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  1. 1. STOCK MARKET MOVEMENTS IN PRESENT ECONOMIC SCENARIO FINAL PROJECT REPORT In Partial fulfillment of the requirements For the degree of Master of Business Administration (2007-09) Submitted By: Amandeep Saini (Roll no-7065222359)GIAN JYOTI INSTITUTE OF MANAGEMENT & TECHNOLOGY PHASE-2, MOHALI, (PUNJAB) Affiliated to Punjab Technical University
  2. 2. ACKNOWLEDGEMENTThe project “stock market movements in present economic scenario” is anoutcome of my research. For the completion of this project I get anopportunity to express my deep gratitude to all those who helped me inmaking this report.First of all I would like to thank The Almighty for his blessing forcompleting this project successfully.I would like to extend my sincere thanks to Dr. A.N Garg for providing mearticulate guidance and ceaseless encouragement throughout my project.Last but not the least, I also express my grateful thanks to my friends forgiving their valuable suggestions to make this project to success. AMANDEEP SAINI
  3. 3. CERTIFICATE OF COMPLETIONThis is to certify that the Project entitled “STOCK MARKET MOVEMENTS INPRESENT ECONOMIC SCENARIO” is a bonafide work of Amandeep saini studentof Masters of Business Administration –finance (2007-2009). This project is submitted inthe partial fulfillment of his MBA curriculum & was successfully completed under myguidance. Wish him All the Best for future endeavors.Date: DR. A.N GARG (Project Guide)
  4. 4. DECLARATIONI hereby declare that the work, which is being presented in the project report “STOCKMARKET MOVEMENTS IN PRESENT ECONOMIC SCENARIO” for partialfulfillment of the requirement for the degree of Masters of Business Administration”submitted in Gain Jyoti institute of management & technology, Mohali which isAffiliated to Punjab Technical University, Jallandhar is record of my own work and iscarried out under the guidance of Dr. A.N GARG. Amandeep Saini (7065222359)
  5. 5. EXECUTIVE SUMMARYThis project investigates the nature of the causal relationship between stock prices andmacroeconomic aggregates in India. By applying the technique of correlation, the causalrelationship between the BSE Sensitive Index and the key macroeconomic variables, viz.,Money supply, Index of industrial production, Per capita income, GDP at factor cost,Exchange rate, Net domestic savings using the data from 1995-96 to 2008-09 is beingtested. And likewise the correlation is applied between S&P CNX NIFTY and abovementioned key macroeconomic variables.The major findings are :- • There is no causal linkage between stock prices and per capita income, exchange rate and the net domestic savings. • There is a very high degree of correlation between stock prices and broad money and gross domestic product at factor cost. • There is a moderate degree of correlation between stock prices and gross domestic product at factor cost, (AMANDEEP SAINI)
  6. 6. INDEXCHAPTER NO. TABLE OF CONTENTS PAGE NO. ACKNOWLEDGEMENT I CERTIFICATE OF COMPLETION II DECLARATION III EXECUTIVE SUMMARY IV INTRODUCTION1. 1 Capital Market and Economic Growth 1.1 2 Functions of capital market 1.2 4 An Indian Economy 1.3 6 Financial Market 1.4 28 Bombay Stock Exchange 1.5 32 National Stock Exchange 1.6 33 REVIEW OF LITERATURE2 36 RESEARCH METHODOLOGY3 38 ANALYSIS & INTERPRETATION4 40 CONCLUSION5 576 BIBLIOGRAPHY 58
  7. 7. 7 ANNEXURE 59
  8. 8. Chapter- 1 AN INTRODUCTIONCAPITAL MARKET AND ECONOMIC GROWTH:-It is needless to say that the securities markets, finance, economic growth There have anumber of studies, starting from World Bank and IMF to various scholars, which have
  9. 9. established robust relationship not only one way, but also the both ways, between thedevelopment in the securities market and the economic growth. As market gets disciplined /developed/ efficient, it avoids the allocation of scarce savings to low yielding enterprises andforces the enterprises to focus on their performance which is being continuously evaluatedthrough share prices in the market and which faces the threat of takeover. Thus securitiesmarket converts a given stock of investible resources to a larger flow of goods and services.The securities market fosters economic growth to the extent that it:-(a) Augments the quantities of real savings and capital formation from any given level ofnational income.(b) Increases net capital inflow from abroad.(c) Raises the productivity of investment by improving allocation of investible funds.(d) Reduces the cost of capital.The securities market facilitates the internationalization of an economy by linking it with therest of the world. This linkage assists through the inflow of capital in the form of portfolioinvestment. Moreover, a strong domestic stock market performance forms the basis for wellperforming domestic corporate to raise capital in the international market. This implies thatthe domestic economy is opened up to international competitive pressures, which help toraise efficiency.In as much as the securities market enlarges the financial sector, promoting additional andmore sophisticated financing, it increases opportunities for specialization, division of labourand reductions in costs in financial activities. The securities market and its institutions helpthe user in many ways to reduce the cost of capital. They provide a convenient market placeto which investors and issuers of securities go and thereby avoid the need to search a suitablecounterpart. The market provides standardized products and thereby cuts the informationcosts associated with individual instruments. The market institutions specialize and operateon large scale which cuts costs through the use of tested procedures and routines.CAPITAL MARKET:-
  10. 10. Progress on developing India’s capital market, which is becoming more competitive, deepand developed as on international markets standards. Business in the country’s oldest stockexchange, namely the Bombay Stock Exchange (BSE) dating back to 1875, which is also oneof the oldest stock exchanges in the world, continued to thrive. The National Stock Exchange(NSE), which emerged in the mid-1990s and catalyzed improvements in trading systems toprovide the necessary depth and choice to investors, made sustained progress. With the BSEand NSE emerging as the two apex institutions of the country’s capital market, restructuringof other stock exchanges went apace. Overseen by Securities and Exchange Board of India(SEBI), an independent statutory regulatory authority, the country’s capital market dealt inscrips of a large number of listed companies with a wide geographical outreach, providing aworld class trading and settlement system, a wide range of product availability with a fastgrowing derivatives market, and well laid down corporate governance and investor protectionmeasures.As a part of the on-going financial and regulatory reforms of the primary and secondarymarket segments of the capital market, a number of initiatives were taken in 2007-08 and thecurrent year so far. These measures are designed to attain the stability in current turmoil andto keep the pace of economic growth and keep the confidence of investors (both domestic andforeign) in the country’s capital market. The stock market scaled new peaks year after yearsince 2003, with the BSE and NSE indices crossing the 20,000 and 5,000 marks, respectively,in January 2008 but after it came under the direct impact global slowdown and stock indexhave shown the steep downfall to 8000 and 2700 respectively and failure of US investmentbanks also contributed to downfall.The informational efficiency of major stock markets has been extensively examined throughthe study of causal relations between stock price indices and macroeconomic aggregates. Thefindings of these studies are important since informational inefficiency in stock marketimplies on the one hand, that market participants are able to develop profitable trading rulesand thereby can consistently earn more than average market returns, and on the other hand,that the stock market is not likely to play an effective role in channeling financial resources tothe most productive sectors of the economy.
