PROJECT WORK OnCorrelation between NSE and BSE indices (Based on historical data from 1.01.1996-31.12.2010) Submitted By: Mansi Anand (8106) BBS 3 FA Divya Chadha (8108) BBS3 FA Avinash Saraf (8110) BBS 3 FA
OBJECTIVES To understand the basics of NSE and BSE To ascertain the scrip selection criteria for Nifty and Sensex To understand the how their future indices are used as a tool to hedge risk of portfolios To understand the risk return trade off To ascertain the factors affecting Sensex and Nifty ( Macro as well as micro factors) Using Historical data for the period of 15 years starting from 1.01.1996 to 31.12.2010 to understand the correlation between yearly open, high, low and close of Sensex and Nifty. Interpreting the findings via graphs
BASICS OF BSEThe BSE SENSEX is not only scientifically designed but also based on globally acceptedconstruction and review methodology. First compiled in 1986, SENSEX is a basket of 30constituent stocks representing a sample of large, liquid and representative companies. Thebase year of SENSEX is 1978-79 and the base value is 100. The index is widely reported inboth domestic and international markets through print as well as electronic media.SENSEXThe SENSEX, short form of the BSE-Sensitive Index, is a "Market Capitalization-Weighted"index of 30 stocks representing a sample of large, well-established and financially soundcompanies. It is the oldest index in India and has acquired a unique place in the collectiveconsciousness of investors. The index is widely used to measure the performance of theIndian stock markets. SENSEX is considered to be the pulse of the Indian stock markets as itrepresents the underlying universe of listed stocks at The Stock Exchange, Mumbai. Further,as the oldest index of the Indian Stock market, it provides time series data over a fairly longperiod of time (since 1978-79).OBJECTIVES OF SENSEXThe SENSEX is the benchmark index of the Indian Capital Markets with wide acceptanceamong individual investors, institutional investors, foreign investors and fund managers. Theobjectives of the index are:1.To measure market movementsGiven its long history and its wide acceptance, no other index matches the SENSEX inreflecting market movements and sentiments. SENSEX is widely used to describe the moodin the Indian Stock markets.2.Benchmark for funds performanceThe inclusion of blue chip companies and the wide and balanced industry representation inthe SENSEX makes it the ideal benchmark for fund managers to compare the performance oftheir funds.3.For index based derivative productsInstitutional investors, money managers and small investors all refer to the SENSEX for their
specific purposes The SENSEX is in effect the proxy for the Indian stock markets. Thecountrys first derivative product i.e. Index-Futures was launched on SENSEX.CRITERIA FOR SELECTION AND REVIEW OF SCRIPS FOR THE SENSEXA. Quantitative Criteria:1. Market Capitalization:The scrip should figure in the top 100 companies listed by market capitalization. Also marketcapitalization of each scrip should be more than 0.5 % of the total market capitalization ofthe Index i.e. the minimum weight should be 0.5 %. Since the SENSEX is a marketcapitalization weighted index, this is one of the primary criteria for scrip selection. (MarketCapitalization would be averaged for last six months)2. Liquidity:(i) Trading Frequency: The scrip should have been traded on each and every trading day forthe last one year. Exceptions can be made for extreme reasons like scrip suspension etc. (ii)Number of Trades: Number of Trades: The scrip should be among the top 150 companieslisted by average number of trades per day for the last one year. (iii) Value of Shares Traded:Value of Shares Traded: The scrip should be among the top 150 companies listed by averagevalue of shares traded per day for the last one year.3. Continuity:Whenever the composition of the index is changed, the continuity of historical series ofindex values is re-established by correlating the value of the revised index to the old index(index before revision). The back calculation over the last one-year period is carried out andcorrelation of the revised index to the old index should not be less than 0.98. This ensuresthat the historical continuity of the index is maintained.4. Industry Representation:Scrip selection would take into account a balanced representation of the listed companies inthe universe of BSE. The index companies should be leaders in their industry group.5. Listed History:The scrip should have a listing history of at least one year on BSE.
