1. PROJECT WORK
On
Correlation 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
2. 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
3. BASICS OF BSE
The BSE SENSEX is not only scientifically designed but also based on globally accepted
construction and review methodology. First compiled in 1986, SENSEX is a basket of 30
constituent stocks representing a sample of large, liquid and representative companies. The
base year of SENSEX is 1978-79 and the base value is 100. The index is widely reported in
both domestic and international markets through print as well as electronic media.
SENSEX
The 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 sound
companies. It is the oldest index in India and has acquired a unique place in the collective
consciousness of investors. The index is widely used to measure the performance of the
Indian stock markets. SENSEX is considered to be the pulse of the Indian stock markets as it
represents 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 long
period of time (since 1978-79).
OBJECTIVES OF SENSEX
The SENSEX is the benchmark index of the Indian Capital Markets with wide acceptance
among individual investors, institutional investors, foreign investors and fund managers. The
objectives of the index are:
1.To measure market movements
Given its long history and its wide acceptance, no other index matches the SENSEX in
reflecting market movements and sentiments. SENSEX is widely used to describe the mood
in the Indian Stock markets.
2.Benchmark for funds performance
The inclusion of blue chip companies and the wide and balanced industry representation in
the SENSEX makes it the ideal benchmark for fund managers to compare the performance of
their funds.
3.For index based derivative products
Institutional investors, money managers and small investors all refer to the SENSEX for their
4. specific purposes The SENSEX is in effect the proxy for the Indian stock markets. The
country's first derivative product i.e. Index-Futures was launched on SENSEX.
CRITERIA FOR SELECTION AND REVIEW OF SCRIPS FOR THE SENSEX
A. Quantitative Criteria:
1. Market Capitalization:
The scrip should figure in the top 100 companies listed by market capitalization. Also market
capitalization of each scrip should be more than 0.5 % of the total market capitalization of
the Index i.e. the minimum weight should be 0.5 %. Since the SENSEX is a market
capitalization weighted index, this is one of the primary criteria for scrip selection. (Market
Capitalization would be averaged for last six months)
2. Liquidity:
(i) Trading Frequency: The scrip should have been traded on each and every trading day for
the 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 companies
listed 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 average
value 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 of
index 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 and
correlation of the revised index to the old index should not be less than 0.98. This ensures
that the historical continuity of the index is maintained.
4. Industry Representation:
Scrip selection would take into account a balanced representation of the listed companies in
the 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.
5. B. Qualitative Criteria:
Track Record:
In the opinion of the Index Committee, the company should have an acceptable track record.
BETA
Beta measures the sensitivity of a scrip movement relative to movement in the benchmark
index i.e. SENSEX. A Beta of one means that for every change of 1% in index, the scrip
moves 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 and
SENSEX scrips.
PROCEDURE FOR CALCULATING SENSEX
SENSEX is calculated using a "Market Capitalization-Weighted" methodology. As per this
methodology, the level of index at any point of time reflects the total market value of 30
component stocks relative to a base period. (The market capitalization of a company is
determined by multiplying the price of its stock by the number of shares issued by the
company). An index of a set of a combined variables (such as price and number of shares) is
commonly referred as a 'Composite Index' by statisticians. A single indexed number is used
to represent the results of this calculation in order to make the value easier to work with and
track over time. It is much easier to graph a chart based on indexed values than one based on
actual values.
The base period of SENSEX is 1978-79. The actual total market value of the stocks in the
Index during the base period has been set equal to an indexed value of 100. This is often
indicated by the notation 1978-79=100. The formula used to calculate the Index is fairly
straightforward. However, the calculation of the adjustments to the Index (commonly called
Index maintenance) is more complex.
The calculation of SENSEX involves dividing the total market capitalization of 30 companies
in the Index by a number called the Index Divisor. The Divisor is the only link to the
original base period value of the SENSEX. It keeps the Index comparable over time and is the
adjustment point for all Index maintenance adjustments. During market hours, prices of the
6. index scrips, at which latest trades are executed, are used by the trading system to calculate
SENSEX every 15 seconds and disseminated in real time.
PROCEDURE FOR CALCULATING CLOSING INDEX
The closing SENSEX is computed taking the weighted average of all the trades on SENSEX
constituents in the last 15 minutes of trading session. If a SENSEX constituent has not traded
in the last 15 minutes, the last traded price is taken for computation of the Index closure. If a
SENSEX constituent has not traded at all in a day, then its last day's closing price is taken for
computation of Index closure. The use of Index Closure Algorithm prevents any intentional
manipulation of the closing index value.
