HighPowered Study Group on Establishment of New Stock Exchanges, whichrecommended promotion of a National Stock Exchange by financial institutions(FIs) to provide access to investors from all across the country on an equal footing.Based on the recommendations, NSE was promoted by leading FinancialInstitutions at the behest of the Government of India and was incorporated inNovember 1992 as a tax-paying company unlike other stock exchanges in thecountry.On its recognition as a stock exchange under the Securities Contracts (Regulation)Act, 1956 in April 1993, NSE commenced operations in the Wholesale Debt Market(WDM) segment in June 1994. The Capital Market (Equities) segment commencedoperations in Novem The most popular index is the Nifty 50, followed by the CNXNifty Junior, CNX 100, S&P CNX 500, Nifty Midcap 50, CNX Midcap, S&P CNXDefty, S&P CNX Industry indices (for 72 industries) and CNXIT. These indices are monitored and updated dynamically and are reviewedregularly. These are maintained professionally to ensure that it continues to be aconsistent benchmark of the equity markets, which involves inclusion and exclusionof stocks in the index, day-to-day tracking and giving effect to corporate actions onindividual stocks.Meaning of Volatility: 14TMU New Satara College of Engg. & Mgmt. Pandharpur
  15. 15. MBA Volatility & Affecting Factors in Indian Stock MarketVolatility refers to the amount of uncertainty or risk about the size of changesin a securitys value. A higher volatility means that a securitys value can potentiallybe spread out over a larger range of values. This means that the price of the securitycan change dramatically over a short time period in either direction. A lowervolatility means that a securitys value does not fluctuate dramatically, but changesin value at a steady pace over a period of time.Volatility most frequently refers to the standard deviation of the change in value ofa financial instrument with a specific time horizon. It is often used to quantify therisk of the instrument over that time period. Volatility is typically expressed inannualized terms, and it may either be an absolute number ($5) or a fraction of themean (5%).One measure of the relative volatility of a particular stock to the market is its beta.A beta approximates the overall volatility of a securitys returns against the returnsof a relevant benchmark.Volatility is often viewed as a negative in that it represents uncertainty and risk.However, volatility can be good in that if one shorts on the peaks, and buys on thelows one can make money, with greater money coming with greater volatility. Thepossibility for money to be made via volatile markets is how short term marketplayers like day traders hope to make money, and is in contrast to the long terminvestment view of buy and hold.In todays markets, it is also possible to trade volatility directly, through the use ofderivative securities such as options and variance swaps.Scope of the study: 15TMU New Satara College of Engg. & Mgmt. Pandharpur
  16. 16. MBA Volatility & Affecting Factors in Indian Stock MarketThe existence of volatility is not surprising: stock market volatility depends on theoverall health of the economy, and real economic variables themselves tend todisplay existence of volatility. The persistence of stock market return volatility hastwo interesting implications. First, volatility is a proxy for investment risk.Persistence in volatility implies that the risk and return tradeoff changes in apredictable way over the business cycle. Second, the persistence in volatility can beused to predict future economic variables. Some of the facts of stock market volatility are: • The volatility of daily returns of the Sensex has come down sharply from the levels they were at in 1992. • Daily return volatility of Sensex and Nifty in 2003 was comparable to volatility of a few of the indices in developed markets. • Daily return volatility of Sensex and Nifty increased in 2004 compared to 2003. • Despite increase in volatility in 2004, Sensex and Nifty continue to be slightly less volatile than market indices in Brazil and South Africa. Brazil and South Africa are two of the many emerging markets that are competing with India for FII flows. Volatility in markets in Brazil and South Africa also increased in 2004. • Nifty and Sensex suffered a fall of 12 per cent in a single day in May 2004. • We also need to consider margins. Margin- money collected from traders facilitates smooth settlement of trades. When the market is caught in a frenzy, however, these margins accentuate volatility. 16TMU New Satara College of Engg. & Mgmt. Pandharpur
  17. 17. MBA Volatility & Affecting Factors in Indian Stock Market • Stock markets globally have experienced weak starts in 2008, many realising substantial falls during the month of January. Although many markets have bounced back since that point, confidence remains fragile and volatility remains. • The current market turmoil has its roots in the US housing market, and is an illustration of how “globalised” financial markets have become. • The impact of rising oil prices, the outcome of the US Presidential election and increase in interest rates in the US also caused volatility in Nifty and Sensex. • The January 2008 stock market volatility was a sharp decrease in non- U.S. stock market prices on Monday, January 21, 2008, and to a lesser extent on Tuesday, January 22, 2008. Some called it "Black Monday" and a "global shares crash," even though the effects were quite different in different markets and the Dow Jones Industrial Average never closed worse than a 1.6% decrease from the previous Friday, and indeed closed up for the week. • In the first three weeks of 2008, the Dow Jones Industrial Average fell 9%. • On Monday the biggest falls since September 11, 2001 occurred in Asian stock markets. "Indias benchmark stock index tumbled 7.4%, while Hong Kongs blue chip Hang Seng Index plummeted 5.5% to 23,818.86" Over the course of two days, the BSE Sensex in India • dropped from 19,013 on Monday morning to 16,370 by Tuesday evening or a two day fall of 13.9%. In the first 21 days of 2008, Japans Nikkei has lost 13% of its value and Hong Kongs Hang Seng 14%.The 17TMU New Satara College of Engg. & Mgmt. Pandharpur
  18. 18. MBA Volatility & Affecting Factors in Indian Stock Market Asian crash is thought to have been caused by the fallout from general economic fear stemming from the 2007 subprime mortgage financial crisis triggered by a drop in the U.S. housing market and fears of a U.S. • Indias Sensex registered its biggest ever gain of 1,139.92 points (6.62%) on the 25th January, 2008 recovering much of its losses from the 21st January, but fell by 4% again on reopening on the 28th January. • Many commentators have declared that the global “bull market” in equities which has been in place since 2003 is now over. The most important factor to focus on for investors is what the prospects for equity markets are from here.However, what happens to equity markets over the short term is a lot more difficultto predict. There’s no doubt that the recent market movement resembles a period ofpanic, which differentiates it from most stockmarket corrections in a bull market.And there’s also no doubt that the economic backdrop is more troubling than it hasbeen since the start of the bull run in 2003 – a US recession seems likely, a globaldownturn is possible.1. Background: 18TMU New Satara College of Engg. & Mgmt. Pandharpur