B. Qualitative Criteria:Track Record:In the opinion of the Index Committee, the company should have an acceptable track record.BETABeta measures the sensitivity of a scrip movement relative to movement in the benchmarkindex i.e. SENSEX. A Beta of one means that for every change of 1% in index, the scripmoves by 1%. Statistically Beta is defined as: Covariance (SENSEX, Stock )/Variance(SENSEX)Note: Covariance and variance are calculated from the Daily Returns data of the SENSEX andSENSEX scrips.PROCEDURE FOR CALCULATING SENSEXSENSEX is calculated using a "Market Capitalization-Weighted" methodology. As per thismethodology, the level of index at any point of time reflects the total 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). An index of a set of a combined variables (such as price and number of shares) iscommonly referred as a Composite Index by statisticians. A single indexed number is usedto represent the results of this calculation in order to make the value easier to work with andtrack over time. It is much easier to graph a chart based on indexed values than one based onactual values.The base period of SENSEX is 1978-79. The actual total market value of the stocks in theIndex during the base period has been set equal to an indexed value of 100. This is oftenindicated by the notation 1978-79=100. The formula used to calculate the Index is fairlystraightforward. However, the calculation of the adjustments to the Index (commonly calledIndex maintenance) is more complex.The calculation of SENSEX involves dividing the total market capitalization of 30 companiesin the Index by a number called the Index Divisor. The Divisor is the only link to theoriginal base period value of the SENSEX. It keeps the Index comparable over time and is theadjustment point for all Index maintenance adjustments. During market hours, prices of the
index scrips, at which latest trades are executed, are used by the trading system to calculateSENSEX every 15 seconds and disseminated in real time. PROCEDURE FOR CALCULATING CLOSING INDEXThe closing SENSEX is computed taking the weighted average of all the trades on SENSEXconstituents in the last 15 minutes of trading session. If a SENSEX constituent has not tradedin the last 15 minutes, the last traded price is taken for computation of the Index closure. If aSENSEX constituent has not traded at all in a day, then its last days closing price is taken forcomputation of Index closure. The use of Index Closure Algorithm prevents any intentionalmanipulation of the closing index value.ROUTINE MAINTENANCE OF SENSEXOne of the important aspects of maintaining continuity with the past is to update the baseyear average. The base year value adjustment ensures that additional issue of capital andother corporate announcements like bonus etc. do not destroy the value of the index. Thebeauty of maintenance lies in the fact that adjustments for corporate actions in the Indexshould not per se affect the index values.The Index Cell of the Exchange does the day-to-day maintenance of the index within thebroad index policy framework set by the Index Committee. The Index Cell takes special careto ensure that SENSEX and all the other BSE indices maintain their benchmark properties bystriking a delicate balance between high turnover in Index scrips and its representativecharacter. The Index Committee of the Exchange has experts from different field of financerelated to the capital markets. They include Academicians, Fund-managers from leadingMutual Funds, Finance - Journalists, Market Participants, Independent Governing Boardmembers, and Exchange administration.PROCEDURE FOR ADJUSTMENTS FOR BONUS, RIGHTS AND NEWLY ISSUEDCAPITALThe arithmetic calculation involved in calculating SENSEX is simple, but problem ariseswhen one of the component stocks pays a bonus or issues rights shares. If no adjustmentswere made, a discontinuity would arise between the current value of the index and itsprevious value. The Index Cell of the Exchange periodically adjusts the base value to take
care of such corporate announcements.Adjustments for Rights Issues:When a company, included in the compilation of the index, issues right shares, the marketcapitalisation of that company is increased by the number of additional shares issued basedon the theoretical (ex-right) price. An offsetting or proportionate adjustment is then made tothe Base Market Capitalisation (see Base Market Capitalisation Adjustment below).Adjustments for Bonus Issue:When a company, included in the compilation of the index, issues bonus shares, the marketcapitalisation of that company does not undergo any change. Therefore, there is no change inthe Base Market Capitalisation, only the number of shares in the formula is updated.Other Issues: Base Market Capitalisation Adjustment is required when new shares are issuedby way of conversion of debentures, mergers, spin-offs etc. or when equity is reduced by wayof buy-back of shares, corporate restructuring etc.Base Market Capitalisation Adjustment: The formula for adjusting the Base MarketCapitalisation is as follows:New Base Market Capitalisation = Old Base Market Capitalisation X (New MarketCapitalisation/Old Market Capitalisation)To illustrate, suppose a company issues right shares which increases the market capitalisationof the shares of that company by say, Rs.100 crores. The existing Base Market Capitalisation(Old Base Market Capitalisation), say, is Rs.2450 crores and the aggregate marketcapitalisation of all the shares included in the index before the right issue is made is, sayRs.4781 crores. The "New Base Market Capitalisation " will then be: Rs.2501.24 crores = 2450X (4781+100)/4781This figure of 2501.24 will be used as the Base Market Capitalisation for calculating the indexnumber from then onwards till the next base change becomes necessary.FREQUENCY OF SENSEX CALCULATIONDuring market hours, prices of the index scrips, at which trades are executed, areautomatically used by the trading computer to calculate the SENSEX every 15 seconds andcontinuously updated on all trading workstations connected to the BSE trading computer inreal time.