ROUTINE MAINTENANCE OF SENSEX
One of the important aspects of maintaining continuity with the past is to update the base
year average. The base year value adjustment ensures that additional issue of capital and
other corporate announcements like bonus etc. do not destroy the value of the index. The
beauty of maintenance lies in the fact that adjustments for corporate actions in the Index
should not per se affect the index values.
The Index Cell of the Exchange does the day-to-day maintenance of the index within the
broad index policy framework set by the Index Committee. The Index Cell takes special care
to ensure that SENSEX and all the other BSE indices maintain their benchmark properties by
striking a delicate balance between high turnover in Index scrips and its representative
character. The Index Committee of the Exchange has experts from different field of finance
related to the capital markets. They include Academicians, Fund-managers from leading
Mutual Funds, Finance - Journalists, Market Participants, Independent Governing Board
members, and Exchange administration.
PROCEDURE FOR ADJUSTMENTS FOR BONUS, RIGHTS AND NEWLY ISSUED
CAPITAL
The arithmetic calculation involved in calculating SENSEX is simple, but problem arises
when one of the component stocks pays a bonus or issues rights shares. If no adjustments
were made, a discontinuity would arise between the current value of the index and its
previous value. The Index Cell of the Exchange periodically adjusts the base value to take
7. care of such corporate announcements.
Adjustments for Rights Issues:
When a company, included in the compilation of the index, issues right shares, the market
capitalisation of that company is increased by the number of additional shares issued based
on the theoretical (ex-right) price. An offsetting or proportionate adjustment is then made to
the 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 market
capitalisation of that company does not undergo any change. Therefore, there is no change in
the 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 issued
by way of conversion of debentures, mergers, spin-offs etc. or when equity is reduced by way
of buy-back of shares, corporate restructuring etc.
Base Market Capitalisation Adjustment: The formula for adjusting the Base Market
Capitalisation is as follows:
New Base Market Capitalisation = Old Base Market Capitalisation X (New Market
Capitalisation/Old Market Capitalisation)
To illustrate, suppose a company issues right shares which increases the market capitalisation
of 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 market
capitalisation of all the shares included in the index before the right issue is made is, say
Rs.4781 crores. The "New Base Market Capitalisation " will then be: Rs.2501.24 crores = 2450
X (4781+100)/4781
This figure of 2501.24 will be used as the Base Market Capitalisation for calculating the index
number from then onwards till the next base change becomes necessary.
FREQUENCY OF SENSEX CALCULATION
During market hours, prices of the index scrips, at which trades are executed, are
automatically used by the trading computer to calculate the SENSEX every 15 seconds and
continuously updated on all trading workstations connected to the BSE trading computer in
real time.
8. BASICS OF NSE
NIFTY
S&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 based
derivatives 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 India's first specialised company
focused upon the index as a core product.
CALCULATION METHODOLOGY
S&P CNX Nifty is computed using market capitalization weighted method, wherein the level
of the index reflects the total market value of all the stocks in the index relative to a
particular base period. The method also takes into account constituent changes in the index
and importantly corporate actions such as stock splits, rights, etc without affecting the index
value.
SCRIP SELECTION CRITERIA
The 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 of
0.50% or less during the last six months for 90% of the observations for a basket size of Rs. 2
Crores.
Impact cost is cost of executing a transaction in a security in proportion to the weightage of
its market capitalisation as against the index market capitalisation at any point of time. This
is the percentage mark up suffered while buying / selling the desired quantity of a security
compared to its ideal price (best buy + best sell) / 2
Floating Stock
9. 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 and
associated entities (where identifiable) of such companies.
Others
a) A company which comes out with a IPO will be eligible for inclusion in the index, if it
fulfills the normal eligiblity criteria for the index like impact cost, market capitalisation and
floating 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 stock
having 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 index
stock i.e. the stock with the highest market capitalization in the replacement pool has at least
twice the market capitalization of the index stock with the lowest market capitalization.
10. NSE Nifty and BSE Sensex 2011, Projections and Estimates
Note:
Nifty : 6200 base points, Sensex : 19000 base points
Time 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 of
2011.
If any up and downs due to world financial condition and Governments policy can impact
the index.
11. 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, an
indigenous form of forward-trading, is prone to misuse and is not a hedging tool. Hence, the
logical step is to introduce stock index futures.
Investors would look to `index futures' contract as a device for hedging their portfolios
against losses. Alternatively, they would want to lock into a reasonable and acceptable rate of
return. This is where index futures come in. The investors would have to enter into a
contract for sale of `index futures' at the going value of the index. The idea being that even if
the value of the index falls -- indicating a decline in the value of the portfolio -- that could be
offset by a gain in the `futures' market.