  19. 19. MBA Volatility & Affecting Factors in Indian Stock MarketDue to the ever changing Global Economy and its effects, the Indian Economy isalso becoming volatile. Hence the stock markets in India are having too many upsand downs. Hence many Investors are facing the problem of deciding andanalyzing their investment pattern in equity market to minimize the risk andmaximize the returns.2. Statement of the problem: STUDY OF VOLATILITY AND ITS FACTORS IN INDIAN STOCK MARKET3. Objectives of the study: • To know the causes of volatility in Indian Stock Market • To make a detailed study of each and every cause of volatility • To know the Market reaction to various causes of volatility • To put the investors and traders at ease to play in the Indian Stock market • To increase the return and reduce the risk of the investors and traders • To help investors and traders in managing future volatility • To suggest the steps to be taken by investors and traders during volatility4. Methodology of the study: 19TMU New Satara College of Engg. & Mgmt. Pandharpur
  20. 20. MBA Volatility & Affecting Factors in Indian Stock Market Research Design: Descriptive Research design: 1. Survey: Personal Interaction with investors 2. Observation: Personal Observation of Secondary data Research Type: • Stratified Random Sampling Type. Data Collection tool: • Practical observation Data Collection Methods: • Primary Survey • Secondary Survey Duration of the Project: • 2 months Analysis Technique: • Mean • Mode • Standard deviation • Co-variance • Co-efficient of variation 20TMU New Satara College of Engg. & Mgmt. Pandharpur
  21. 21. MBA Volatility & Affecting Factors in Indian Stock Market Presentation tools to be used: • Date wise presentation of stock market data5. Scope of the Report: The study mainly focuses on the BSE markets for the year2007-08. • To know the movement of BSE SENSEX. • To make a detailed study of the causes of volatility. • To help the investors and traders in analyzing markets easily. • To study various factors that effects the movement of markets and market response • The study mainly concentrates on the recent year i.e., FY 2007-086. Limitation of the Study: • The study is limited to Bombay Stock exchange. • What is true in case of BSE may not be the same for other stock exchanges. • The period of the study is limited to the year 2007-08. • The study does not include other small factors which indirectly results in volatility. 21TMU New Satara College of Engg. & Mgmt. Pandharpur
  22. 22. MBA Volatility & Affecting Factors in Indian Stock Market7. Chapter Scheme: Executive Summary Chapter 1 Introduction Chapter 2 Review of Literature Chapter 3 Methodology Chapter 4 Data Analysis & Interpretation Chapter 5 Findings & Conclusion Bibliography Annexure8. Contribution from the Study: • To learn the practical aspects of equity market. • To help the investors and traders to take right decisions at different circumstances. • To help the investors and traders to make maximum profits at minimum risk. • To help in analyzing and ascertaining the future movements in the market. • To help investors in analyzing stop loss, support and resistance levels • To help the investors and traders with the tricks of playing in volatile markets.Vision and Principles: 22TMU New Satara College of Engg. & Mgmt. Pandharpur
  23. 23. MBA Volatility & Affecting Factors in Indian Stock MarketRelax Investments was born out of a vision to explore the immense investment opportunitiesin the Indian financial market, to benefit the investors. The firm is built on the pillars offinancial expertise, professionalism, exemplary ethics and a commitment to provide ultimatecustomer satisfaction. Relax constantly strives to meet the changing market needs and trends.The guiding principles of Relax Investments are: • Serve the clients with the highest level of responsiveness and integrity. • Place the clients interests and protection of their investments as the top priorities. • Operate on predefined and constantly updated service standards. Be customer driven, rather than deal driven. • Adopt futuristic technology to gather vital information on real time basis to optimize investor protection and investor returns. • Set up most modern trading facilities for its clients at par with global standards.Business profile:The company began as a sub-brokerage house in the year 2007. The financialexpertise and professionalism coupled with ethics and a commitment has made 23TMU New Satara College of Engg. & Mgmt. Pandharpur
  24. 24. MBA Volatility & Affecting Factors in Indian Stock MarketRelax Investments one of the major players in market.Relax Investment caters efficiently to the diverse and complex needs of over20,000 customers, most of whom are individual traders, institutions and moneymanagers.The vision of the Relax Investment is to be a financial player in Market. It aims toprovide all types of financial services to its clients at one place to save them fromgoing from place to place to meet their investment needs.With the opening up of the Indian economy and the advent of IT enabled trading,the Indian capital market has become a whole new ball game. From floor trading,the custom is fast shifting to Internet trading. Equally fast is the role of the financialservice provider, which is being redefined. Earlier, a financial service providersresponsibility was limited to executing customers instructions to buy and sell. Now,the whole operational paradigm has progressively shifted with the opening of moreand more avenues to offer strategic customer supports. SWOT ANALYSIS 24TMU New Satara College of Engg. & Mgmt. Pandharpur
  25. 25. MBA Volatility & Affecting Factors in Indian Stock Market Strength – Advantage inside the Company • A very good team of employees • Very good Infrastructure • Good and uninterrupted terminal set up and broadband connection • Good communication setup among various branches • This indicates that company is very transparent in its transactions • Good services to clients who are satisfied with the company so far • Growth in no. of Clients and services • Betterment of services and upgradation of technology at regular intervals. • Margin provided by the Company to Customers Weakness – Disadvantage inside the company • Satellite Signal problems • Convincing of uneducated clients which is a very difficult task • Educating the unknown clients about the advantages and disadvantages of various investment options • Communication Gap among clients and employees • Restrictions on intra-day margin to clientsOpportunities – Advantages outside the company • More no. of people opting for trading options 25TMU New Satara College of Engg. & Mgmt. Pandharpur
  26. 26. MBA Volatility & Affecting Factors in Indian Stock Market • Increase in investments • Increase in job opportunities which has blown up savings • Entry of foreign companies • Increase in FII • Dematerialization which has reduced complexities of trading in Stock Market • New investment opportunities such as currency tradingThreats – Disadvantages outside the company • Large no. of Competitors • Volatility in the Stock market • Strict regulations from SEBI • Strict regulations from Government • Change in technology • Increase in Taxes 26TMU New Satara College of Engg. & Mgmt. Pandharpur