  11. 11. FUNCTIONS OF CAPITAL MARKET:The securities market allows people to do more with their savings than they would otherwise.It also allows people to do more with their ideas and talents than would otherwise bepossible. The people’s savings are matched with the best ideas and talents in the economy.Stated formally, the securities market provides a linkage between the savings and thepreferred investment across the entities, time and space. It mobilizes savings and channelisesthem through securities into preferred enterprises.The securities market enables all individuals, irrespective of their means, to share theincreased wealth provided by competitive enterprises. The securities market allowsindividuals who cannot carry an activity in its entirety within their resources to investwhatever is individually possible and preferred in that activity carried on by an enterprise.Conversely, individuals who cannot begin an enterprise they like can attract enoughinvestment form others to make a start and continue to progress and prosper. In either case,individuals who contribute to the investment share the fruits.The securities market also provides a market place for purchase and sale of securities andthereby ensures transferability of securities, which is the basis for the joint stock enterprisesystem. The liquidity available to investors does not inconvenience the enterprises thatoriginally issued the securities to raise funds. The existence of the securities market makes itpossible to satisfy simultaneously the needs of the enterprises for capital and of investors forliquidity.The liquidity the market confers and the yield promised or anticipated on security encouragespeople to make additional savings out of current income. In the absence of the securitiesmarket, the additional savings would have been consumed otherwise. Thus the provision ofsecurities market results in net savings.The securities market enables a person to allocate his savings among a number ofinvestments. This helps him to diversify risks among many enterprises, which increases thelikelihood of long term overall gains.ROAD AHEAD FOR CAPITAL MARKET:
  12. 12. The securities market promotes economic growth. More efficient is the securities market, thegreater is the promotion effect on economic growth. It is, therefore, necessary to ensure thatour securities market is efficient, transparent and safe. In this direction, SEBI has beenworking since its inception and would continue to work to continuously improve marketdesign to bring in further efficiency and transparency to market and make available newerand newer products to meet the varying needs of market participants, while protectinginvestors in securities. The aim is to make Indian securities market a model for otherjurisdictions to follow and make SEBI the most dynamic and respected regulator globally.Some of the initiatives on which SEBI is working are:A.) Introducing exchange traded interest rate derivativesB.) Promoting an index to comprehensively reflect the level of corporate governanceC.) Setting up a central listing authority to dynamise listing requirementsD.) Facilitating demutualization of stock exchangesE.) Building a cadre of securities market professionals through training and certificationF.) Constructing a central registry of securities market participants and professionalsG.) Rationalizing margin trading, securities lending and short sellingH.) Promoting secondary market for corporate debt securitiesI.) Implementing market wide straight through processing from trade initiation to settlementJ.) Operationalising T+1 rolling settlementK.) Reviewing all regulations of SEBI and code of conduct for intermediariesL.) Providing a legal framework for central counter partyM.) Consolidation of exchanges and other market participantsN.) Benchmarking Indian securities market with best in the WorldThese measures would definitely improve efficiency of the market leading to highereconomic growth.INDIAN ECONOMYThe economy of India is the fourth largest in the world as measured by purchasing powerparity (PPP). Consistent growth with strong macroeconomic fundamentals has characterizeddevelopments in the Indian economy in 2008-09 so far. However, there are some genuine
  13. 13. concerns on the inflation front earlier which was controlled later. Growth of 8.5 per cent in2007-08 and the estimates for the current year 2008-09 is around 7.5 per cent but globalestimates for imdian economy is around 5.5 per cent . While the up-and-down pattern inagriculture continued with growth estimated at 6.0 per cent and 2.7 per cent in the two recentyears, and services maintained its vigorous growth performance, there were distinct signs ofsustained improvements on the industrial front. Entrenchment of the higher growth trends,particularly in manufacturing, has boosted sentiments, both within the country and abroad.The overall macroeconomic fundamentals are satisfactory, even in the global meltdown andperiod of fall industrial growth the economy is generating the 7.5 percent growth shows thestrength of the fundamentals.The economy is diverse and encompasses agriculture, handicrafts, textile, manufacturing, anda multitude of services. Although two-thirds of the Indian workforce still earn their livelihooddirectly or indirectly through agriculture, services are a growing sector and are playing anincreasingly important role of Indias economy. The advent of the digital age, and the largenumber of young and educated populace fluent in English, is gradually transforming India asan important back office destination for global companies for the outsourcing of theircustomer services and technical support. India is a major exporter of highly-skilled workersin software and financial services, and software engineering.1. OVERALL ECONOMY:Advance estimates of GDP for the year 2008-09 shows that GDP is slated to grow by 8.5 percent. This growth will be primarily led by the industry, manufacturing and services sectors.The Industrial growth is expected to remain at about 10 per cent for the current fiscal,manufacturing sector and the services sector are likely to achieve 11.3% and 11.18% growthrespectively. However, the agriculture sector will expand by a merge 2.7 per cent as per themost of forecasted figures.Advance estimates of GDP for the year 2008-09 shows that GDP is slated to grow by 8.5 percent. This growth will be primarily led by the industry, manufacturing and services sectors.The Industrial growth is expected to remain at about 10 per cent for the current fiscal with themanufacturing sector and the services sector likely to achieve 11.3 per cent and 11.18 percent growth. However, the agriculture sector will expand by a merge 2.7 per cent in 2008-09
  14. 14. Table 1: Real GDP Growth (%) Sector First Half Year (April-September) 2007-08 2008-09 Agriculture 4.5 2.9 Industry 9.1 5.0 Services 10.6 9.9 Overall 9.3 7.82. INDUSTRIAL GROWTH:The General Index stands at 267.2, which is 2.4% higher as compared to the level in themonth of November 2007. The cumulative growth for the period April-November 2008-09stands at 3.9% over the corresponding period of the pervious year. The Indices of IndustrialProduction for the Mining, Manufacturing and Electricity sectors for the month of November2008 stand at 175.0, 285.7, and 217.5 respectively, with the corresponding growth rates of0.5%, 2.4% and 3.1% as compared to November 2007. The cumulative growth during April-November, 2008-09 over the corresponding period of 2007-08 in the three sectors have been3.4%, 4.0% and 2.9% respectively, which moved the overall growth in the General Index to3.9%.In terms of industries, as many as ten (10) out of the seventeen (17) industry groups (asper 2-digit NIC-1987) have shown positive growth during the month of November 2008 ascompared to the corresponding month of the previous year. The industry group ‘Rubber,Plastic, Petroleum and Coal Products’ have shown the highest growth of 30.7%, followed by14.5% in ‘Beverages, Tobacco and Related Products’ and 8.7% in ‘Wood and WoodProducts; Furniture and Fixtures’. On the other hand, the industry group ‘OtherManufacturing Industries’ have shown a negative growth of 16.9% followed by 13.1% in‘Leather and Leather & Fur Products‘and 11.4% in ‘Wool, Silk and Man-made Fibre Textiles’.As per Use-based classification, the Sectoral growth rates in November 2008 overNovember 2007 are 2.3% in Basic goods, (-)2.3% in Capital goods and 2.6% in Intermediategoods. The Consumer durables and Consumer non-durables have recorded growth of (-)4.2%and 7.3% respectively, with the overall growth in Consumer goods being 4.4%.Alongwith theQuick Estimates of IIP for November 2008, the indices for October 2008 have undergone thefirst revision and those for August 2008 have undergone the second (final) revision in thelight of the updated data received from the source agencies. (It may be noted that revisedindices (first revision) in respect of September 2008 have already been released in December2008 and these indices shall undergo final (second) revision in February 2009).Statements
  15. 15. giving Quick Estimates of the Index of Industrial Production at Sectoral, 2-digit level of National Industrial Classification (NIC)-1987 and by Use-based classification for the month of November 2008, along with the growth rates over the corresponding month of previous year, including the cumulative indices and growth rates, are enclosed. INDEX OF INDUSTRIAL PRODUCTION (Growth at 2-digit level) (Base: 1993-94=100)Industry Description Weight Index Cumulative Index Percentage growthcode Nov2007 Nov2008 Apr-Nov Nov2008 Apr-Nov 2007-2008 2008-2009 2008-200920-21 Food Products 90.8 166.6 172.9 149.6 149.0 3.8 -0.4 Beverages, Tobacco and22 Related Products 23.8 508.3 581.9 488.4 575.6 14.5 17.923 Cotton Textiles 55.2 153.9 153.8 163.0 161.3 -0.1 -1.0 Wool, Silk and man-made24 fibre textiles 22.6 286.0 253.3 276.1 268.4 -11.4 -2.8 Jute and other vegetable fibre Textiles (except25 cotton) 5.9 114.6 120.5 119.1 114.5 5.1 -3.9 Textile Products (including Wearing26 Apparel) 25.4 272.4 288.8 292.4 303.8 6.0 3.9 Wood and Wood Products; Furniture and27 Fixtures 27.0 108.8 118.3 127.0 119.7 8.7 -5.7 Paper & Paper Products and Printing, Publishing28 & Allied Industries 26.5 255.8 256.2 251.7 262.0 0.2 4.1 Leather and Leather & Fur29 Products 11.4 167.7 145.8 166.0 156.5 -13.1 -5.7 Basic Chemicals & Chemical Products (except products of30 Petroleum & Coal) 140.0 297.9 291.5 313.6 325.1 -2.1 3.7 Rubber, Plastic, Petroleum and Coal31 Products 57.3 241.3 315.4 243.1 246.2 30.7 1.3 Non-Metallic Mineral32 Products 44.0 304.9 311.9 320.1 320.8 2.3 0.2 Basic Metal and Alloy33 Industries 74.5 307.1 324.2 304.7 323.4 5.6 6.1