After all, when you sell something for delivery at a future date, where the price agreed on is
the current market price, any fall in the price of the asset on the delivery date actually
represents a profit. So, the loss on current holdings of investment is offset by the gains in sale
contract (futures) in a declining market.
But the effectiveness of this strategy -- that is, selling index futures -- lies in the investor
portfolio 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 the
portfolios and the index being considered.
Zeroing in on the index
With a variety of stock indices available, selecting the right one to introduce futures trading
is important. The test used to check for the best index is its hedging effectiveness with the
portfolio. Hedging effectiveness refers to the gains in terms of reduction in the uncertainties
associated 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 the
indices showed that, over time, there was no abnormal volatility.
TESTING WITH MUTUAL FUND PORTFOLIOS
The 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
12. using the Mid-Cap index works out to 0.568, followed closely by the S&P CNX 500 with
0.486.
This means the fund manager using the CNX Mid-Cap Index to hedge his risks can minimise
his variance in profits by around 60 per cent (0.568*100). In other words, 40 per cent of his
portfolio variations would be exposed to the vagaries of the market movement. The Sensex
and Nifty had a hedging effectiveness ratio of 0.12 and 0.34 respectively. Overall, the results
show that the degree of hedge effectiveness is comparatively at the lower end.
TESTING WITH SIMULATED PORTFOLIOS
In the absence of index futures, mutual fund schemes have been managed aggressively. This
reduces the credibility of the results obtained from testing mutual fund portfolios. If the fund
manager has the option of hedging his risks in the futures market, he may take a passive
strategy with respect to his funds. Hence, it is necessary to test the efficiency of the indices
using simulated portfolios which more or less mimic real portfolios but with the assumption
that they are not shuffled frequently.
For this purpose, a test was run on the same set of indices with simulated portfolios. Close to
2,500 portfolios were generated from 312 stocks. Constraints were placed on the
development of the portfolios to mimic mutual fund portfolios. The portfolio selections, as
well as the weightages, were done randomly.
The results of the analysis were not surprising. The S&P CNX Mid-Cap Index turned out to
be 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 of
0.51 and 0.57 respectively.
REASON FOR POOR PERFORMANCE OF NSE AND BSE FUTURE INDEX
The basic reason, in this case, is the composition of the portfolio itself. Most of the portfolios
analysed provided excess returns over their tenure. For instance, the Alliance '95 fund
earned an excess return of close to 32.7 per cent over a balanced benchmark which
constitutes 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 indices
analysed. Hence, the movement in such benchmark indices as the Nifty and Sensex is not
highly correlated with the net asset values of the portfolio. The other reason could be that as
most of these schemes are actively managed, the portfolio shuffling might have led to the
lower correlation with the indices. For instance, the Morgan Stanley Growth Fund where, in
the top 25 exposures, there were seven new entrants in every quarter.
13. Consider this: The portfolios of Kothari Pioneer Prima, Kothari Pioneer Blue-chip, Morgan
Stanley Growth Scheme, Alliance Tax Relief and Alliance '95 Dividend indicate a degree of
correlation close to 90 per cent with the Mid-Cap Index. This literally means the portfolios
of 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. Reddy's
Laboratories, Software Solutions, Novartis, HCL Infosystems, Satyam Computers, Hero
Honda and Zee Telefilms, are part of most of the portfolios considered. However, some of
these stocks recently entered the Sensex and the Nifty.
Most market players do not closely follow the CNX Mid-Cap index. The possibility of
introducing 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 to
the technology sector for a significantly long period.
However, with the recent reshuffling of index constituents, there is more weightage on the
technology sector. Hence, in the next couple of years, there may be better correlation
between the main market indices and the mutual funds. Despite its low value in terms of
hedging, the recent inclusion of some tech stocks in the indices may improve their value.
14. DESIRABLE ATTRIBUTES FOR AN INDEX
Every index should have certain attributes to be used for futures trading. The most
important issue in selecting an index is its liquidity. Illiquid indices have certain inherent
problems 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 an
illiquid one. Market manipulation refers to a few players moving the market to their
convenience. Such markets fail to enthuse genuine investors, and this may result in the
failure of the contracts.
The main problem with price manipulation is that it may lead to basis risk, which is the risk
associated with the difference between the futures and the spot market. Consider this: If, on
the arrival of significant information, the futures prices move in a way that reflects the
available information, but the spot price does not move in tandem, some form of market
manipulation may ensue. This tends to hamper the price discovery mechanism in an efficient
market.