BASICS OF NSENIFTYS&P CNX Nifty is a well diversified 50 stock index accounting for 21 sectors of the economy.It is used for a variety of purposes such as benchmarking fund portfolios, index basedderivatives and index funds.S&P CNX Nifty is owned and managed by India Index Services and Products Ltd. (IISL),which is a joint venture between NSE and CRISIL. IISL is Indias first specialised companyfocused upon the index as a core product. CALCULATION METHODOLOGYS&P CNX Nifty is computed using market capitalization weighted method, wherein the levelof the index reflects the total market value of all the stocks in the index relative to aparticular base period. The method also takes into account constituent changes in the indexand importantly corporate actions such as stock splits, rights, etc without affecting the indexvalue. SCRIP SELECTION CRITERIAThe constituents and the criteria for the selection judge the effectiveness of the index.Selection of the index set is based on the following criteria:Liquidity (Impact Cost)For inclusion in the index, the security should have traded at an average impact cost of0.50% or less during the last six months for 90% of the observations for a basket size of Rs. 2Crores.Impact cost is cost of executing a transaction in a security in proportion to the weightage ofits market capitalisation as against the index market capitalisation at any point of time. Thisis the percentage mark up suffered while buying / selling the desired quantity of a securitycompared to its ideal price (best buy + best sell) / 2Floating Stock
Companies eligible for inclusion in S&P CNX Nifty should have atleast 10% floating stock.For this purpose, floating stock shall mean stocks which are not held by the promoters andassociated entities (where identifiable) of such companies.Othersa) A company which comes out with a IPO will be eligible for inclusion in the index, if itfulfills the normal eligiblity criteria for the index like impact cost, market capitalisation andfloating stock, for a 3 month period instead of a 6 month period.b) Replacement of Stock from the Index:A stock may be replaced from an index for the following reasons:i. Compulsory changes like corporate actions, delisting etc. In such a scenario, the stockhaving largest market capitalization and satisfying other requirements related to liquidity,turnover and free float will be considered for inclusion.ii. When a better candidate is available in the replacement pool, which can replace the indexstock i.e. the stock with the highest market capitalization in the replacement pool has at leasttwice the market capitalization of the index stock with the lowest market capitalization.
NSE Nifty and BSE Sensex 2011, Projections and EstimatesNote:Nifty : 6200 base points, Sensex : 19000 base pointsTime taken : January 1st of 2011, All values are technical and approximate.Nifty by 2011: end is 6990 points and BSE Sensex can stable at 20850 points by year end of2011.If any up and downs due to world financial condition and Governments policy can impactthe index.