  27. 27. MBA Volatility & Affecting Factors in Indian Stock MarketStock market is the barometer of the economy and is the sensitive segment of theeconomy. Volatility of stock market is caused due various reasons. It may be causedby Arbitrage. Arbitrage is the simultaneous or almost simultaneous buying andselling of an asset to profit from price discrepancies. Arbitrage causes markets toadjust prices quickly. This has the effect of causing information to be more quicklyassimilated into market prices. This is a curious result because arbitrage requires nomore information than the existence of a price discrepancy.Another obvious reason for market volatility is technology. This includes moretimely information dissemination, improved technology to make trades and morekinds of financial instruments. The faster information is disseminated, the quickermarkets can react to both negative and positive news.Most people would say that new information in general causes volatility. Newsdigests of the day’s market performance almost always include a reason the marketis up or down. Often, different writers give different reasons for market changesVolatility is difficult to analyze because it means different things to differentpeople. People are rarely precise when they talk about volatility. Also, there is alot of misinformation about volatility. Hence it is very important to know thevarious factors that cause volatility in the stock market.When the stock market goes up one day, and then goes down for the next five, thenup again, and then down again, that’s what you call stock market volatility.In layman’s terms, volatility is like car insurance premiums that go up along withthe likelihood of risky situations, such as if you have a poor driving record or if youkeep the car in a high-theft area.Some cynics say volatility is a polite way of referring to investors’ nervousness. 27TMU New Satara College of Engg. & Mgmt. Pandharpur
  28. 28. MBA Volatility & Affecting Factors in Indian Stock MarketInvestors may think volatility indicates a problem. But many analysts believe thatincreased volatility can indicate a rebound.Success in the market does not depend on predicting the future—predictions onlymeasure the short term. Volatility is more dependent on mass hysteria—fear andgreed—than on underlying economic or financial events. Those are not reliableemotions on which to base long-term investment decisions. Some of the Important factors that causevolatility are: 1. Foreign Institutional Investors: 2. Impact of Global Economy: 3. Inflation: 4. RBI Policies 5. Government policies and budget 6. Other factorsForeign Indirect Investments:-Mutual funds, insurance companies, pension funds, university funds, investmenttrusts, endowment funds and charitable trusts incorporated outside India butinvesting in equity and debt securities in the country are known as FIIs. They 28TMU New Satara College of Engg. & Mgmt. Pandharpur
  29. 29. MBA Volatility & Affecting Factors in Indian Stock Marketcollect money from individuals and corporates (primarily from countries belongingto the European and American continents), and invest it in financial instrumentsworldwide, with India being one of the targeted markets.FIIs were first allowed to transact in Indian markets in 1993. SEBI lays downparameters relating to eligibility, investments and taxation. Chief among theserelates to investment limits. The collective FII holding in a listed company cannotexceed 40 per cent of its equity capital.FIIs wanting to invest in equity and debt securities in India have to register withSEBI (Securities and Exchange Board of India) under the Securities and ExchangeBoard of India (Foreign Institutional Investors) Regulations, 1995. They also haveto get approval from the RBI (Reserve Bank of India) to operate foreign currencyaccounts (to bring in and take out funds) and rupee bank accounts (to pay fortransactions).Typically FIIs invest either directly or as sub accounts (through participatory notes)or as domestic entities. Participatory Notes (P Notes) are used by FIIs for foreignfunds, not yet registered.The key benefits of FII investments include reduced cost of capital, impartingstability to Indias balance of payments, institutionalizing the market, improvingmarket efficiency and strengthening corporate governance. FIIs have been termedas speculators, arbitrageurs and fair weather friends. FII inflows, globally, areconsidered hot money.In the past four years there has been more than $41 trillion worth of FII fundsinvested in India. This has been one of the major reasons on the bull marketwitnessing unprecedented growth with the BSE Sensex rising 221% in absolute 29TMU New Satara College of Engg. & Mgmt. Pandharpur
  30. 30. MBA Volatility & Affecting Factors in Indian Stock Marketterms in this span. The present downfall of the market too is influenced as these FIIsare taking out some of their invested money.On the basis of some elementary analysis, It was basically found that correlationbetween FII flows (net) and the Sensex, from January 2006 to September 2007. Thecoefficient was very low at 0.18, which can hardly be said to be a strong correlation.Further, the regression analysis between the two variables found that FII flowsexplain only 3% of the Sensex movements. However, this 3% wasSTATISTICALLY significant. Its a bit difficult to reach at a final conclusion whensuch issues are concerned. At times markets over-react to FII flows. However, FIIsare more than just money. They represent something unquantifiable known asinvestors sentiment. Thats why we get a bit anxious when there are sudden FIIoutflows, since such behavior may reflect a change in investor sentiment.Macro-economic importance of FII flows for India:A survey of literature on portfolio investments revealed the importance of suchinvestments for a developing economy like India’s. Foremost, FII investments arenon-debt creating flows, also a reason why Indian policy makers sought to liberalizesuch flows in the wake of the BoP crisis in 1990-91. Theoretically, FII investmentsbring in global liquidity into the equity markets and raise the price-earningratio and thereby reduce the cost of capital domestically. FII inflows helpsupplement domestic savings and smoothen inter-temporal consumption.Studies indicate a positive relationship between portfolio flows and the growthperformance of an economy, though such specific studies for India were not found.India, in the recent past few years seems to have received a disproportionately largepart of its foreign investment flows via the FII investments in the equity markets. The large build-up of foreign exchange reserves through FII inflows poses apotential threat of destabilization of the economy. Portfolio flows are most often 30TMU New Satara College of Engg. & Mgmt. Pandharpur
  31. 31. MBA Volatility & Affecting Factors in Indian Stock Marketreferred to as “hot money” that can be notoriously volatile when compared to otherforms of capital flows. The Mexican crisis and the East Asian crisis are classicexamples of the damage that sudden outflows of portfolio money can do to aneconomy.Without immediately implicating any significant withdrawal of funds out of Indiaof crisis precipitating proportions, it needs to be noted that outflows of FII capitalfrom the market could adversely impact the value of the Indian currency, as FIIinflows form the most significant part of foreign inflows into the economy. Indeed,the recent soft trends in FII inflows in May had led the Indian currency todepreciate against the US dollar The risk of a large depreciation is even more as weare in a situation where the higher international price of crude oil has led to asignificant weakening of the current account deficit. In other words, in the event ofa significant tapering off of FII inflows, $/Re could depreciate sharply inconsonance to a widening current account deficit, as the other forms of capitalinflows into the economy are not significant enough.There are likely to be repercussions on the growth momentum of the Indianeconomy if FII inflows significantly slow down. This is because a large extent ofbuoyancy in consumption was possible due to the positive wealth effects of abooming stock market and a decline in the interest rates due to a large overhang ofrupee liquidity in the system (also a byproduct of large FII inflows over the last fewyears). Therefore, if FII inflows were to slow down, it will reduce the wealthgenerated by the stock market, the Indian currency will depreciate and RBI willhave to draw down on the foreign exchange reserves or hike interest rates to preventwild swings in the exchange rate. 31TMU New Satara College of Engg. & Mgmt. Pandharpur