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. Index
arbitrage bridges the gaps between the spot and futures markets, essentially leading to
improved volumes in these markets.
15. RISK-RETURN TRADE OFF
The relationship between risk and return is a fundamental financial relationship that affects
expected rates of return on every existing asset investment. The Risk-Return relationship is
characterized as being a "positive" or "direct" relationship meaning that if there are
expectations of higher levels of risk associated with a particular investment then greater
returns are required as compensation for that higher expected risk. Alternatively, if an
investment has relatively lower levels of expected risk then investors are satisfied with
relatively lower returns.
Greater degrees of risk must be compensated for with greater returns on investment. Since
investment returns reflects the degree of risk involved with the investment, investors need
to be able to determine how much of a return is appropriate for a given level of risk. This
process is referred to as "pricing the risk". In order to price the risk, we must first be able to
measure the risk (or quantify the risk) and then we must be able to decide an appropriate
price for the risk we are being asked to bear.
In the investing world, the dictionary definition of risk is the chance that an investment's
actual return will be different than expected. Technically, this is measured in statistics
by standard deviation. Risk means you have the possibility of losing some, or even all, of our
original investment.
Low levels of uncertainty (low risk) are associated with low potential returns. High levels of
uncertainty (high risk) are associated with high potential returns. The risk/return tradeoff is
the 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 a
higher risk and higher possible return.
16. A common misconception is that higher risk equals greater return. The risk/return tradeoff
tells 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 on
Government Securities because their chance of default is next to nothing. If the risk-free rate
is 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 year
over the long run? The answer to this is that even the entire market (represented by the
index fund) carries risk. The return on index funds is not 12% every year, but rather -5% one
year, 25% the next year, and so on. An investor still faces substantially greater risk and
volatility to get an overall return that is higher than a predictable government security. We
call this additional return the risk premium, which in this case is 6% (12% - 6%).
Determining what risk level is most appropriate for you isn't 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.
17. FACTORS AFFECTING NIFTY AND SENSEX
MACRO FACTORS
INTEREST RATE
Interest rate as a specific financial parameter indicates the value of money and significantly
influences any actions on money and capital markets. Interest rate on money market is the
main parameter representing at the same time a minimum yield in comparing various yields
on investments on money and capital markets. Investor’s decision on investments on money
and 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, special
futures, and so on. Traditionally the interest rate in India was fairly high and most of the
interest 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 the
discount rate applied by equity investors both of which have an adverse impact on stock
price on the other hand, a fall in interestrate improves corporate profitability and also leads
to a decline in the discount rate applied by equity investors, both of which have a favorable
impact on the stock price.
GROWTH RATE OF GROSS DOMESTIC PRODUCT OF INDIA
The gross domestic product (GDP) is a measure of the total production of final goods and
services in the economy during a specific period usually a year. the growth rate represent the
average 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 indicator
of the performance of the economy. The average rate of GDP in India during 1950 – 80 was
around 4% in real terms (the real growth rate is the nominal growth ratethe less inflation
rate) 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 significantly
subsequently, but decline slightly towards the end.Firm estimate of the GDP rate are
available the time lag of one to tow year before so, but preliminary estimates are made from
time to time by various bodies like RBI. The higher the growth rate of GDP, other things
being equal the more favorable it is for the stock market.
18. The India Gross Domestic Product is worth 1296 billion dollars or 2.09% of the world
economy, according to the World Bank. From 2006 until 2010, India's average annual GDP
Growth was 8.50 percent reaching an historical high of 9.70 percent in March of 2007 and a
record low of 6.70percent in March of 2009.
By the Central Statistical Organization (CSO) on February 7, 2007, places the growth of GDP
at factor cost at constant (1999-2000) prices in the current year at 9.2 per cent.
INFLATION
Not in itself an indication of aggregate economic activity, the price level measure the degree
to which the nominal rate of growth in GDP is attributable to inflation.The sector inflation
rate in Indian economy has been around 7 percent till the late 1990s, with wide year to year
infatuation though in resent years inflation rate has increases in significantly. The effect of
inflation on the corporate sector tends to be uneven. Whilecertain industries may benefit
other tend to suffer. Industries that enjoy strong market for their product and which do not
come under preview ofprice control may benefit on the other hand , industries that have a
weak market and which come under the preview of price control tend to lose .an estimated
inflation 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 in
1991-1992, to 10 billion in 2005. This market growth of FII investment is due to the financial
liberalization policies followed by India since 1991. This buoyancy demonstrated the high
level of confidence that the international investor repose in the Indian economy. One reason
for the surge in FII inflow is the strengthening of the rupee against the US $. The
strengthening of the rupee is due to the weakening of dollar across global currencies. Until
about two years ago, FIIs used to bear losses on their portfolio investment when the rupee
would continuously depreciate. With the rupee strengthening, that’s not the case now. Give
the perception about FIIs as market leaders in the domestic stock market along with their
dominate position in the nifty companies; we can understand that FIIs are in a position to
influence the movement of nifty in a significant proportion. The influence of FIIs on the
movement of the nifty became apparent after the general election in India when the sudden
reversal of FII flows triggered a panic reaction, which resulted in very high volatility in the
Indian stock market. During this period, the S & P Nifty experienced its worst single-day
decline in its history and in the three month period between April to June 2005, it declined
by about 17 percent.