  16. 16. Metal Products and Parts, except Machinery and34 Equipment 28.1 160.3 146.3 164.6 165.4 -8.7 0.5 Machinery and Equipment other than Transport35-36 equipment 95.7 387.8 409.2 379.5 409.6 5.5 7.9 Transport Equipment and37 Parts 39.8 389.7 355.1 369.4 394.3 -8.9 6.7 Other Manufacturing38 Industries 25.6 430.1 357.3 342.4 335.3 -16.9 -2.11 Mining & Quarrying 104.7 174.2 175.0 162.3 167.8 0.5 3.42-3 Manufacturing 793.6 278.9 285.7 276.7 287.9 2.4 4.04 Electricity 101.7 210.9 217.5 216.4 222.6 3.1 2.9 General Index 1000.0 261.0 267.2 258.6 268.7 2.4 3.9 INDEX OF INDUSTRIAL PRODUCTION : USE-BASED (Base : 1993-94=100) Basic goods Capital goods Intermediate goodsMonth (355.65) (92.57) (265.14) 2007-2008 2008-2009 2007-2008 2008-2009 2007-2008 2008-2009Apr 212.8 221.3 278.4 313.0 249.2 256.9May 223.6 230.4 334.7 349.0 264.2 269.1Jun 215.8 220.5 358.3 386.3 260.1 267.5Jul 216.7 228.2 317.4 374.3 264.1 271.9Aug 217.6 226.0 368.6 372.0 273.3 258.3Sep 214.0 223.8 389.1 461.3 264.8 258.0
  17. 17. Oct 227.2 234.3 350.8 361.1 260.5 250.1Nov* 220.8 225.9 392.1 383.2 255.7 262.3Dec 230.0 420.5 271.7Jan 235.2 340.0 266.6Feb 226.4 356.8 259.4Mar 246.3 543.4 279.3AverageApr-Nov 218.6 226.3 348.7 375 261.5 261.8Growth over the corresponding period of previous yearNov 5.2 2.3 24.2 -2.3 5.5 2.6Apr-Nov 8.4 3.5 20.9 7.5 9.8 0.1* Indices for Nov 2008 are Quick Estimates.NOTE : Indices for the months of Aug2008 and Oct2008 incorporate updated production data. INDEX OF INDUSTRIAL PRODUCTION : USE-BASED (Base : 1993-94=100) Consumer goods Consumer durables Consumer non-durables Month (286.64) (53.65) (232.99) 2007-2008 2008-2009 2007-2008 2008-2009 2007-2008 2008-2009 Apr 290.9 315.6 341.8 352.9 279.2 307.0 May 288.8 310.3 380.3 391.0 267.7 291.7 Jun 266.9 293.2 357.9 374.4 246.0 274.5 Jul 274.5 290.8 351.5 400.5 256.8 265.6 Aug 266.8 283.9 379.7 394.5 240.8 258.4 Sep 273.4 293.2 388.9 445.7 246.8 258.1 Oct 280.6 274.5 431.9 418.7 245.8 241.3 Nov* 273.5 285.6 368.4 353.1 251.7 270.0 Dec 320.8 353.7 313.2 Jan 335.2 383.4 324.1 Feb 327.6 389.6 313.3 Mar 324.0 408.4 304.6 Average Apr-Nov 276.9 293.4 375.1 376.2 254.4 270.8 Growth over the corresponding period of previous year
  18. 18. Nov -2.9 4.4 -5.5 -4.2 -2 7.3Apr-Nov 5.3 6 -1.9 4.3 8.1 6.4* Indices for Nov 2008 are Quick Estimates. 3. TELECOMMUNICATIONS: The telecommunication sector is growing at a phenomenal rate. Soon, in a month’s time, This rise in the total phone subscription to 400 million is on the back of additions seen in the mobile phones growing at the rate of 4-5% every month.15.41 million wireless subscribers added in the January 2009 Teledensity already achieved 34.5 mark this month. Net addition of wireless and fixed line subscribers in the January 2009 was 15.26 million, which is almost 1.5 times greater as compared to the addition of 10.66 million in the corresponding period of last year. Table-3.1 - Growth of the telecommunication network (in million) April-January Fixed line Cellular mobile (including WLL phones Total phones fixed) (including WLL mobile) 1997-98 17.8 0.9 18.7 1998-99 21.6 1.2 22.8 1999-00 26.8 1.9 28.7 2000-01 33.0 3.6 36.6 2001-02 39.1 6.4 45.6 2002-03 41.5 13.0 54.5 2003-04 42.6 33.6 76.2 2004-05 45.9 52.2 98.1 2005-06 49.7 90.0 139.8 2006-07 40.4 156.3 196.7 2007-08 37.70 362.30 400 Source: Telecom Regulatory Authority of India
  19. 19. 4. INFLATION TRENDS:Wholesale price index (WPI), fell by more than half from its intra-year peak of 12.91 per centon August 2, 2008 to 5.60 per cent by January 10, 2009. While prices of primary articles andmanufactured products increased, fuel prices declined (Table 2). In terms of relativecontribution to decelerating headline inflation between August 2, 2008 and January 10, 2009,petroleum and basic metals (combined weight of 13.2 per cent in WPI) together accountedfor 79.4 per cent, followed by ‘oilseeds, edible oils & oil cakes’ (16.4 per cent). Clearly, thefall in commodity prices reflecting global trends has been the key driver of the sharp fall inWPI inflation although effective management of domestic demand too has contributed to thismoderation. Table 2: Annual Inflation Rate (%) Wholesale Price Index (WPI) January 12, 2008January 10, 2009 (y-o-y) (y-o-y) WPI - All Commodities 4.36 5.60 WPI - Primary Articles 4.49 11.64 WPI - Fuel Group 3.69 -1.32 WPI - Manufactured Products 4.57 5.90 WPI - Excluding Fuel 4.55 7.53 WPI - Excluding Food and Fuel 5.21 6.52 Consumer Price Index (CPI) December 2007December 2008 (y-o-y) (y-o-y) 1. CPI for Industrial Workers* 5.51 10.45 2. CPI for Agricultural Labourers 5.90 11.14 3. CPI for Rural Labourers 5.63 11.14 4. CPI for Urban Non-Manual Employees*5.06 10.79 * Pertains to November.On the other hand, inflation based on various consumer price indices (CPIs) is still in doubledigits due to the firm trend in prices of food articles and the higher weight of food articles inmeasures of consumer price inflation (Table 2). As the decline in input prices percolates overtime to the prices of manufactured and other products, consumer price inflation too isexpected to soften in the months ahead. For its overall assessment of inflation outlook forpolicy purposes, the Reserve Bank continues to monitor the full Array of price indicators.5. MONETARY INDICATORS:
  20. 20. Growth in key monetary aggregates – reserve money and money supply (M3) – in 2008-09so far has reflected the changing liquidity positions arising from domestic and globalfinancial conditions and the monetary policy response to the evolving macroeconomicdevelopments. Reserve money variations during 2008-09 have largely reflected increase incurrency in circulation and reduction in the cash reserve ratio (CRR) of banks. Reduction inthe CRR has three inter-related effects on reserve money. First, it reduces reserve money asbankers’ required cash deposits with the Reserve Bank fall. Second, the money multiplierrises. Third, with the increase in the money multiplier, M3expands with a lag. While theinitial expansionary effect is strong, the full effect is felt in 4-6 months. Reflecting thesechanges, while the year-on-year increase in reserve money as on January 2, 2009 was lower,it was significantly higher when adjusted for the first round effect of CRR reduction. Theannual M3 growth as on January 2, 2009 though lower compared with last year, was higherthan the trajectory projected in the Annual Policy Statement (Table 4). Table 4: Annual Variations in Monetary Aggregates (%) Item Annual Variations (y-o-y) January 4, 2008 January 2, 2009 Reserve Money 28.8 7.4 Reserve Money 18.1 19.4 (adjusted for CRR changes) Currency in Circulation 15.6 16.6 Money Supply (M3) 22.6 19.6 M3 (Policy Projection)* 17.0-17.5 16.5-17.0 Money Multiplier 4.66 5.20 * Policy projections are for the financial year as indicated in the Annual Policy Statements of the respective financial years. Since September 2008, monetary conditionshave been evolving following changes in monetary policy in response to global developments
  21. 21. and also due to slackening of domestic demand conditions. As the Reserve Bank had toprovide dollar liquidity, its net foreign exchange assets (NFEA) contracted. The ReserveBank sought to compensate the fall in NFEA by expanding its net domestic assets (NDA)through: (i) buy-back of securities held under the market stabilisation scheme (MSS); (ii)purchase of oil bonds; (iii) enlargement of the refinance window; and (iv) repo operationsunder the liquidity adjustment facility (LAF). Thus, a notable feature of monetary operationsduring the third quarter of 2008-09 was the substitution of foreign assets by domestic assetsto keep the overall liquidity conditions comfortable. Liquidity conditions have indeedimproved since mid-November 2008 as reflected in daily absorption under the LAF reverserepo and moderation in market interest rates.7. FISCAL TRENDS:As a proportion of the budget estimates (BE), both tax and non-tax revenue receipts of theCentral Government for the period April-November 2008 were lower than those in thecorresponding period of the previous year. On the other hand, both revenue expenditure andtotal expenditure, as a proportion to the BE, were higher than a year ago. Consequently, therevenue deficit and the gross fiscal deficit (GFD) were significantly higher during April-November 2008 as compared with the corresponding period of the previous year (Table 3). Table 3: Fiscal Position of the Central Government Item April-November Percentage to Budget Estimates Growth (%) 2007-08 2008-09 2007-08 2008-09 1. Revenue Receipts 56.5 52.2 24.2 14.7 2. Gross Tax Revenue 55.5 52.0 25.2 17.5 3. Tax Revenue (Net) 54.6 50.0 24.5 15.1 4. Non-Tax Revenue 65.7 64.1 22.7 13.2 5. Total Expenditure 60.5 65.8 22.2 20.1 (58.7) (11.7) (31.5) 6. Revenue Expenditure 61.8 69.3 12.7 32.4 7. Capital Expenditure 54.5 40.7 116.3 -43.4 (37.8) (1.2) (21.0) 8. Revenue Deficit 97.9 256.2 -17.2 102.0 9. Fiscal Deficit 63.8 132.4 -11.0 83.3 (63.0) (-12.2) (85.7) Note : Figures in parentheses are net of transactions relating to transfer of the Reserve Bank’s stake in State Bank of India to the Government.