IMPACT OF NSE AND BSE INDEX FUTURE ON PORTFOLIO MANAGEMENT The Indian market has so far not offered any tools to hedge risks. The badla system, anindigenous form of forward-trading, is prone to misuse and is not a hedging tool. Hence, thelogical step is to introduce stock index futures.Investors would look to `index futures contract as a device for hedging their portfoliosagainst losses. Alternatively, they would want to lock into a reasonable and acceptable rate ofreturn. This is where index futures come in. The investors would have to enter into acontract for sale of `index futures at the going value of the index. The idea being that even ifthe value of the index falls -- indicating a decline in the value of the portfolio -- that could beoffset by a gain in the `futures market.After all, when you sell something for delivery at a future date, where the price agreed on isthe current market price, any fall in the price of the asset on the delivery date actuallyrepresents a profit. So, the loss on current holdings of investment is offset by the gains in salecontract (futures) in a declining market.But the effectiveness of this strategy -- that is, selling index futures -- lies in the investorportfolio reflecting the composition of the index itself. If not in terms of the actual identity,at least in terms of the relative value movements between the net asset values of theportfolios and the index being considered.Zeroing in on the indexWith a variety of stock indices available, selecting the right one to introduce futures tradingis important. The test used to check for the best index is its hedging effectiveness with theportfolio. Hedging effectiveness refers to the gains in terms of reduction in the uncertaintiesassociated with the profits a portfolio manager stands to gain by hedging risks.For the analysis, six equity indices were chosen -- the BSE-Sensex, BSE-100 (Natex), BSE-200, S&P CNX Nifty, S&P CNX 500 and the Mid-Cap index. A test on the volatility of theindices showed that, over time, there was no abnormal volatility.TESTING WITH MUTUAL FUND PORTFOLIOSThe CNX Mid-Cap Index turns out to be the one with the highest hedging effectiveness,while the Sensex and Nifty are at the bottom. The average level of hedging effectiveness
using the Mid-Cap index works out to 0.568, followed closely by the S&P CNX 500 with0.486.This means the fund manager using the CNX Mid-Cap Index to hedge his risks can minimisehis variance in profits by around 60 per cent (0.568*100). In other words, 40 per cent of hisportfolio variations would be exposed to the vagaries of the market movement. The Sensexand Nifty had a hedging effectiveness ratio of 0.12 and 0.34 respectively. Overall, the resultsshow that the degree of hedge effectiveness is comparatively at the lower end.TESTING WITH SIMULATED PORTFOLIOSIn the absence of index futures, mutual fund schemes have been managed aggressively. Thisreduces the credibility of the results obtained from testing mutual fund portfolios. If the fundmanager has the option of hedging his risks in the futures market, he may take a passivestrategy with respect to his funds. Hence, it is necessary to test the efficiency of the indicesusing simulated portfolios which more or less mimic real portfolios but with the assumptionthat they are not shuffled frequently.For this purpose, a test was run on the same set of indices with simulated portfolios. Close to2,500 portfolios were generated from 312 stocks. Constraints were placed on thedevelopment of the portfolios to mimic mutual fund portfolios. The portfolio selections, aswell as the weightages, were done randomly.The results of the analysis were not surprising. The S&P CNX Mid-Cap Index turned out tobe the best for hedging, with an effectiveness of 0.72, closely followed by the S&P CNX 500,with a ratio of 0.65. Sensex and Nifty were the worst performers, with effectiveness rates of0.51 and 0.57 respectively. REASON FOR POOR PERFORMANCE OF NSE AND BSE FUTURE INDEXThe basic reason, in this case, is the composition of the portfolio itself. Most of the portfoliosanalysed provided excess returns over their tenure. For instance, the Alliance 95 fundearned an excess return of close to 32.7 per cent over a balanced benchmark whichconstitutes 60 per cent of the BSE 200 index and 40 per cent debt.These portfolios have a heavier weightage to the technology sector than some of the indicesanalysed. Hence, the movement in such benchmark indices as the Nifty and Sensex is nothighly correlated with the net asset values of the portfolio. The other reason could be that asmost of these schemes are actively managed, the portfolio shuffling might have led to thelower correlation with the indices. For instance, the Morgan Stanley Growth Fund where, inthe top 25 exposures, there were seven new entrants in every quarter.
Consider this: The portfolios of Kothari Pioneer Prima, Kothari Pioneer Blue-chip, MorganStanley Growth Scheme, Alliance Tax Relief and Alliance 95 Dividend indicate a degree ofcorrelation close to 90 per cent with the Mid-Cap Index. This literally means the portfoliosof these funds more or less capture the trends in the Mid-Cap Index.Some of the stocks in the Mid-Cap Index, such as Digital Equipment, Dr. ReddysLaboratories, Software Solutions, Novartis, HCL Infosystems, Satyam Computers, HeroHonda and Zee Telefilms, are part of most of the portfolios considered. However, some ofthese stocks recently entered the Sensex and the Nifty.Most market players do not closely follow the CNX Mid-Cap index. The possibility ofintroducing index futures on this index seems remote. But why have Sensex and Nifty,considered the market indices, failed? The main reason is that they have not been exposed tothe technology sector for a significantly long period.However, with the recent reshuffling of index constituents, there is more weightage on thetechnology sector. Hence, in the next couple of years, there may be better correlationbetween the main market indices and the mutual funds. Despite its low value in terms ofhedging, the recent inclusion of some tech stocks in the indices may improve their value.