  32. 32. MBA Volatility & Affecting Factors in Indian Stock MarketFIIs are the most dangerous people for the Indian markets. Unlike mutual funds,they don’t sit on their investments in difficult times. They just sell their shares andgo to another country for better options. But this correction is good for freshinvestments and real investors.There is little doubt that FII inflows have significantly grown in importance overthe last few years. In the absence of any other substantial form of capital inflows,the potential ill effects of a reduction in the FII flows into the Indian economy canbe severe. Thus, FII inflows are per-se bad, there is possibly a need to gear upmacro-economic policies to target other form of foreign investments into theeconomy and reduce the over-reliance of the economy on portfolio flows.The swings in the market forced several FIIs to withdraw from India and investtheir dollars in other emerging markets. Some of the other markets includeUruguay, Russia, the Ukraine, and several other former Soviet countries. Thoughthere have been swing’s in the past too but FII response this time was differentbecause of margin pressures back home as even they have to provide regular returnsto their investors.The Indian markets are not seen as a good short-term bet any more. India is seen asa good investment for the medium to long term. FIIs seem to fear the pace ofgrowth and the fundamentals of the markets.Most FIIs are looking at corporate governance and execution abilities, which couldbe significant drivers in creating a strong portfolio of Indian stocks. Recent actiontaken by the market regulator indicates that the Indian government would like tomoderate the inflow of FII money. 32TMU New Satara College of Engg. & Mgmt. Pandharpur
  33. 33. MBA Volatility & Affecting Factors in Indian Stock MarketSome of the volatile dates and events Caused by the FII on IndianStock Market are:Friday, July 27, 2007:This is the day everyone is waiting for. IT was a wonderful opportunityfor entering into good stocks. This selling was mainly due towithdrawal of funds by FIIs. Heavy selling was seen in all the globalmarkets with 2-5% loss in various indices.Local Political CrisesThursday, August 23, 2007 Communist parties are doing their best to dampen the spirits ofbulls. Before this political uncertainty, India was the last option forwithdrawal of money by FIIs due to the strong fundamentals. But Indiais now the first choice for FIIs to withdraw money in case of crisisdue to political uncertainty. Uncertainty is always more dangerousthan real thing. Communists may not withdraw support to UPAGovernment but they will cause enough damage to the investors bytheir comments.Monday, October 8, 2007 This is the single most major reason for stock market crash inOctober 2007 also. Investors especially FIIs never like political 33TMU New Satara College of Engg. & Mgmt. Pandharpur
  34. 34. MBA Volatility & Affecting Factors in Indian Stock Marketinstability and they will book profits and go to another country. Eventhough political turmoil will have no significant impact on the growthof companies, stock markets always negatively respond to politicalinstabilityWednesday, October 17, 2007 All hell broke loose in the stock markets for a few minutes onWednesday, hours after SEBI announced the previous night that itplanned to impose restrictions on ‘participatory notes’ (PNs), whichcould effect the in-flow of FII money. In less than three minutes, theSensex, the benchmark index on the Bombay Stock Exchange, plungedby over 1,500 points, shedding nine per cent and triggering off lowercircuit-breakers and forcing the authorities to stop trading for an hour. It was only after Finance Minister P. Chidambaram’s assurancethat the government had no plans to ban PNs, and SEBI’s objective wasmerely to moderate capital inflows that the markets bounced back.Chidambaram also clarified the government would not discourage FIIsfrom investing in the capital markets.Wednesday, January 9, 2008 Huge foreign capital has been a key driver to the surge in Indianstock market, but a possible outflow of FIIs has a potential to send thebenchmark Sensex crashing down to 14,000 points within a quarter, areport said on Wednesday. "This would imply a level of 14,000 forSensex, which was the level around a year ago" 34TMU New Satara College of Engg. & Mgmt. Pandharpur
  35. 35. MBA Volatility & Affecting Factors in Indian Stock MarketHBJ Capital Report:-Friday, March 21, 2008FII Investments In Indian Companies & Its Negative Impact. Just look at the above chart, as on today FII has investment of close to $200bn in India companies (20-30% of Mcap of BSE which is $0.75 to $1 trillion). During last 3 months they have withdrawn just $3bn (3-4% of total Investments) and Indian Stock Market tanked 30% down. 35TMU New Satara College of Engg. & Mgmt. Pandharpur
  36. 36. MBA Volatility & Affecting Factors in Indian Stock MarketImpact of Global Economy:-Markets across the world are seeing a lot of short term volatility (frequent rise orfall in stock market) mainly driven by news and events in the global markets. Forexample, news/rumours related to economic recession in USA, soft/hard landingand estimation of losses due to sub-prime crisis in USA, speculation over interestrates cut by FED, rise in global commodities prices, fluctuation in global crude oilprices etc. These are some fundamental reasons why global markets, especially theIndian stock market behave in a volatile manner based on developments in globalmarkets.Indian economy is increasingly exposed to global markets post liberalization in theearly 90s. We are seeing fast economic growth in last few years and as a result wehave seen large fund inflows into Indian market from across the world. Most ofthese foreign funds are large momentum players and their activity in the marketresults in large volatility in stock markets. Investment decisions of these funds are driven and depend on thedevelopment/events in foreign markets, or their own local markets. As a result, weare seeing our markets are getting more and more integrated with movement inglobal (especially American) stock markets. Market analysts track and talk aboutthese global events and global market movements very closely.USA economy is the largest economy in the world. A lot of small and largecountries mainly depend on exporting to American markets (for example China). Asa result, analysts track the news related to USA very closely (for example weeklyUSA employment numbers, sub-prime crisis of USA, FED interest rate movementetc). Whenever we see any negative news triggered from the American markets ittriggers a tsunami in global markets especially in short term. Indian economy is mainly driven by the domestic consumption, but postliberalization the share of Indian trade as part of global trade is growing at a rapid 36TMU New Satara College of Engg. & Mgmt. Pandharpur