  22. 22. For 2008-09, the Central Government had budgeted gross market borrowingof Rs.1,78,575 crore and net market borrowing of Rs.99,000 crore. Subsequently, theGovernment presented two supplementary demands, as a result of which the marketborrowing programme of the Central Government was raised to Rs.2,52,154 crore (gross) andRs.1,75,374 crore (net). Against this enhanced borrowing programme, market borrowing ofthe Central Government was Rs.2,22,154 crore (gross) and Rs.1,51,697 crore (net) during2008-09 so far (up to January 23, 2009). The weighted average yield and weighted averagematurity of central government dated securities issued during 2008-09 (up to January 23,2009) were at 8.03 per cent and 14.59 years respectively as compared with 8.10 per cent and14.38 years in 2007-08. The State Governments have borrowed a net amount of Rs.46,327crore up to January 23, 2009. The evolving scenario raises some concerns on the extent of stress on the fisc in thecurrent year emanating from several factors. First, the Centre is expected to suffer revenuelosses from lower direct tax collection on account of the economic slowdown. Second, theCentre is likely to lose further revenues worth about 0.6 per cent of GDP due to cuts in exciseand customs duties. Third, there has been a disproportionate growth in expenditure of theCentral Government during April-November 2008, particularly in respect of revenueexpenditure arising out of increase in subsidies, disbursements as well as implementation ofthe recommendations of the Sixth Pay Commission and the farm debt waiver scheme. The netcash outgo indicated in supplementary demands for grants would be of the order of 2.8 percent of GDP (Rs.1,50,310 crore). Thus, additional expenditure coupled with foregonerevenue would raise the fiscal deficit from the budget estimate of 2.5 per cent to at least 5.9per cent of GDP. In addition, special bonds for Rs.44,000crore and Rs.14,000 crore, amounting to 1.1 per cent of GDP, have been issued to oilmarketing companies and fertiliser companies respectively during 2008-09 (up to January 23,2009). In its latestReview of the Economy (January 2009), the Economic Advisory Council tothe Prime Minister has placed the consolidated fiscal deficit of the Central Government,including full issuances of oil and fertiliser bonds, at 8.0 per cent of GDP for 2008-09.The consolidated budgeted revenue surplus of the States in 2008-09 may not, in fact,materialise. Consequently, the consolidated fiscal deficit of the States is expected to rise to2.6 per cent of GDP. While some of the increase in the revenue and fiscal deficits is onaccount of post-budget expenditure commitments such as payment of arrears resulting fromthe Sixth Pay Commission Award, a substantial increase is also due to the economic
  23. 23. downturn arising from the impact of the global financial crisis. Although the fiscal stimuluspackages have meant deviation from the roadmap laid out by the Fiscal Responsibility andBudget Management (FRBM) Act, reversing the consolidation process of the last severalyears, they were warranted under the prevailing circumstances. It is critically important,however, that the Centre and States re-anchor to a revised FRBM mandate once theimmediacy of the crisis is behind us 8. FOREIGN TRADE: India’s current account deficit (CAD) of the balance of payments (BoP) widened in the first half of 2008-09 in comparison with the corresponding period of the previous year due to a large trade deficit, reflecting high oil prices even as private transfers and software export earnings were sustained. As net capital flows declined sharply, the overall balance of payments position turned marginally negative during the first half of 2008-09 as against a large surplus in the corresponding period of the previous year (Table 12). Import growth had moderated during October-November 2008 reflecting the fall in international oil prices and slowing domestic demand. During the same period, export growth turned negative reflecting slowing global demand. Going forward, it is expected that imports may slow down faster than exports. Table 12: India’s Balance of Payments (US $ billion) April-September 2007-08 2008-09 Exports 72.6 96.7 Imports 115.9 165.9 Trade Balance - 43.2 - 69.2 Invisibles, net 32.3 46.8 Current Account Balance - 11.0 - 22.3 Capital Account* 51.4 19.8 Change in Reserves# (-) 40.4 (+) 2.5 # On a BoP basis (excluding valuation): (-) indicates increase; (+) indicates decrease. * Including errors and omissions. The reversal of capital flows has raised concerns about management of theBoP, particularly with reference to outstanding external debt with residual maturity of lessthan one year. These concerns are somewhat misplaced as the following analysis will show.
  24. 24. India’s external debt with residual maturity of less than one year as at end-March 2008 wasestimated at around US $ 85 billion (as per revised data), which would mature during thefinancial year 2008-09. Sovereign debt and commercial borrowings are most likely to berolled over during 2008-09. Indeed, the BoP data for the first half of the year (April-September 2008) indicate net positive accretions beyond roll-over under both these heads.Current trends indicate that under NRI deposits, not only will the maturing debt be rolledover but there will be net accretions as a result of the upward adjustment in interest rateceilings on such deposits. Here again, available data up to December 2008 show netaccretions. That leaves trade credit of the order of US $ 43.2 billion to be repaid during2008-09. Of this, as much as US $ 28.1 billion has already been disbursed during April-November 2008 leaving a balance of US $ 15.1 billion. There are reports that large inflowsare in the pipeline on account of commitments of buyers’ credit by the importers and oilcompanies. Even conservatively projecting that only a small portion of this balance would berolled over, India’s external payment situation remains stable. The overall approach to the management of India’s foreignexchange reserves takes into account the changing composition of the balance of paymentsand endeavours to reflect the ‘liquidity risks’ associated with different types of flows andother requirements. As capital inflows during 2007-08 were far in excess of the normalabsorptive capacity of the economy, there was substantial accretion to foreign exchangereserves by US $ 110.5 billion. The foreign exchange reserves declined by US $ 23.4 billionfrom US $ 309.7 billion as at end-March 2008 to US $ 286.3 billion by end-September 2008largely reflecting valuation effects. Excluding valuation effects, the decline was US $ 2.5billion. Between October 2008 and January 16, 2009 foreign exchange reserves declined byUS $ 34.1 billion to US $ 252.2 billion, including valuation effects. India’s current level offoreign exchange reserves remains comfortable.9. CAPITAL INFLOWS:Net capital flows during 2008-09 were lower than those in the corresponding period of2007-08, mainly on account of outflows by foreign institutional investors ($7.3 billion)during 2008-09 (up to October 10, 2008) in contrast to net FII inflows ($ 18.9 billion) duringthe corresponding period of 2007-08. On the other hand, net FDI flows into India were placed
  25. 25. higher at $16.7 billion during April-August 2008 against $8.5 billion during April-August2007. The funds raised through issuances of ADRs/GDRs abroad were at $1.1 billion duringApril-August 2008 ($2.8 billion in April-August 2007). NRI deposits recorded a net inflow of$273 million during April-August 2008 mainly due to inflows under the rupee depositaccounts as against a net outflow ($168 million) during April-August 2007, said the report.With net capital flows being higher than the current account deficit, the overall balance ofpayments recorded a surplus of $2.2 billion during the first quarter of 2008-09 ($11.2 billionin the first quarter of 2007-08).10. CREDIT CONDITIONThe year-on-year (y-o-y) growth in non-food bank credit at 23.9 per cent as on January 2,2009 was higher than that of 22.0 per cent as on January 4, 2008 (Table 5). Increase in totalflow of resources from the banking sector to the commercial sector (i.e., non-food bank credittogether with investments in shares/bonds/debentures and commercial papers issued bypublic sector/private sector companies) was also higher at 23.4 per cent as compared with21.7 per cent a year ago. Despite the expansion in bank credit, there was a perception of lackof credit availability. This could be attributed to reduced flow of funds from non-banksources, notably the capital market and external commercial borrowings.During 2008-09 so far, the total flow of resources to the commercial sector from banks andother sources was marginally lower than in the previous year reflecting contraction of fundsfrom other sources (Table 6). Table 5: Annual Variations in Banking Indicators (%) Item January 4, 2008 January 2, 2009 (y-o-y) (y-o-y) Aggregate Deposits 25.1 21.2 Bank Credit 21.4 24.0 Non-food Bank Credit 22.0 23.9 Total flow of Resources from 21.7 23.4 Banks to the Commercial Sector SLR Investments 25.8 19.2 Incremental Credit-Deposit Ratio 63.1 81.4
  26. 26. Table 6: Flow of Financial Resources to the Commercial Sector (Rs. crore) Item 2007-08 2008-09 (Up to January (Up to January 4, 2008) 2, 2009) From Banks 2,24,921 2,93,243 From Other Sources* 2,74,563 1,91,470 Total Resources 4,99,484 4,84,713 * Includes borrowings from financial institutions and NBFCs as well as resources mobilised from the capital market and by way of ECBs, FCCBs, ADRs/GDRs, FDI and short-term credit as per the latest available data, adjusted for double counting.At a disaggregated level, the year-on-year increase in bank credit to industry as of December2008 was sharply higher than that in the previous year reflecting the substitution effect ofother sources of funding by bank credit (Table 7). Table 7: Annual Sectoral Flow of Credit Sector As on December 21, 2007As on December 19, 2008 (y-o-y) (y-o-y) Amount Variations Amount Variations (Rs. crore) (%) (Rs. crore) (%) Agriculture 38,139 19.3 53,612 22.7 Industry 1,56,192 24.9 2,36,064 30.2 Real Estate 13,621 35.8 24,827 48.1 Housing 31,780 14.6 21,989 8.8 NBFCs 22,953 59.6 24,668 40.1 Overall 3,54,802 21.8 4,90,199 24.8 CreditThere has been a noticeable variation in credit expansion across bank groups. Expansion ofcredit by public sector banks was much higher this year than in the previous year, whilecredit expansion by foreign and private sector banks was significantly lower. The relativelyslower pace of credit expansion by foreign and private sector banks has also added to theperception of inadequate credit flow in the system. There has also been perceptibledeceleration in growth of deposits with private and foreign banks (Table 8). Table 8: Bank Group-wise Deposits and Credit Bank Group Annual Growth (y-o-y) (%) As on January As on January 2, 2009