DESIRABLE ATTRIBUTES FOR AN INDEX Every index should have certain attributes to be used for futures trading. The mostimportant issue in selecting an index is its liquidity. Illiquid indices have certain inherentproblems that reduce the effectiveness of the products derived from them.The important issue is that a highly liquid index is less prone to market manipulation than anilliquid one. Market manipulation refers to a few players moving the market to theirconvenience. Such markets fail to enthuse genuine investors, and this may result in thefailure of the contracts.The main problem with price manipulation is that it may lead to basis risk, which is the riskassociated with the difference between the futures and the spot market. Consider this: If, onthe arrival of significant information, the futures prices move in a way that reflects theavailable information, but the spot price does not move in tandem, some form of marketmanipulation may ensue. This tends to hamper the price discovery mechanism in an efficientmarket.The index must be quoted on a real-time basis, as both the Nifty and the Sensex are. Further,there should be an opportunity for arbitrage between the spot and the futures markets. Indexarbitrage bridges the gaps between the spot and futures markets, essentially leading toimproved volumes in these markets.
RISK-RETURN TRADE OFFThe relationship between risk and return is a fundamental financial relationship that affectsexpected rates of return on every existing asset investment. The Risk-Return relationship ischaracterized as being a "positive" or "direct" relationship meaning that if there areexpectations of higher levels of risk associated with a particular investment then greaterreturns are required as compensation for that higher expected risk. Alternatively, if aninvestment has relatively lower levels of expected risk then investors are satisfied withrelatively lower returns.Greater degrees of risk must be compensated for with greater returns on investment. Sinceinvestment returns reflects the degree of risk involved with the investment, investors needto be able to determine how much of a return is appropriate for a given level of risk. Thisprocess is referred to as "pricing the risk". In order to price the risk, we must first be able tomeasure the risk (or quantify the risk) and then we must be able to decide an appropriateprice for the risk we are being asked to bear.In the investing world, the dictionary definition of risk is the chance that an investmentsactual return will be different than expected. Technically, this is measured in statisticsby standard deviation. Risk means you have the possibility of losing some, or even all, of ouroriginal investment.Low levels of uncertainty (low risk) are associated with low potential returns. High levels ofuncertainty (high risk) are associated with high potential returns. The risk/return tradeoff isthe balance between the desire for the lowest possible risk and the highest possible return.This is demonstrated graphically in the chart below. A higher standard deviation means ahigher risk and higher possible return.
A common misconception is that higher risk equals greater return. The risk/return tradeofftells us that the higher risk gives us the possibility of higher returns. There are no guarantees.Just as risk means higher potential returns, it also means higher potential losses.On the lower end of the scale, the risk-free rate of return is represented by the return onGovernment Securities because their chance of default is next to nothing. If the risk-free rateis currently 6%, this means, with virtually no risk, we can earn 6% per year on our money.The common question arises: who wants to earn 6% when index funds average 12% per yearover the long run? The answer to this is that even the entire market (represented by theindex fund) carries risk. The return on index funds is not 12% every year, but rather -5% oneyear, 25% the next year, and so on. An investor still faces substantially greater risk andvolatility to get an overall return that is higher than a predictable government security. Wecall this additional return the risk premium, which in this case is 6% (12% - 6%).Determining what risk level is most appropriate for you isnt an easy question to answer.Risk tolerance differs from person to person. Your decision will depend on your goals,income and personal situation, among other factors.