  37. 37. MBA Volatility & Affecting Factors in Indian Stock Marketpace. Indias economy has grown over USD 1 trillion and ranked as the eleventhlargest economy in the world. A large number of Indian companies are gettinginvolved in exporting their products to global markets, raising funds by listing onforeign stock exchange (NYSE, London Stock exchange and NASDAQ etc). Thepercentage revenue of Indian companies coming from foreign markets is growingyear over year. Therefore, share price movements of these companies are morelikely to be affected by the development in world economy.Turmoil in the global financial currency markets has started affecting Indiancompanies and the stock market. While ICICI Bank has lost as much as $264million until January due to its exposure to the overseas credit derivatives markets,other banks too are facing significant losses. Analysts note that the total mark-to-market losses of corporate India’s exposure to the foreign exchange derivativesmarket may be in the region of $5 billion.Us EconomyRecession:The fear of a recession looms over the United States. And as the clich goes,whenever the US sneezes, the world catches a cold. This is evident from the waythe Indian markets crashed taking a cue from a probable recession in the US and aglobal economic slowdown. Weakening of the American economy is bad news, notjust for India, but for the rest of the world too.A recession is a decline in a countrys gross domestic product (GDP) growth for twoor more consecutive quarters of a year. A recession is also preceded by severalquarters of slowing down.The economy and the stock market are closely related. The stock markets reflect thebuoyancy of the economy. In the US, a recession is yet to be declared by the Bureauof Economic Analysis, but investors are a worried lot. The Indian stock marketsalso crashed due to a slowdown in the US economy. 37TMU New Satara College of Engg. & Mgmt. Pandharpur
  38. 38. MBA Volatility & Affecting Factors in Indian Stock MarketThe Sensex crashed by nearly 13 per cent in just two trading sessions in January.The markets bounced back after the US Fed cut interest rates. However, stockprices are now at a low ebb in India with little cheer coming to investors.During a full recession, US companies in health care, financial services and allconsumer demand driven firms are likely to cut down on their spending. Amongother sectors, manufacturing and financial institutions are moderately vulnerable.Worst affected because of US recession will be the service industry of India. Underservice industries come BPO, KPO, IT, ITeS etc. Service industry contributes about52% to Indias GDP growth. Now if that is going to get hurt then it will also hurtIndias overall growth but very slightly.Subprime lending:The defaults on sub-prime mortgages (home loan defaults) have led to a major crisisin the US. Sub-prime is a high risk debt offered to people with poor creditworthiness or unstable incomes. Major banks have landed in trouble after peoplecould not pay back loans.Recession and GDP:Indian companies have major outsourcing deals from the US. Indias exports to theUS have also grown substantially over the years. The India economy is likely tolose between 1 to 2 percentage points in GDP growth in the next fiscal year. Indiancompanies with big tickets deals in the US would see their profit margins shrinking.The worries for exporters will grow as rupee strengthens further against the dollar.But experts note that the long-term prospects for India are stable. A weak dollarcould bring more foreign money to Indian markets. Oil may get cheaper briningdown inflation. A recession could bring down oil prices to $70.The whole of Asia would be hit by a recession as it depends on the US economy.Even though domestic demand and diversification of trade in the Asian region will 38TMU New Satara College of Engg. & Mgmt. Pandharpur
  39. 39. MBA Volatility & Affecting Factors in Indian Stock Marketpartly counter any drop in the US demand, one simply cant escape a downturn inthe worlds largest economy. The US economy accounts for 30 per cent of theworlds GDP.If the service sector takes a serious hit, India may have to revise its GDP to about 8to 8.5 per cent or even less. Some of the volatile dates and events Caused by the impact ofGlobal Economy on Indian Stock Market are:Wednesday, July 25, 2007: Indian stocks will see heavy selling in the initial session due tofall down in global markets. If late buying is not seen in the latesession, today will become black Wednesday. Capital goods will seeheavy selling due to vertical rise in the recent days. This correction isgood for markets and real investors who are waiting in the sidelines forfresh investments. New inexperienced investors should stay away frommarkets until RBI announced credit policy. Weakness in globalmarkets, rising rupee, drop in earnings, derivative expiry, crude pricewill make the stock markets a dangerous territory in the coming day.sWednesday, July 18, 2007Indian share Markets are in bearish phase: Bears will dominate Indian stock markets in the followingsessions due to weak global markets and profit booking. There was be aclear slow down in the growth of most sectors and failed to justify theirvery high valuations. This was a very opportunistic period for newinvestors who want to enter into good stocks. 39TMU New Satara College of Engg. & Mgmt. Pandharpur
  40. 40. MBA Volatility & Affecting Factors in Indian Stock MarketTuesday, March 18, 2008: Finance Minister P Chidambaram said that the fallout of the USsubprime crisis on the global credit and housing markets would impactIndia. “When crisis (has) moved from the subprime mortgage market tothe housing market, and now the housing market to the credit market,there is an impact on India. There is an impact in terms of credit flowsand financial flows. But at the moment, the impact is second-orderimpact and a moderate impact. 40TMU New Satara College of Engg. & Mgmt. Pandharpur
  41. 41. MBA Volatility & Affecting Factors in Indian Stock MarketInflation:-Most analyses of accelerating inflation in India emphasise the role of “importedinflation” in driving Indian prices upwards.With the annual rate of inflation in India having touched 7 per cent on a point-to-point basis during the week-ending March 22, 2008, the search for policies tocombat the price rise has begun. One factor seen as making that search difficult isthe ostensible role of “imported inflation” in driving the rise in domestic prices.There is an obvious reason why such an argument arises. Among the productsprimarily responsible for the current inflation are food products of different kinds,including cereals, intermediates like metals and the universal intermediate, oil.While the disruption caused by the US occupation of Iraq, other geopolitical factorsand the speculation that followed have played a role in the case of oil, what explainsthe recent increase in other global commodity prices, especially food articles andmetals? Chart 3 (based on IMF data) shows that, except for agricultural rawmaterials whose prices have increased very little, all the other commodity groupshave shown sharp rises in price.The rise in price levels for metals was the earliest in the recent surge, with theweighted average of metals prices increasing sharply from the last quarter of 2005,and almost doubling in the two-year period to February 2008. Coal prices more thandoubled last year, thereby showing a faster rise than even the oil price. Food prices,like agricultural raw materials, had shown only a modest increase until early 2007.But since then they have zoomed, such that the IMF data show more than 40 percent increase in world food prices over 2007. 41TMU New Satara College of Engg. & Mgmt. Pandharpur
  42. 42. MBA Volatility & Affecting Factors in Indian Stock MarketThe FAO food price index, which includes national prices as well as those in cross-border trade, suggests that the average index for 2007 was nearly 25 per cent abovethe average for 2006. Apart from sugar, nearly every other food crop has shownvery significant increases in price in world trade over 2007, and the latest evidencesuggests that this trend has continued and even accelerated in the first few monthsof 2008. The net result is that globally the prices of many basic commodities havebeen rising faster than they ever did during the last three decades.Forces behind the rise in inflation:To understand this, it is necessary to examine the forces behind the price rises fordifferent commodities. In the case of food, there are more than just demand forcesat work, although it is certainly true that rising incomes in Asia and other parts ofthe developing world have led to increased demand for food. Five major aspectsaffecting supply conditions have been crucial in changing global market conditionsfor food crops. 42TMU New Satara College of Engg. & Mgmt. Pandharpur