  27. 27. 4, 2008 Deposits Public Sector Banks 24.2 24.2 Foreign Banks 34.1 12.1 Private Sector Banks 26.9 13.4 Scheduled Commercial 25.1 21.2 Banks * Credit Public Sector Banks 19.8 28.6 Foreign Banks 30.7 16.9 Private Sector Banks 24.2 11.8 Scheduled Commercial Banks * 21.4 24.0 * Including regional rural banks (RRBs). Commercial banks’ holdings of SLR securities became more liquid on account of twofactors. First, banks were permitted to use SLR securities to the tune of 1.5 per cent of theirnet demand and time liabilities (NDTL) under the LAF to meet the funding requirements ofmutual funds, non-banking finance companies (NBFCs) and housing finance companies(HFCs). Second, the reduction in SLR by one percentage point to 24.0 per cent of NDTL inNovember 2008 released funds for credit deployment. Commercial banks’ SLR holdingsdeclined from 27.8 per cent (28.4 per cent adjusted for LAF) of NDTL in March 2008 to 25.8per cent (28.1 per cent adjusted for LAF) in mid-October 2008 reflecting the banks’ relianceon the repo facility under the LAF as liquidity conditions tightened. Reversing this trend byearly January 2009, banks’ SLR holdings increased to 28.9 per cent of NDTL (27.1 per centadjusted for LAF) reflecting improved liquidity conditions and increased government marketborrowings. Bank deposit and lending rates, which had firmed up during the current financialyear up to October 2008, started easing from November 2008. Between November 2008 andJanuary 2009, all public sector banks, several private sector banks and some foreign banksreduced their deposit and lending rates. The magnitude of reduction by public sector bankswas larger than that by foreign and private sector banks (Table 9).
  28. 28. Table 9: Deposit and Lending Rates of Banks (%) Bank Group/Maturity October 2008 January 2009 Domestic Deposit Rate Public Sector Banks 61-90 days 5.25-6.00 5.25-6.00 180 days – 1 year 8.00-8.75 7.25-8.00 1-3 years 9.50-10.50 8.00-9.00 > 3 years 8.75-9.75 8.25-8.50 Private Sector Banks 61-90 days 4.00-6.25 4.00-5.50 180 days – 1 year 8.00-9.00 7.75-8.00 1-3 years 9.00-10.10 8.00-9.00 > 3 years 8.50-9.75 8.00-8.75 Foreign Banks 61-90 days 6.00-8.50 5.25-7.00 180 days – 1 year 7.00-9.50 7.50-9.00 1-3 years 7.50-9.00 7.50-8.50 > 3 years 7.50-10.00 7.50-7.75 Benchmark Prime Lending Rate (BPLR) Public Sector Banks 13.75-14.00 12.00-12.50 Private Sector Banks 15.25-17.25 14.75-16.75 Foreign Banks 14.25-15.50 14.25-15.50 Note: Data relate to five major public sector banks, four private sector banks and three foreign banks.The interest rate response to monetary policy easing has been faster in the money and bondmarkets as compared to the credit market because of several structural factors. First, theadministered interest rate structure on small savings could potentially constrain the reductionin deposit rates below some threshold. Second, a substantial portion of bank deposits ismobilised at fixed interest rates with an asymmetric contractual relationship. During theupturn of the interest rate cycle, depositors have the flexibility to prematurely terminate theexisting deposits and re-deposit the funds at higher interest rates. However, in the downturnof the interest rate cycle, banks have to necessarily carry these deposits at higher rates ofinterest till their maturity. Third, competition among banks for wholesale deposits formeeting the higher credit demand in the upswing leads to an increase in the cost of funds.Fourth, linkage of concessional lending rates to banks’ BPLRs makes overall lending ratesless flexible. Fifth, persistence of the large market borrowing programme of the governmenthardens interest rate expectations. Sixth, with increase in risk aversion, lending rates tend tobe high even during a period with falling credit demand. From the real economy perspective,
  29. 29. however, for monetary policy to have demand inducing effects, lending rates will have tocome down.Notwithstanding the various factors that impede monetary transmission, market interest ratesdo respond to changes in policy interest rates. As such, current deposit and lending rates havesignificant room for further reduction. Interest rates in the money and bond markets havealready declined perceptibly since their peaks in October 2008 (Table 10). Major publicsector banks have also reduced their term deposit rates in the range of 50-150 basis points.Benchmark prime lending rates (BPLRs) of major public sector banks have come down by150-175 basis points. Major private sector banks have reduced their BPLRs by 50 basispoints, while major foreign banks are yet to do so. As a result of several measures initiated bythe Reserve Bank since mid-September 2008, banks’ cost of funds would come down. Thisshould encourage banks to reduce their lending rates in the coming months.OVER ALL SCENARIOAt the heart of the global financial crisis lie the non-functional and frozen financial markets.In sharp contrast to their international counterparts, the financial system in India has beenresilient and stable. Barring some tightness in liquidity during mid-September to earlyOctober, the money, foreign exchange and government securities markets have been orderlyas reflected in market rates, spreads and transaction volumes relative to those observed duringnormal times. India’s banking system remains healthy, well-capitalised, resilient andprofitable. Credit markets have been functioning well and banks have been expanding credit,notwithstanding the perceptions in some quarters of lack of adequate credit from the banks tothe commercial sector. Over the last five years, India clocked 8.8 per cent average annualgrowth, driven largely by domestic consumption and investment even as the share of netexports rose. While the benign global environment, easy liquidity and low interest rateshelped, at the heart of India’s growth have been its growing entrepreneurial spirit and rise in
  30. 30. productivity. These fundamental strengths continue to be in place. Nevertheless, the globalcrisis will dent India’s growth trajectory as investments and exports slow. Clearly, there is aperiod of painful adjustment ahead of us. However, once the global economy begins torecover, India’s turnaround will be sharper and swifter, backed by our strong fundamentalsand the untapped growth potential. Meanwhile, the challenge for the Government and theReserve Bank is to manage the adjustment with as little pain as possible.Since September 2008, international developments have largely circumscribed domesticpolicy responses. There have been severe disruptions in the international money and foreignexchange markets since September 2008. Policymakers in governments, central banks and inother regulating agencies of financial institutions around the world responded to the crisiswith aggressive, radical and unconventional measures to restore calm and confidence infinancial markets and bring them back to normalcy. The immediate challenge was to maintainfinancial stability, which moved up in the hierarchy ofobjectives.FINANCIAL MARKET:It is needless to say that the financial markets (banks and the securities markets) financeeconomic growth. They channelise savings to investments and thereby decouple these twoactivities. As a result, savers and investors are not constrained by their individual abilities,but by the economy’s ability to invest and save respectively, which inevitably enhancessavings and investment in the economy. To the extent the growth of an economy depends onthe rate of savings and investment, financial markets promote economic growth.TYPES OF FINANCIAL MARKETS: 1. Money Market 2. Capital Market a) Primary Market b) Secondary Market i. Regional Stock Exchanges ii. OTCEI1. MONEY MARKET: Money market is a market for debt securities that pay off in theshort term usually less than one year, for example the market for 90-days treasury bills. This
  31. 31. market encompasses the trading and issuance of short term non equity debt instrumentsincluding treasury bills, commercial papers, bankers acceptance, certificates of deposits, etc.2. CAPITAL MARKET: Capital market is a market for long-term debt and equityshares. In this market, the capital funds comprising of both equity and debt are issued andtraded. This also includes private placement sources of debt and equity as well as organizedmarkets like stock exchanges. Capital market can be further divided into primary andsecondary markets. a.) PRIMARY MARKET: The primary is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. This is typically done through a syndicate of securities dealers. In the case of a new stock issue, this sale is an initial public offering (IPO). b.) SECONDARY MARKET: Secondary Market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. Majority of the trading is done in the secondary market. Secondary market comprises of equity markets and the debt markets. For the general investor, the secondary market provides an efficient platform for trading of his securities. For the management of the company, Secondary equity markets serve as a monitoring and control conduit—by facilitating value-enhancing control activities, enabling implementation of incentive-based management contracts, and aggregating information (via price discovery) that guides management decisions. Secondary market could be either auction or dealer market. While stock exchange is the part of an auction market, Over-the-Counter (OTC) is a part of the dealer market. (i) REGIONAL STOCK EXCHANGES: A stock exchange in India is recognized by the Central Government under section 4 of Securities Contracts (Regulation) Act, 1956 (SCRA). Over a period of time, stock exchanges came to be set up almost in every State. These stock exchanges set up regionally were known as the Regional Stock Exchanges (RSEs). The objective of establishing the RSEs was to enable regional companies in the respective geographical locations to raise capital and to help spread the equity cult amongst investors across the length and breadth of the country.