FACTORS AFFECTING NIFTY AND SENSEX MACRO FACTORS INTEREST RATEInterest rate as a specific financial parameter indicates the value of money and significantlyinfluences any actions on money and capital markets. Interest rate on money market is themain parameter representing at the same time a minimum yield in comparing various yieldson investments on money and capital markets. Investor’s decision on investments on moneyand capital markets will be always based on the interest rate prevailing on money market.Interest rate varies with maturity, default risk, inflation rate productivity of capital, specialfutures, and so on. Traditionally the interest rate in India was fairly high and most of theinterest rate in the organized sector was regulated. In the several interests have deregulated.More important, in the last few years interest rates have softened significantly.*A rise in the interest rates depresses corporate profitability and also leadto increases in thediscount rate applied by equity investors both of which have an adverse impact on stockprice on the other hand, a fall in interestrate improves corporate profitability and also leadsto a decline in the discount rate applied by equity investors, both of which have a favorableimpact on the stock price. GROWTH RATE OF GROSS DOMESTIC PRODUCT OF INDIAThe gross domestic product (GDP) is a measure of the total production of final goods andservices in the economy during a specific period usually a year. the growth rate represent theaverage of the growth rates of the three principal sectors of the economy – service sector ,industrial sectors and agriculture sector. Growth rate of GDP, the most important indicatorof the performance of the economy. The average rate of GDP in India during 1950 – 80 wasaround 4% in real terms (the real growth rate is the nominal growth ratethe less inflationrate) with wide year to year fluctuation though. The GDP growth rate had risen to about 5%in the 1980s, in the 1990s the GDP growth rate began on a dismal note significantlysubsequently, but decline slightly towards the end.Firm estimate of the GDP rate areavailable the time lag of one to tow year before so, but preliminary estimates are made fromtime to time by various bodies like RBI. The higher the growth rate of GDP, other thingsbeing equal the more favorable it is for the stock market.
The India Gross Domestic Product is worth 1296 billion dollars or 2.09% of the worldeconomy, according to the World Bank. From 2006 until 2010, Indias average annual GDPGrowth was 8.50 percent reaching an historical high of 9.70 percent in March of 2007 and arecord low of 6.70percent in March of 2009.By the Central Statistical Organization (CSO) on February 7, 2007, places the growth of GDPat factor cost at constant (1999-2000) prices in the current year at 9.2 per cent. INFLATIONNot in itself an indication of aggregate economic activity, the price level measure the degreeto which the nominal rate of growth in GDP is attributable to inflation.The sector inflationrate in Indian economy has been around 7 percent till the late 1990s, with wide year to yearinfatuation though in resent years inflation rate has increases in significantly. The effect ofinflation on the corporate sector tends to be uneven. Whilecertain industries may benefitother tend to suffer. Industries that enjoy strong market for their product and which do notcome under preview ofprice control may benefit on the other hand , industries that have aweak market and which come under the preview of price control tend to lose .an estimatedinflation in the end of 2007 was 3.8 percent . FOREIGN INSTITUTIONAL INVESTORS (FII)FIIs share in the Indian capital markets has shown steady increases from US $ 200 million in1991-1992, to 10 billion in 2005. This market growth of FII investment is due to the financialliberalization policies followed by India since 1991. This buoyancy demonstrated the highlevel of confidence that the international investor repose in the Indian economy. One reasonfor the surge in FII inflow is the strengthening of the rupee against the US $. Thestrengthening of the rupee is due to the weakening of dollar across global currencies. Untilabout two years ago, FIIs used to bear losses on their portfolio investment when the rupeewould continuously depreciate. With the rupee strengthening, that’s not the case now. Givethe perception about FIIs as market leaders in the domestic stock market along with theirdominate position in the nifty companies; we can understand that FIIs are in a position toinfluence the movement of nifty in a significant proportion. The influence of FIIs on themovement of the nifty became apparent after the general election in India when the suddenreversal of FII flows triggered a panic reaction, which resulted in very high volatility in theIndian stock market. During this period, the S & P Nifty experienced its worst single-daydecline in its history and in the three month period between April to June 2005, it declinedby about 17 percent.