  43. 43. MBA Volatility & Affecting Factors in Indian Stock MarketFirst, there is the impact of high oil prices, which affect agricultural costs directlybecause of the significance of energy as an input in the cultivation process itself(through fertiliser and irrigation costs) as well as in transporting food. Across theworld, governments have reduced protection and subsidies on agriculture, whichmeans that high costs of energy directly translate into higher costs of cultivation,and therefore higher prices of output.Second, there is the impact of both oil prices and government policies in the US,Europe, Brazil and elsewhere that have promoted bio-fuels as an alternative topetroleum. This has led to significant shifts in acreage as well as use of certaingrains. For example, in 2006 the US diverted more than 20 per cent of its maizeproduction to the production of ethanol; Brazil used half of its sugarcane productionto make bio-fuel, and the European Union used the greater part of its vegetable oilproduction as well as imported vegetable oils, to make bio-fuel. This has naturallyreduced the available land for producing food.Third, the impact of policy neglect of agriculture over the past two decades isfinally being felt. The prolonged agrarian crisis in many parts of the developingworld; the shifts in acreage from food crops to cash crops relying on purchasedinputs; the excessive use of groundwater and inadequate attention to preserving orregenerating land and soil quality; the lack of attention to relevant agriculturalresearch and extension; the overuse of chemical inputs that have long-runimplications for both safety and productivity; the ecological implications of bothpollution and climate change, including desertification and loss of cultivable land:all these are issues that have been highlighted by analysts but largely ignored bypolicymakers in most countries.Reversing these processes is possible but will take time and substantial publicinvestment, so until then global supply conditions will remain problematic. 43TMU New Satara College of Engg. & Mgmt. Pandharpur
  44. 44. MBA Volatility & Affecting Factors in Indian Stock MarketFourth, there is the impact of changes in market structure, which allow for greaterinternational speculation in commodities. It is often assumed that rising food pricesautomatically benefit farmers, but this is far from the case, especially as the globalfood trade has become more concentrated and vertically integrated.A small number of agribusiness companies worldwide increasingly control allaspects of cultivation and distribution, from supplying inputs to farmers to buyingcrops and even in some cases to retail food distribution. This means that marketingmargins are large and increasing, so that direct producers do not get the benefits ofincreases expect with a time lag and even then not to the full extent. Thisconcentration also enables greater speculation in food, with more centralizedstorage. Some of the volatile dates and events Caused by the impact ofInflation on Indian Stock Market are:Friday, July 20, 2007Profit booking in the late session Indian share markets rise in the early session due to strong cuesfrom global markets. Profit booking will be seen in the late session dueto rise in inflation and unsustainable valuations.Saturday, March 1, 2008 Inflation continues to rise; touches 5.11 per cent for weekended. Rise in headline inflation is mainly due to increase in priceof primary articles 44TMU New Satara College of Engg. & Mgmt. Pandharpur
  45. 45. MBA Volatility & Affecting Factors in Indian Stock MarketFriday, March 28, 2008 Inflation at 6.68%. High inflation is a big election problemand the only way to counter it is high interest rates. Governmentcontinues with fiscal measures to curb inflation. Three majorcomponents aided the rise in inflation i.e. the fuel group, foodarticles & manufactures productsMonday, March 31, 2008Emergency cabinet committee meeting to tackle inflationThe cabinet is likely to have discussions on prices of steel, wheat,cement, edible oils and food articles including rice and other essentialgoods.Monday, April 7, 2008Inflation touches 7%; RBI may hike key ratesThe current inflation is mainly supply led, with rising prices of metals,fuel and agriculture commodities being key contributors The high inflation may prompt RBI to take tough monetarymeasures to ease out inflationary pressure in its annual credit policy,scheduled to be announced on 29 April. 45TMU New Satara College of Engg. & Mgmt. Pandharpur
  46. 46. MBA Volatility & Affecting Factors in Indian Stock MarketRBI Policies:-The capital market, which has been at the receiving end since the unexpected hikein the Cash Reserve Ratio and repo rates in end March,2007 to contain the risinginflation rate, has cheered the Reserve Bank of India for leaving unchanged all thekey rates in the April 24 Annual Policy Statement.The policy response to the rising inflation and the overheating of the economy hasbeen to hike the repo rates five times in FY-07 from 6.50 per cent to 7.75 per cent.As the RBI had already intervened recently via market operations, this time aroundthe central bank appears to have stayed its hand.The market correctly did not expect any rate to be raised, reflected in the BankIndex being up 1.4 per cent just before the Policy announcement. Further, in aCNBC poll before the policy announcement, 67 per cent of the respondentspredicted `no change in interest rates.Predictably, the market welcomed the Monetary Policy wholeheartedly, as evidentfrom the equity index ending approximately 1.4 per cent up, and the Bank Indexrising more than 4.5 per cent. The bond market also gave a thumbs-up to the policy,with 10-year yields falling more than 10 basis points.In an indication that it may hold back a policy rate cut tomorrow, the Reserve Bankof India (RBI) on Monday said inflation in India was artificially “suppressed” ashigher international oil prices have not been passed on to domestic consumers.In its report on macro-economic and monetary developments a day before the thirdquarterly review of its 2007-08 monetary policy, RBI also said “elevatedinternational food prices also pose potential inflationary pressures in the periodahead.” 46TMU New Satara College of Engg. & Mgmt. Pandharpur
  47. 47. MBA Volatility & Affecting Factors in Indian Stock MarketSome of the volatile dates and events Caused by the RBI Policieson Indian Stock Market are:Monday, July 23, 2007With derivative expiry and RBI credit policy are around the corner,Indian share markets will trade in extreme volatility in the comingsessions. Indian stocks are in “unclear” zone with Mutual funds andbig domestic investors are waiting for correction, NRIs and FIIs arepumping money. My advice- does not take long positions and bookprofits immediately in high growth stocks. Correction is eminentThursday, August 30, 2007The RBI, for the first time, has given its views on the subprime. It has said that further deterioration will lead to reassessment ofrisk of investors. It added that the emerging markets may face furtheroutflow of capital. The dominance of hedge funds will add fuel to fire, itfeels. According to the RBI, global financial volatility will impactgrowth and stability. On the issue of inflows, the RBI said that a significant part of FIIinflows is in the form of PNs & sub-accounts. The portfolio flows arevolatile and can reverse direction, the RBI said. India is not immune toglobal volatility and risky flows. RBI has cautioned banks and corporates to be vigilant. It saidthat banks and corporates should keep risk strategies in place. They 47TMU New Satara College of Engg. & Mgmt. Pandharpur