  32. 32. (ii) OTCEI: Over the Counter Exchange of India was incorporated in 1990 as a Section 25 company under the Companies Act 1956 and is recognized as a stock exchange under Section 4 of the Securities Contracts Regulation Act, 1956. The Exchange was set up to aid enterprising promoters in raising finance for new projects in a cost effective manner and to provide investors with a transparent & efficient mode of trading. Modelled along the lines of the NASDAQ market of USA, OTCEI introduced many novel concepts to the Indian capital markets such as screen-based nationwide trading, sponsorship of companies, market making and scripless trading. As a measure of success of these efforts, the Exchange today has 115 listings. BOMBAY STOCK EXCHANGEVISION: “Emerge as the premier Indian stock exchange by establishing globalbenchmarks”INTRODUCTION: Bombay Stock Exchange Limited is the oldest stock exchange inAsia with a rich heritage. Popularly known as "BSE", it was established as "The Native Share
  33. 33. & Stock Brokers Association" in 1875. It is the first stock exchange in the country to obtainpermanent recognition in 1956 from the Government of India under the Securities Contracts(Regulation) Act, 1956.The Exchanges pivotal and pre-eminent role in the development ofthe Indian capital market is widely recognized and its index, SENSEX, is tracked worldwide.Earlier an Association of Persons (AOP), the Exchange is now a demutualised andcorporatised entity incorporated under the provisions of the Companies Act, 1956, pursuantto the BSE (Corporatisation and Demutualisation) Scheme, 2005 notified by the Securitiesand Exchange Board of India (SEBI).With demutualisation, the trading rights and ownershiprights have been de-linked effectively addressing concerns regarding perceived and realconflicts of interest. The Exchange is professionally managed under the overall direction ofthe Board of Directors. The Board comprises eminent professionals, representatives ofTrading Members and the Managing Director of the Exchange. The Board is inclusive and isdesigned to benefit from the participation of market intermediaries. The Exchange has anation-wide reach with a presence in 417 cities and towns of India. The systems andprocesses of the Exchange are designed to safeguard market integrity and enhancetransparency in operations. During the year 2004-2005, the trading volumes on the Exchangeshowed robust growth and in January 2008 it scaled new heights of 20000 mark then itstarted crashing sharply due to global recession and negative market sentiments which led itback to 8000 mark. The Exchange provides an efficient and transparent market for trading inequity, debt instruments and derivatives. The BSEs On Line Trading System (BOLT) is aproprietory system of the Exchange and is BS 7799-2-2002 certified. The surveillance andclearing & settlement functions of the Exchange are ISO 9001:2000 certified.SENSEX - BAROMETER OF INDIAN CAPITAL MARKETSINTRODUCTION: For the premier Stock Exchange that pioneered the stock brokingactivity in India, 128 years of experience seems to be a proud milestone. A lot has changedsince 1875 when 318 persons became members of what today is called "The Stock Exchange,Mumbai" by paying a princely amount of Re1Since then, the countrys capital markets havepassed through both good and bad periods. The journey in the 20th century has not been aneasy one. Till the decade of eighties, there was no scale to measure the ups and downs in theIndian stock market. The Stock Exchange, Mumbai (BSE) in 1986 came out with a stockindex that subsequently became the barometer of the Indian stock market.SENSEX is not
  34. 34. only scientifically designed but also based on globally accepted construction and reviewmethodology. First compiled in 1986, SENSEX is a basket of 30 constituent stocksrepresenting a sample of large, liquid and representative companies. The base year ofSENSEX is 1978-79 and the base value is 100. The index is widely reported in both domesticand international markets through print as well as electronic media.The Index was initiallycalculated based on the "Full Market Capitalization" methodology but was shifted to the free-float methodology with effect from September 1, 2003. The "Free-float MarketCapitalization" methodology of index construction is regarded as an industry best practiceglobally.SENSEX Calculation MethodologySENSEX is calculated using the "Free-float Market Capitalization" methodology. As per thismethodology, the level of index at any point of time reflects the Free-float market value of 30component stocks relative to a base period. The market capitalization of a company isdetermined by multiplying the price of its stock by the number of shares issued by thecompany. This market capitalization is further multiplied by the free-float factor to determinethe free-float market capitalization.. NATIONAL STOCK EXCHANGEORIGIN: The National Stock Exchange of India was promoted by leading financialinstitutions at the behest of the Government of India, and was incorporated in November1992 as a tax-paying company. In April 1993, it was recognized as a stock exchange underthe Securities Contracts (Regulation) Act, 1956. NSE commenced operations in theWholesale Debt Market (WDM) segment in June 1994. The Capital Market (Equities)
  35. 35. segment of the NSE commenced operations in November 1994, while operations in theDerivatives.The National Stock Exchange of India Limited (NSE), is a Mumbai-based stock exchange.It is the largest stock exchange in India and the third largest in the world in terms of volumeof transactions. NSE is mutually-owned by a set of leading financial institutions, banks,insurance companies and other financial intermediaries in India but its ownership andmanagement operate as separate entities. As of 2006, the NSE VSAT terminals, 2799 in total,cover more than 1500 cities across India. In March 2008, the NSE indices started crashingdue to global meltdown and sentiments and it led it from 6000 mark to back it at 2600 mark.It is the second-largest stock market in South Asia in terms of market-capitalization.INDICES: NSE also set up as index services firm known as India Index Services & ProductsLimited (IISL) and has launched several stock indices, including: • S&P CNX Nifty • CNX Nifty Junior • CNX 100 (= S&P CNX Nifty + CNX Nifty Junior) • S&P CNX 500 (= CNX 100 + 400 major players across 72 industries) • CNX Midcap (introduced on 18 July 2005 replacing CNX Midcap 200)S&P CNX Nifty: The S&P CNX Nifty (nicknamed Nifty 50 or simply Nifty) (TickerNSE:^NSEI), is the leading index for large companies on the National Stock Exchange ofIndia. S&P CNX Nifty is a well diversified 50 stock index accounting for 22 sectors of theeconomy. It is used for a variety of purposes such as benchmarking fund portfolios, indexbased derivatives and index funds.CURRENT STATUS OF CAPITAL MARKETS IN INDIA:The overnight interest rates generally ruled above the ceiling of the LAF rate corridor at thebeginning of October 2008 when the domestic money and foreign exchange markets cameunder pressure. The overnight interest rates eased in mid-October 2008 in response to thesuccessive monetary easing measures by the Reserve Bank which alleviated the liquiditypressures. The overnight interest rates have remained below the upper bound of the LAFcorridor since November 3, 2008. Interest rates on various other segments of the moneymarket and government securities market have also softened markedly (Table 10).