And it all started because of the selling pressure entered by the FIIs after the post electionphase when they became less confident about the continuation of reform process in India.However, when we look at the shareholding pattern of FIIs in Nifty companies, we see thatthe shareholding pattern of the FIIs have remained relatively unchanged between March andJune 2007. The volume of trades done by FIIs is not very high as compared to other marketparticipants; they are the driving force in determination of market sentiments and pricetrends. This is so because they do only delivery based trades and they are perceived to beinfallible in their assessment of the market. Another aspect is that the other marketparticipants perceive the FIIs to be infallible in their assessment of the market and tend tofollow the decisions taken by FIIs. This heard instinct displayed by other market participantsamplifies the importance of FIIs in the domestic stock market in India. MICRO FACTORS GOVERNMENT POLICIES(CURRENT)The govt. policy announced by govt. has own impact on companies and industries of afavorable or unfavorable govt. policy. There may be a big change in the company or industryafter the announcement of govt. policy. If a policy is in favor of company than the profit andsales may grow. These policies mainly reflect in the annual budget for the year 2006-07.1. Corporate taxThe government reduced corporate tax from 35 to 30% in 2006-2007. Specific tax proposalsand their impact on individual stock. Reduction in customs duty on crude to 5 percent it isnegative for ONGC . Reduction in income tax rates: this would put more money in the handsof the consumers and should be positive for all FMCG companies, especially HLL ITC. 10 %surcharge on tobacco products is negative for ITC. Excise duty cut on PFY is positive forReliance. Excise duty cut on refined edibal oil and vanaspati would benefit ITC and HLL.Effect of taxes on nifty shows that it affects the market. Other taxes like FBT has not a verybig impact on market. The major impact is from the side of corporate and excise tax. Itreveals that it affect the nifty but for short term.
2. AUTOMOBILESPOSITIVE Reduction in excise duty on motorcars and tiers from 32 % to 24%. This may result in lower prices to the consumer and possibly boost demand. Reduction in the excise duty on electric vehicles from 16 % to 8 %.NEGATIVE Increases in additional custom duty on petrol and high speed diesel oil from Rs. 1 par litter to Rs. 1.50 par litter; increases in the excise duty on light diesel oil by Rs. 1.50 par litter; impositions of additional Cass of 50 pace par litter on diesel and patrol, imposition of duty of Rs. 50 par metric tune on imported crud oil. Rising fuel price could dampen growth in sales of automobile as price of fuel rise, fuel efficient vehicles are expected to benefit. Imposition of 1 % national calamity contingent duty for one year on motor care, MUV’S and two wheelers.Major Beneficiaries:-Maruti Suzuki, Tata Motars, Ashok Leyland, BajajAuto, Hero HondaMotors and TVS Motors.3. BANKSPOSITIVES Buy-back of old high cost debts of the govt. from the banks at a premium and the business income so earned to get tax benefit it set of against NPA provisioning . This would give banks liquidity and help clean up their balance sheet as well. Hike in FDI in privet banks from 49% to 74% and removable of voting right restriction of 10 %. This should lead to strategic investment by international investors. However, the retention of the FDI limit at 20 % form PSU banks has been a disappointment. Extension of the benefits of section 72A of IT act to nationalized banks where by banking companies can merge with consequential tax benefit. This would pave the way for consolidation. Continuation of sops for housing. Surge in retail loans portfolio in this segment to continue.
Reduction in small savings and PPF rates by 1%. This would help banks reduce deposit ratesand maintain spread. Lowering of savings account rate from 4% to 3.5% would also benefitbanks.NEGATIVE Fixing of S.S.I. (small scale industries) landing under band of 2 % above and below PLR. This may exert miner pressure on interest rate spread.4. CEMENTPOSITIVESModerately positive Demand triggers for cement from thrust on infrastructure: a quarter of the proposed 48 new road projects would be cement concrete; funding for north –south and east- west corridors tied up with the levy of cases of 50 peace on petrol or diesel (to garner rupies 26 Billion) and augmentation of resource for rural road; continuation of housing sops and tax exemption of income from approved housing project. Railway budget in announcement –reduction in freight rates for clinker by 3.7 % and cement by 3.6 %.concision in short distance freight. These measures stand to benefit cement transported through rail, which is 30% to 40% of the total freight transported.NEGATIVEIncrease in excise duty on cement from Rs350 per mt to 400 per mt, clinker from Rs 200permt to Rs 250 per mt, mini cement plants from Rs 200 per mt to250per mt and cement clearedin bulk from Rs332 per mt to Rs382 per mt. Although the price revision per bag on thiscount would be marginal, it would nevertheless impact the industry reeling under pricepressure.5. INFORMATION TECHNOLOGYPOSITIVESRestoration of tax breaks for IT companies under section 10A and 10B of the income tax actto 100% from 90%. This would provide an incentive to companies looking out for inorganicgrowth and could spurt some big ticket mergers and acquisitions.