19. And it all started because of the selling pressure entered by the FIIs after the post election
phase 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 that
the shareholding pattern of the FIIs have remained relatively unchanged between March and
June 2007. The volume of trades done by FIIs is not very high as compared to other market
participants; they are the driving force in determination of market sentiments and price
trends. This is so because they do only delivery based trades and they are perceived to be
infallible in their assessment of the market. Another aspect is that the other market
participants perceive the FIIs to be infallible in their assessment of the market and tend to
follow the decisions taken by FIIs. This heard instinct displayed by other market participants
amplifies 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 a
favorable or unfavorable govt. policy. There may be a big change in the company or industry
after the announcement of govt. policy. If a policy is in favor of company than the profit and
sales may grow. These policies mainly reflect in the annual budget for the year 2006-07.
1. Corporate tax
The government reduced corporate tax from 35 to 30% in 2006-2007. Specific tax proposals
and their impact on individual stock. Reduction in customs duty on crude to 5 percent it is
negative for ONGC . Reduction in income tax rates: this would put more money in the hands
of 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 for
Reliance. 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 very
big impact on market. The major impact is from the side of corporate and excise tax. It
reveals that it affect the nifty but for short term.
20. 2. AUTOMOBILES
POSITIVE
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 Honda
Motors and TVS Motors.
3. BANKS
POSITIVES
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.
21. Reduction in small savings and PPF rates by 1%. This would help banks reduce deposit rates
and maintain spread. Lowering of savings account rate from 4% to 3.5% would also benefit
banks.
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. CEMENT
POSITIVES
Moderately 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.
NEGATIVE
Increase in excise duty on cement from Rs350 per mt to 400 per mt, clinker from Rs 200per
mt to Rs 250 per mt, mini cement plants from Rs 200 per mt to250per mt and cement cleared
in bulk from Rs332 per mt to Rs382 per mt. Although the price revision per bag on this
count would be marginal, it would nevertheless impact the industry reeling under price
pressure.
5. INFORMATION TECHNOLOGY
POSITIVES
Restoration of tax breaks for IT companies under section 10A and 10B of the income tax act
to 100% from 90%. This would provide an incentive to companies looking out for inorganic
growth and could spurt some big ticket mergers and acquisitions.
22. Reduction in custom duty on electronic components form 25% to 15% and on routers
modems 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 levying
excise. This might result in marginal reduction in prices of PCs.
6. STEEL
POSITIVES
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 was
beneficial
23. 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 the
past 15 years, i.e., 1996-2010. It shows a high degree of correlation between the two indexes. A
positive price of the correlation indicates a positive correlation between the BSE and the NSE
stock indexes. However, the price of BSE index is higher than that of the NSE. Therefore, there
is greater possibility of arbitrage at BSE due to difference in the prices at the two exchanges.
24. 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 the
past 15 years, i.e., 1996-2010. It shows a high degree of correlation between the two indexes. A
positive price of the correlation indicates a positive correlation between the BSE and the NSE
stock indexes. However, the price of Nifty (close) has always been higher than that of Sensex
during the period.
25. 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 the
past 15 years, i.e., 1996-2010. It shows a high degree of correlation between the two indexes. A
positive price of the correlation indicates a positive correlation between the BSE and the NSE
stock indexes. However, the price of BSE index has always been higher than that of the NSE
during this period. Therefore, there is greater possibility of arbitrage at BSE due to difference in
the prices at the two exchanges.
26. 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 the
past 15 years, i.e., 1996-2010. It shows a high degree of correlation between the two indexes. A
positive price of the correlation indicates a positive correlation between the BSE and the NSE
stock indexes. However, the price of BSE index has always been higher than that of the NSE
during this period. Therefore, there is greater possibility of arbitrage at BSE due to difference in
the prices at the two exchanges.