  48. 48. MBA Volatility & Affecting Factors in Indian Stock Marketshould monitor exposures and hedge them to avoid shocks, the RBIsaid.Friday, October 26, 2007 Trend in inflow from foreign funds dictated the near term trendon the bourses. The market on Friday, 26 October 2007, shrugged offSecurities & Exchange Board of India (Sebi) directive on restriction ofparticipatory notes (PNs) that came into effect from 26 October 2007.Sebi has banned fresh issuance of PNs with derivatives as underlyingand it has also ordered winding up such PNs in 18 months, besidesputting curbs on such issue of PNs in the spot market.Saturday, November 10, 2007 The policies announced in the Mid-Term Review of the ReserveBank of India (RBI) are on expected lines. The policy rates have beenleft unchanged. Only the Cash Reserve Ratio (CRR) has been raised by50 basis points to 7.5 per cent, effective.Tuesday, January 29, 2008RBI Credit Policy: Kept all the prime rates unchanged For the past few days, market participants and players aredesperately waiting for the upcoming announcements among whichRBI’s monetary policy review and ‘two-day’ Federal Reserve meetingschedules were in top priority. A positive rate was always presentsomewhere in everybody’s mind, specially after a rate cut in US on75bps to 3.50% and the down circuit of Indian stock market. Investorshad an expectation towards a boost to the market on part of theGovernment. The investors having significant amount of losses were 48TMU New Satara College of Engg. & Mgmt. Pandharpur
  49. 49. MBA Volatility & Affecting Factors in Indian Stock Marketmore keen to see a rate cut. Fact: In realty, there was no rate cut on behalf of the RBI in its4th quarter credit policy review. CRR, Repo rate and Reverse Repo ratewere unchanged at 7.50%, 7.75% and 6% respectively. The initialrepercussion reflected as Nifty gone down Negative and the Nifty bankindex was around 300 points down.Monday, March 31, 2008 Inflation spiralled to 6.68 per cent, much beyond the RBIscomfort level of five per cent, prompting Finance Minister PChidambaram to stress that the government would take all measures,monetary, fiscal and supply side, to combat it. The heavy inflow of foreign currency into the country and thesky-rocketing prices of international crude oil will pose a stiffchallenge before the Reserve Bank of India (RBI)Government Policies:-The recent developments in the forex, money and stock markets suggest that theUPA Government and monetary authorities would have to recast their strategy andreformulate the fiscal and monetary policies for ensuring balanced economic growthwith the gross domestic product (GDP) rising by 9-10 per cent.The heady forex inflows so far in the current financial year resulting in an additionof $ 62 billion in foreign exchange assets against $ 46.8 billion in the whole of2006-07 has resulted in a steady appreciation of the rupee by 12.6 per cent vis-À-visthe dollar since the end of October last year. 49TMU New Satara College of Engg. & Mgmt. Pandharpur
  50. 50. MBA Volatility & Affecting Factors in Indian Stock MarketThis increase in the external parity of the Indian currency is due more to technicalfactors rather than improved competitive ability of the industrial and agriculturalsectors of the economy.However, the impact of dearer rupee on select basic industries, which account for40 per cent of total exports, has been such that Kamal Nath, Union Minister forCommerce and Industry has, for the first time, expressed serious apprehensionabout these industries being compelled to reduce exports sizably.It has been indicated that exports of textiles declined by 22 per cent, handicrafts 66per cent, leather 9 per cent and marine products 20 per cent in April-October 2007.The shortfall under these heads have to be overcome with a step up in shipments ofother items which are in peak demand in overseas markets. But the industriesadversely affected by dearer rupee account for employment of millions of workersand it is imperative that their competitive ability should not be impaired unduly tillsuch time new measures yield the desired results.The increase in exports up to September was only 18 per cent against 27.1 per centin the corresponding period in 2006-07.The spurt in exports by 35.65 per cent in October may prove to be a flash in the panas the ministry’s spokesman has observed that forex earnings in 12 months may beonly around $ 140-150 billion and the target of $ 160 billion may be difficult ofachievement.As imports also will be increasing noticeably with larger outgo in respect of oil andnon-oil imports, the trade gap may widen uncomfortably in 2007-08 and the currentaccount deficit may be higher at $ 13-14 billion against $ 9.6 billion in 2006-07.This gap may be bridged as on former occasions with heavy forex inflows oncapital account. Even though it may be argued that the future prospects arepromising and there may not be deficit on current account after 2008-09, themonetary authorities have been obliged to intervene in the forex market and effectsizable purchases of U.S. dollars. The substantial purchase has resulted in disturbingincrease in money supply and it has been necessary to hike the cash reserve ratio by 50TMU New Satara College of Engg. & Mgmt. Pandharpur
  51. 51. MBA Volatility & Affecting Factors in Indian Stock Markethalf a percentage point to 7 per cent effective from August 4 and also intensifymarket stabilisation operations.These measures have not been quite fruitful. While there has been a surge in thegrowth of deposits, credit expansion has slowed down significantly due toprevalence of higher lending rates and cost escalation in some directions.While the industries turning out capital goods, communication equipment,electronic and electrical components have been maximising their output, theaverage rise in industrial output was 9.2 per cent in April-September against 11.1per cent comparably.The slower rise in industrial output cannot be allowed to persist even though it maybe claimed from the national angle that the growth in the GDP may be even 9.2 percent because of the better performance of the agricultural sector.Sharath Pawar, Union Minister for Agriculture, has stated that there will not be anyfurther increase in wheat imports in the coming months apart from the commitmentRailway Minister Lalu Prasad has already presented a populist budget whichannounced cuts in passenger fares and selective reduction in freight rates, whilepainting a rosy picture on its earnings.GOVERNMENT moves to impose curbs on PNs have in the past also resulted inwild fluctuations in the market. With FIIs having such a major presence in theIndian capital markets, the government has been cautious in dealing with theseinstruments, for any moves perceived by the markets as imposing curbs oninternational investors, could have a disastrous impact on the stock marketsWith steady open market prices for rice and a noticeable downtrend in prices forwheat and pulses, the monetary authorities have to worry only about the effects ofupward adjustments in respect of the petroleum sector if world prices for crudefluctuate around $ 90 per barrel. As the UPA Government and the Reserve Bank ofIndia can now expect that there will be an abatement of new inflationary pressures,it has become necessary to stimulate industrial growth in some directions. Towards 51TMU New Satara College of Engg. & Mgmt. Pandharpur