Reduction in custom duty on electronic components form 25% to 15% and on routersmodems and fixed wireless terminals 15% to 10%.This would reduce the cost of many hardware requirements of the IT industry.Exclusion of value of pared loaded soft wear from cost computers for the purpose of levyingexcise. This might result in marginal reduction in prices of PCs.6. STEELPOSITIVES Announcement of initiatives in the infrastructure sector aggregation Rs600 bn: 48 new roads projected with a total length of 10,000 kms, railway projects of Rs 80bn, airport and seaport projects of Rs 110 bn and convention canters of Rs 10 bn. Exemption from income tax for housing projects approved by local authorities up to march 07.thess would trigger demand for construction grade steel. Reduction of excise duty on automobiles from 32% to 24% .this mightily to high automobile sales there by benefiting the flat steel manufactures. Reduction in custom duty on nicile, an input imported by stainless steel manufacture, from 15% to 10%.NEGATIVES Increases in services tax from 5% to 8%. In the face of severe competition, passing on the additional burden to customers may be difficult.The year was good for the steel industries. As budget for the year 2006-07 for this sector wasbeneficial
FINDINGS OF THE PROJECT Correlation between Historical data of Nifty and Sensex (Open) Degree of correlation = 0.999055576 Time Series of Sensex and Nifty (open) 25000 20000 15000 10000 5000 0 BSE SENSEX (OPEN) S&P CNX NIFTY (OPEN)INTERPRETATION: The above graph depicts the opening prices of Sensex and Nifty for thepast 15 years, i.e., 1996-2010. It shows a high degree of correlation between the two indexes. Apositive price of the correlation indicates a positive correlation between the BSE and the NSEstock indexes. However, the price of BSE index is higher than that of the NSE. Therefore, thereis greater possibility of arbitrage at BSE due to difference in the prices at the two exchanges.
Correlation between Historical data of Nifty and Sensex (Close) Degree of correlation =0.999225389 Time Series of Sensex and Nifty (close) 25000 20000 15000 10000 5000 0 S&P CNX NIFTY (CLOSE) BSE SENSEX (CLOSE)INTERPRETATION: The above graph depicts the opening prices of Sensex and Nifty for thepast 15 years, i.e., 1996-2010. It shows a high degree of correlation between the two indexes. Apositive price of the correlation indicates a positive correlation between the BSE and the NSEstock indexes. However, the price of Nifty (close) has always been higher than that of Sensexduring the period.
Correlation between Historical data of Nifty and Sensex (High) Degree of correlation =0.99920801 Time Series of Sensex and Nifty (High) 25000 20000 15000 10000 5000 0 BSE SENSEX (HIGH) S&P CNX NIFTY (HIGH)INTERPRETATION: The above graph depicts the high prices of BSE Sensex and Nifty for thepast 15 years, i.e., 1996-2010. It shows a high degree of correlation between the two indexes. Apositive price of the correlation indicates a positive correlation between the BSE and the NSEstock indexes. However, the price of BSE index has always been higher than that of the NSEduring this period. Therefore, there is greater possibility of arbitrage at BSE due to difference inthe prices at the two exchanges.
Correlation between Historical data of Nifty and Sensex (Low) Degree of correlation =0.999194663 Time Series of Sensex and Nifty (Low) 30000 25000 20000 15000 10000 5000 0 S&P CNX NIFTY (LOW) BSE SENSEX (LOW)INTERPRETATION: The above graph depicts the low prices of BSE Sensex and Nifty for thepast 15 years, i.e., 1996-2010. It shows a high degree of correlation between the two indexes. Apositive price of the correlation indicates a positive correlation between the BSE and the NSEstock indexes. However, the price of BSE index has always been higher than that of the NSEduring this period. Therefore, there is greater possibility of arbitrage at BSE due to difference inthe prices at the two exchanges.