  36. 36. Table 10: Interest Rates (%) Segment/Instrument October 2008January 23, 2009 Call Money 9.90 4.21 CBLO 7.73 3.85 Market Repo 8.40 4.24 Commercial Paper 14.17 10.98* Certificates of Deposit 10.00 8.85* 91-day Treasury Bills 7.44 4.67 10-year Government Securities 7.45 5.87 * Pertains to December 2008.The rupee had appreciated against major currencies in 2007-08 due to large capital inflows. Itdepreciated during 2008-09 so far reflecting extraordinary developments in internationalfinancial markets and portfolio outflows by foreign institutional investors (FIIs). It hasremained range-bound since November 2008 (Table 11). Table 11: Rupee Exchange Rate Rupee per Unit of Range AprilNovemberJanuary* 2008 2008 2009 US Dollar Maximum40.46 50.52 49.19 Minimum39.89 47.18 48.37 Euro Maximum63.80 64.68 68.09 Minimum62.25 60.57 63.60 Pound Sterling Maximum79.94 80.26 74.42 Minimum78.66 72.14 67.61 100 Japanese Yen Maximum39.58 53.12 55.58 Minimum38.36 47.31 51.90 * Up to January 23, 2009.Equity markets weakened sharply till end-October 2008 in tandem with global stock markets,particularly Asian markets, reflecting further deterioration in the global financial marketsentiment, FII outflows, slowdown in industrial growth and lower corporate profits. The BSESensex declined from an all-time high of 20873 on January 8, 2008 to a low of 8451 onNovember 20, 2008. The equity market has since remained generally range-bound; the BSESensex was at 8674 on January 23, 2009. The outlook for the domestic financial markets willbe determined largely by the developments in global financial markets and domestic liquidityconditions. The banking system has been in surplus liquidity mode since mid-November2008. The pressure on the exchange rate of the rupee has eased due to moderation in capital
  37. 37. outflows. In addition, the decline in global commodity prices, particularly crude oil, isexpected to further ease the pressure on foreign currency on account of oil imports. Chapter- 3 RevIew
  38. 38. Of LITeRATUReIndian Capital Market since liberalizations has undergone tremendous changes and hasevolved as a vibrant system of investment flows. A dynamic capital market is an importantsegment of the financial system of any country as it plays a significant role in mobilizingsavings and channeling them for productive purposes.In recent times, studies on therelationship between macroeconomic variables and national stock market have been thecornerstone of most economic literature. Among the many macroeconomic variables, therelationship between money supply and stock prices has been widely studied because of thebelief that money supply changes have important direct effects through portfolio changes,and indirect effects through their effect on real economic activity, which in turn postulated tobe the fundamental determinants of stock prices. Despite extensive investigations, the precisenature of the relationship between money supply and the stock market remainsambiguous.Other macroeconomic variables apart from money supply are equally importantbecause there is a strong relationship between stock returns with other macroeconomicvariables, notably, inflation and national output as well as industrial production. The inflationrate is an important element in determining stock returns due to the fact that during the timesof high inflation, people recognize that the market is in a state of economic difficulty. Peopleare laid off work, which could cause production to decrease. When people are laid off, theytend to buy only the essential items. Thus production is cut even further. This eats into
  39. 39. corporate profits, which in turn makes dividends diminish. When dividends decrease, theexpected return of stocks decrease, causing stocks to depreciate in value. CHAPTER- 4 ReSeARCH MeTHODOLOGY
  40. 40. OBJECTIVES: • To know that whether the Indian stock market acts as a barometer of the Indian economy’s growth and development or not. • To find out the correlation between macroeconomic variables and stock market indices.SCOPE: The scope of the study includes BSE Sensitive Index, S&P CNX NIFTY and themacroeconomic variables, viz., • Index of industrial production • Agriculture production • Service sector’s contribution towards GDP • Money supply • Per capita income • Net domestic savings • Market capitalization • Exchange rate of Indian Rupee vis-à-vis US DollarTECHNIQUES USED:
  41. 41. • Correlation test has been applied to establish the relationship between the Indian stock indices and macroeconomic variables. • Trend of movement of the stock indices against the macroeconomic variables has been examined with the help of line charts.PERIOD: The data for the purpose is restricted to the period between 1995-96 to2008-09. CHAPTER- 5 ANALYSIS
  43. 43. GDP:(SENSEX,NIFTY) 200 180 160 140 120 100 PERCENTAGE 80 NIFTY 60 40 GDP 20 SENSEX 0 -20 19 96 19 97 19 98 20 00 20 01 20 -02 20 03 20 04 20 05 20 06 20 07 9 19 99 20 08 -0 - - - - - - - - - - - - -40 05 95 96 97 98 99 00 01 02 03 04 06 07 08 19 -60 -80 -100 YEARS Source: Economic Survey 2008CORRELATION: SENSEX S&P CNX NIFTYGDP AT FACTOR COST 0.721198776 0.740981009 • Moderate degree of positive correlation.INTERPRETATION:Does Sensex trace GDP growth?
  44. 44. An answer to this question is that in the series of fourteen years of data of growth rate ofGDP and both indices, there is a clear correlation between them.On an annual basis in the last ten years the BSE Sensex and S&P CNX NIFTY have had avery volatile trend but GDP at factor cost has been growing at a steady rate because GDP ofthe economy is the collective output of the agriculture, industrial and services sector.Economy goes through cycles of recovery, peak, slowdown and depression over the longerperiod of time. Similarly, stock markets also have cycles, depending on how the economy isperforming. Therefore, even if Indias GDP grows at 12% in one year, the Sensex may notgain a similar percentage during the year. However, the relationship may hold true over thelonger-term.The often repeated story of developments in stock markets continues to be breath-taking.From quarterly average of 3138 points in Oct-Dec 2001, within about six years, the Sensexhas reached an average level of 20000 points in Dec 2008. Nobody should think that theSensex is up simply because Indias GDP has accelerated to 9% in the first half of the year. 2.) CAUSAL RELATIONSHIP BETWEEN THE STOCK MARKET INDICES AND THE AGRICULTURE PRODUCTION.
  45. 45. AGRICULTURE;(SENSEX,NIFTY) 200 180 160 140 120 100 80 NIFTY 60 40 20 SENSEX 0 -20 G N C R A E P T -40 AGRICUL -60 -80 TURE -100 -120 YEARS Source: Economic Survey 2008 CORRELATION: SENSEX S&P CNX NIFTYAGRICULTURE 0.635073379 0.656944965PRODUCTION• AGRICULTURE – SENSEX: Moderate degree of positive correlation.• AGRICULTURE – NIFTY: Moderate degree of positive correlation.INTERPRETATION:There is a moderate degree of correlation between the agriculture production and the stockmarket indices. It did not come out with a high degree of correlation simply becauseagriculture sector of the economy indirectly helps in the growth of the market indices. As weall know that farmers do not go to capital market or they do not invest their money in thecapital market but in fact they assist others, like manufacturing sector, to grow and increaseGDP of the economy.
  46. 46. It puts an indirect impact on the capital market as it is having the lowest contribution in thecountry’s GDP as compare to other sectors, that is, 19.01 per cent in 2005-06 as given by theEconomic survey of 2006-07. Its contribution has been declined from 19.01 per cent of2005-06 to 16 per cent in 2008-09The Economic Survey for 2008 has estimated a growth rate of 3.9% in the agriculturalproduction. The total foodgrains production is estimated to be 219.3mn tons in the year2007-08 against 204.6mn tons in 2004-05 and 227.3 in 2008-09.On the global level, India was the second largest producer of both fruits and vegetables with aproduction of 69mn tons and 105mn tons respectively in 2007-08. India occupies the firstposition in production of cauliflower, second in onion and third in cabbage.3.) CAUSAL RELATIONSHIP BETWEEN THE STOCK MARKETINDICES AND THE INDUSTRY.
  47. 47. Industry(sensex,nifty) 250 200 150 100 nifty 50 INDUSTRY SENSEX 0 p g a n e c r t -50 -100 -150 years Source: Economic Survey 2008 CORRELATION: SENSEX S&P CNX NIFTY INDUSTRIAL 0.671820723 0.695490596 PRODUCTION• INDUSTRY – SENSEX: Moderate degree of positive correlation.• INDUSTRY – NIFTY: Moderate degree of positive correlation. INTERPRETATION:There is a clear correlation between the stock market indices and the industrial production inthe economy. It means industrial production puts a direct impact on the capital market. Itcould be because of two main reasons. Firstly, it has been growing at a faster rate than theagriculture sector. Its growth rate is estimated at 11.1 per cent in the 2007-08 as compare to
  48. 48. 9.58 per cent in the 2005-06. Secondly, capital market includes number of manufacturingcompanies. So, with the growth rate in the industrial sector, capital market also grows.In November, the index of industrial production (IIP) showed very dismal performance aspeople bought less cars, mobiles, houses, and consumer durables. With salary growthreducing, expenditure across sectors, consumption is decling; businessmen, responding todecrese in demand for their goods, are investing less in factories and industrial capacities,pushing demand down to lower level.As countries develop economically, the structures of economic and social organisationschange. At first, the industrial sector tends to grow at the expense of the agriculture sector,and subsequently the service sector increases as a share of the economy. As the populationbecomes more urbanised, traditional social structures may become less important, and thedistribution of income may change. 4.) CAUSAL RELATIONSHIP BETWEEN THE STOCK MARKET INDICES AND THE SERVICE SECTOR’S CONTRIBUTION TOWARDS GDP.