  52. 52. MBA Volatility & Affecting Factors in Indian Stock Marketthis end, the Governor of the Reserve Bank should take a decision about a reductionin interest rates even by controlling an uncomfortable rise in money supply.Selective credit expansion on a cheaper basis will have to be attempted if theslowdown in industrial output is to be reversed.The other side of the story is, if mid-term polls are inevitable, Government preferspeople over companies. Popular policies will slow down momentum which willnegatively impact investors sentiment towards India.Some of the volatile dates and events Caused by Governmentpolicies and budgets on Indian Stock Market are:Feb 26, 2008,TuesdayMarket choppy; Railway Budget 2008-09 lifts market higher in lateafernoon trade Market started with moderate gains as stocks specific buying wasseen across all sectors. Market surged higher only in the late tradebacked by positive global cues and a favourable railway budgetannouncement. Reduced rail fares, lower freight charges, technologyand rail infrastructure upgradation were the major highlights of thebudget. Realty, power, capital goods stocks were the major gainers asall sectoral indices ended in green.Friday, February 29, 2008Budget08 tabled; Short term capital gain increased to 15% asmarket ends weak Market opened lower this morning and slipped sharply in theafternoon trade as the Finance presented the Union Budget 2008. Shortterm capital gain tax has been increased from 10% to 15%. Market had 52TMU New Satara College of Engg. & Mgmt. Pandharpur
  53. 53. MBA Volatility & Affecting Factors in Indian Stock Marketa negative reaction to this announcement and made days low at thispoint in time. However, market rose smartly and managed to recoversome losses. Realty, IT, capital goods, power stocks were major loserswhile auto stocks were among the gainers.Fundamental Analysis is the cornerstone of Investing. In fact, somewould say that you arent really investing if you arent performingfundamental analysis.During fundamental analysis we look at a stock from three aspects1.Company At the company level, fundamental analysis may involveexamination of financial data, management, business concept andcompetition.2.Industry At the industry level, there might be an examination of supplyand demand forces for the products offered.3.Economy Fundamental analysis might focus on economic data to assess thepresent and future growth of the economy. To forecast future stock prices, fundamental analysis combineseconomic, industry, and company analysis to derive a stocks currentfair value and forecast future value. If fair value is not equal to thecurrent stock price, fundamental analysts believe that the stock is eitherover or under valued and the market price will ultimately gravitatetowards fair value. Fundamentalists do not heed the advice of therandom walkers and believe that markets are weak-form efficient.For instance, information regarding changes in the economy, which isreflected in macro level data, changes in policies, including industrial 53TMU New Satara College of Engg. & Mgmt. Pandharpur
  54. 54. MBA Volatility & Affecting Factors in Indian Stock Marketpolicy, political situation and the social situation, influence of overallprice behavior of the market. Industry-specific factors, such asindustrial policies of the domestic as well as foreign governments,demand and supply factors, as also incentives and barriers for themovement of products of a specific industry or group of industries ininternational markets, seasonal factors that influence a particularindustry or group of industries, entry and exit policies, labour relationsetc., influence the prices of all securities of companies in an industry.Company-specific factors such as quality and credibility of promoters,competence and professionalism of management, policies with regardto financing, investment and dividend decisions influence the securityprices of the company and thus the market volatility.But one positive thing though, if one looks at the index performanceover the past three months, it has been getting better progressively. Ifone looks at Asia Ex- Japan index, May’s returns have been minus1.7%, in June it came down to minus 1% and in July it was just 10 basispoints negative return. So although all have been negative, what we seeis a betterment of the returns over a three-month period. 54TMU New Satara College of Engg. & Mgmt. Pandharpur
  55. 55. MBA Volatility & Affecting Factors in Indian Stock MarketOther Factors:-Most of the investors and analysts are unable to cope with this unbelievable rise inIndian stocks especially capital goods and power stocks. Foreign investors and bigfinancial institutions invested heavily in these stocks when markets were crashed inAugust but many retail investors missed to capitalize this rally. FIIs discounted allthe negative news and poured money into Indian stocks after Fed rate cut inSeptember. But will this euphoria last forever?1. Political Instability: This is the single most major reason for stock market crash.Investors especially FIIs never like political instability and they will book profitsand go to another country. Even though political turmoil will have no significantimpact on the growth of companies, stock markets always negatively respond topolitical instability.2. RBI decision: Don’t expect positive news from RBI. Don’t be fooled by inflationdata which is released on every Friday. You will know real inflation in the routinelife. No government will allow raising inflation by cutting interest rate cut justbefore elections. RBI will definitely raise CRR and is major negative news formarkets.3. Negative news: When markets rose too high within a short span, single negativenews will create havoc in stock markets. Markets discounted negative news likeCrude rise, rupee appreciation, inflation concerns in U.S after fed rate cut and slowdown in economic growth etc.4. Economic growth: There is a slow down in economic growth if you see the databut markets already discounted 2008-09 earnings especially for high growth sectorslike power and capital goods.5. Profit booking: Shrewd investor always book profits just before every crashwhether it is in 2000 or 2006. Greedy investors always lose money in every crash.Decide yourself whether you are greedy or not? 55TMU New Satara College of Engg. & Mgmt. Pandharpur
  56. 56. MBA Volatility & Affecting Factors in Indian Stock Market FINDINGS AND SUGGESTIONS • Investors should trade carefully during volatility • Investors should invest in Blue Chip Companies during volatile Market Conditions • Investors should not be very greedy and Book the partial profits even if it is small during the volatile • Investors should always trade discounting the market news • Investors should always be aware of the news which affects market sentiment • Investors should avoid heavy exposure during long week ends • Investors should always have an eye on global and other asian markets. • Investors should always be informed about global and asian economy • Investors and Traders should always enter market with stop loss option • Always have a watch on various support and resistance levels • Investors should entry and exit the market at the proper time 56TMU New Satara College of Engg. & Mgmt. Pandharpur
  57. 57. MBA Volatility & Affecting Factors in Indian Stock Market CONCLUSIONThe expectations and foresight of investors as well as speculators determine themagnitude of price fluctuations to a larger extent. If market participants anticipatechanges in either fundamental factors or any other factors correctly, and if thechange or anticipated change comes about gradually, the prices move in a smoothfashion from one point of equilibrium to another. On the contrary, when theanticipations prove to be either too optimistic or pessimistic, or the changes in thesefactors or anticipations about them, undergo a sudden change, the prices moveerratically, rather than move in a smooth fashion resulting in greater Volatility. 57TMU New Satara College of Engg. & Mgmt. Pandharpur