  49. 49. SERVICE SECTOR (SENSEX,NIFTY) 250 200 150 PERCENTAGE NIFTY 100 SERVICE SECTOR 50 SENSEX 0 19 -96 19 -97 19 -98 19 -99 20 -02 20 -06 20 -07 20 -08 20 -00 20 -01 20 -03 20 -04 20 -05 9 -50 -0 95 96 97 98 99 00 01 02 03 04 05 06 07 08 19 -100 YEARS Source: Economic Survey 2008 CORRELATION: SENSEX S&P CNX NIFTYSERVICE SECTOR 0.619711 0.699453• SERVICE SECTOR-SENSEX: Moderate degree of positive correlation.• SERVICE SECTOR-NIFTY: Moderate degree of positive correlation.INTERPRETATION:There has been a moderate degree of correlation between stock market indices and servicesector’s contribution in the economy’s GDP. It is so because the contribution of the servicesector is highest, as compare to other sectors, in the GDP of the economy and it has beengrowing at the fast rate too.The services sector has been the key driver of our growth, registering growth rates of 11.98,11.2% over the last two years. We expect the growth rate to moderate marginally to 14%
  50. 50. this year since some of the sub-sectors such as communication which saw very rapid growthin recent years are likely to confront subdued demand. 5.) CAUSAL RELATIONSHIP BETWEEN THE STOCK MARKET INDICES AND THE MONEY SUPPLY.
  51. 51. CORRELATION: SENSEX S&P CNX NIFTY BROAD MONEY 0.82411 0.836771 • BROAD MONEY-SENSEX: High degree of positive correlation. • BROAD MONEY-NIFTY: High degree of positive correlation.INTERPRETATION:
  52. 52. Last ten year data of broad money and indices show a clear correlation between them. Wherebroad money includes: Currency with the public + Demand deposits with banks + Timedeposits with banks + Other deposits with RBI.Despite having a steady growth in the broad money, indices have had a volatile trend in thelast ten years. In this data we can easily trace out that broad money has been increasingcontinously.Correlation shows that money supply does put an impact on the stock marketbecause if broad money increases in the economy, it would increase the money in the handsof the public which would increase the purchasing power or the real money of the public. Nodoubt at all that it will also lead to an inflation in the economy but this issue is often wellbeing taken care by the government with the help of monitory policy.Increase in the broad money supply up to September 2008 was 13%. During this period bothcommercial and government borrowings also increased by 4.3% and 9.2% respectively.Aggregate deposits of scheduled commercial banks rose by 9.2%But recent reduction in the Repo rate might lead to rise in the money supply growth anddecline in lending rates in the coming months.6.) CAUSAL RELATIONSHIP BETWEEN THE STOCK MARKETINDICES AND THE PER CAPITA INCOME
  53. 53. Source: India 2008CORRELATION: SENSEX S&P CNX NIFTY PER CAPITA INCOME 0.77701817 0.790154883 • PCI – SENSEX: High degree of positive correlation. • PCI – NIFTY: High degree of positive correlation.INTERPRETATION:There is a very high degree of correlation between Sensex and per capita income although percapita income is known to be better measure for the economic development but above drawngraph shows that this macroeconomic variable does affect the growth rate of capital marketindices.
  54. 54. . The per capita income at current prices is estimated at Rs. 38084 during 2008-09 as againstRs. 33284 in the previous year, a growth of 14 per cent.But the per capita income has a 0.953515 correlation with the GDP at factor cost whichmeans high degree of positive correlation.7.) CAUSAL RELATIONSHIP BETWEEN THE STOCK MARKETINDICES AND THE NET DOMESTIC SAVINGS (Till 31, March 2008).
  55. 55. Source: Reserve Bank of India2008CORRELATION: SENSEX S&P CNX NIFTY NET DOMESTIC 0.921193844 0.933032683 SAVINGS • SAVINGS – SENSEX: High degree of positive correlation • SAVINGS – NIFTY: High degree of positive correlation.INTERPRETATION:This data shows that there is high degree of correlation between the net domestic savings andthe stock market indices. As we know that the increase in savings depends on highereconomic growth rate and a declining dependency ratio which means domestic savings is thegood indicator of the economy growth.
  56. 56. In my opinion, high degree of correlation between domestic savings and stock market indicesbecause securities market channelise savings to investments and thereby decouple these twoactivities. As a result, savers and investors are not constrained by their individual abilities,but by the economy’s ability to invest and save respectively, which inevitably enhancessavings and investment in the economy.But it could also be possible that whole of the savings are not mobilizing towards theinvestments in the capital market but channelising in some other investment alternatives likereal estate and gold. It could be because of the inefficiency of the capital market in terms ofinadequate information, illiteracy etc.Gross domestic savings as a proportion of GDP continued with its upward trend. The savingsratio increased to 45 in FY2008 compared to 22% in FY2009. Savings from private corporateand household sector led the surge in domestic savings rate whereas public sector savingswitnessed a marginal fall.8.) CAUSAL RELATIONSHIP BETWEEN THE STOCK MARKETINDICES AND THE EXCHANGE RATE OF INDIAN RUPEE VIS-À-VISUS DOLLAR.
  57. 57. YEARS BSE Exchange Rate NSE SENSEX Exchange Rate NIFTY 1995 3,618.54 31.375 1071.23 0 0 0 1996 2,931.84 36.48 848.42 -18.97726707 16.27092 -20.79945 1997 3,382.47 35.88 972.65 15.3702112 -1.644737 14.64251 1998 3,224.36 38.915 963.45 -4.674394747 8.458751 -0.94587 1999 3,315.57 42.5 966.2 2.828778424 9.212386 0.285433 2000 5,205.29 43.635 1546.2 56.9953281 2.670588 60.02898 2001 4,326.72 46.415 1371.7 -16.87840639 6.371032 -11.28573 2002 3,311.03 48.575 1075.4 -23.4748262 4.653668 -21.60093 2003 3,250.38 47.8 1041.85 -1.831756281 -1.595471 -3.119769 2004 5,695.67 43.305 1809.75 75.23089608 -9.403766 73.70543 2005 6,555.94 43.695 2057.6 15.10392983 0.900589 13.69526 2006 6,492.82 43.554 2035.65 16.13816 -0.3226 9.8269 2007 13,075.00 45.25 3822 91.23 3.894 87.81 2008 18,048.00 40.41 5277 19.28 -10.696 38.06 2009 8,842.00 50 2620 -40.42 23.73174 -50.35Note: Data are based on FEDAI (Foreign Exchange Dealers Association of India) indicativeratesCORRELATION: SENSEX S&P CNX NIFTY EXCHANGE RATE 0.16287582 0.188455009 • EXCHANGE RATE-SENSEX: Low degree of positive correlation. • EXCHANGE RATE-NIFTY: Low degree of positive correlation INTERPRETATION:There has been a poor correlation between the capital market indices and the exchange rate ofIndian rupee against US dollar. Because mainly exchange rate affects the international trade,that is, imports and exports. But it may indirectly help in the growth of the capital market interms of the following reforms in this area:
  58. 58. • Foreign Institutional Investors are allowed to invest in Indian equities subject to restrictions on maximum holdings in individual companies. Restrictions remain on investment in debt, but these too have been progressively relaxed. • Indian companies are allowed to raise equity in international markets subject to various restrictions. • Indian companies are allowed to borrow in international markets subject to a minimum maturity, a ceiling on the maximum interest rate, and annual caps on aggregate external commercial borrowings by all entities put together. • Indian mutual funds are allowed to invest a small portion of their assets abroad. • Indian companies are given access to long dated forward contracts and to cross currency options. CONCLUSIONThe main objective of the project is to determine the lead and lag relationships between theIndian stock market and key macroeconomic variables. Certain quarters of the investorsbelieve that the positive growth in the gross national product will result in an improvement inthe performance of the stock markets. The endeavor of the study is to investigate thequestion: Can the Indian stock market act as a barometer for the Indian economy’s growth