sensex MRP

Project report

“BSE SENSEX PERFORMANCE AND ECONOMIC VARIABLES

– A STUDY OF CAUSE AND EFFECT RELATIONSHIP”

For the partial fulfillment of Post-Graduation Diploma in Management

Under the Supervision of:

Prof. RK Sharma

Submitted by:Deepak Sharma

Institute of Information Technology and ManagementNew Delhi

1 INSTITUTE OF INFORMATION TECHNOLOGY & MANGEMENT

DECLARATION

I hereby declare that the project work entitled “BSE SENSEX PERFORMANCE

AND ECONOMIC VARIABLES – A STUDY OF CAUSE AND EFFECT

RELATIONSHIP” is an authentic work carried out by me under worthy and

esteemed guidance of Dr. RK Sharma. This work has not been submitted to any

other university for Award of any Degree/Diploma and is the whole sole property

of Deepak Sharma. Any unauthorized use of this Project is strictly prohibited.

For further use, approval of the concerned authority is mandatory.

:

Deepak Sharma

Roll No. - 10708


CERTIFICATE

Certified that the dissertation “BSE SENSEX PERFORMANCE AND

ECONOMIC VARIABLES – A STUDY OF CAUSE AND EFFECT

RELATIONSHIP” is a record of research work done by Mr. Deepak Sharma

during the period of his/her study under my guidance, and that the dissertation has

not previously formed the basis for award of any degree, diploma, associate ship,

fellowship or similar other title and that it is an independent work done by

him/her.

Place: New Delhi Signature of the Guide

Date: 15-04-2009 Name: Dr RK Sharma.

IITM, JANAKPURI


ACKNOWLEDGEMENT

“The greater our involvement the more we learnLittle of what we passively listen is remembered”.

This kind of projects plays a very important role not only in the successful completion of

management qualification but also to get practical knowledge and experiences.

I am grateful to Dr RK Sharma, my guide, for his invaluable guidance and

cooperation during the course of the project. He provided me with his assistance and

support whenever needed that has been instrumental in completion of this project.

I am also thankful to all faculties of finance for their invaluable guidance and support.

Last but not the least I would also like to thank my friends.

The title of this project study is “BSE SENSEX PERFORMANCE AND

ECONOMIC VARIABLES – A STUDY OF CAUSE AND EFFECT

RELATIONSHIP”. The process of study involves collection of data, analysis of data &

finally conclusions.

Deepak Sharma


ABSTRACT

A country’s economic growth is largely associated with the changing dynamics of its

stock market. Since independence, Indian stock market has been incessantly growing.

Lot of government norms and legislations had been imposed for keeping the market free

from the trickery and deception. In spite of these norms and regulations, Indian stock

market could not be perfectly sterilized from scams, even though their performance was

quite noticeable. But the market was really boosted up after the financial sector reform,

which opened the door for the FII inflow. The market was already on its path to maturity

and attained a phenomenal height in March, 2006. My research work attempts to frame a

brief account on the changing dynamics of the Indian stock market and tries to explain

the growth of the market in the light of various economic as well as international

aspects.


PREFACE

Practical Knowledge is an important suffix to theoretical Knowledge. One cannot

merely depend upon the theoretical Knowledge. Classroom lectures make the

fundamental concept of Management clear. They also facilitate the learning of practical

Things. However, Classroom lectures must be correlated with the Practical training

situations. It is in the sense that practical Training in a company has a significant role to

play in the subject of business economics. Market Research is indeed an Ancient Art; it

has been practiced in one form of the other since the day of Adam and Eve. Its

Emergence is of relatively recent origin for success of any business and with in this

relatively short period, it has joined a carry great deal of importance.

Management in India is heading towards a better profession as compared to other

professions. The demand for professional managers is increasing day by day. To

achieve professional competence, manager ought to be fully occupied with theory and

practical exposure of management. A comprehensive understanding of the principle will

increases their decision-making ability and sharpens their tools for this purpose. As an

essential part of our course, I got the privilege to work under guidance of our faculty

member. The work has been carried over a span of 6 months.


TABLE OF CONTENTS

PAGE NO.

DECLARATION---------------------------------------------------------------------------2

ACKNOWLEDGEMENT----------------------------------------------------------------3

ABSTRACT---------------------------------------------------------------------------------4

PREFACE-----------------------------------------------------------------------------------5

INTRODUCTION--------------------------------------------------------------------------7-8

LITERATURE REVIEW------------------------------------------------------------------9-13

OBJECTIVE--------------------------------------------------------------------------------14-15

HYPOTHESIS----------------------------------------------------------------------------- 16

INDIAN STOCK MARKET OVERVIEW---------------------------------------------17-24

FUNDAMENTAL ANALYSIS-----------------------------------------------------------25-35

METHODOLOGY ------------------------------------------------------------------------36-37

FINDINGS----------------------------------------------------------------------------------38-51

C0NCLUSION& RECOMMENDATION --------------------------------------------52-54

REFERENCES----------------------------------------------------------------------------55-56

APENDIX-----------------------------------------------------------------------------------57-59


INTRODUCTION

The movement of stock indices is highly sensitive to the changes in fundamentals of the

economy and to the changes in expectations about future prospects. Expectations are influenced

by the micro and macro fundamentals which may be formed either rationally or adaptively on

economic fundamentals, as well as by many subjective factors which are unpredictable and also

non quantifiable. It is assumed that domestic economic fundamentals play determining role in the

performance of stock market. However, in the globally integrated economy, domestic economic

variables are also subject to change due to the policies adopted and expected to be adopted by

other countries or some global events.

The common external factors influencing the stock return would be stock prices in global

economy, the interest rate and the exchange rate. For instance, capital inflows and outflows are

not determined by domestic interest rate only but also by changes in the interest rate by major

economies in the world. Recently, it is observed that contagion from the US sub prime crisis has

played significant movement in the capital markets across the world as foreign hedge funds

unwind their positions in various markets. Other burning example in India is the appreciation of

currency due to higher inflow of foreign exchange. Rupee appreciation has declined stock prices

of major export oriented companies. Information technology and textile sector are the example of

falling stock prices due to rupee appreciation.

From the beginning of the 1990s in India, a number of measures have been taken for economic

liberalization. At the same time, large number of steps has been taken to strengthen the stock

market such as opening of the stock markets to international investors, regulatory power of

SEBI, trading in derivatives, etc. These measures have resulted in significant improvements in

the size and depth of stock markets in India and they are beginning to play their due role.


A stock market, or (equity market), is a private or public market for the trading of company stock

and derivatives of company stock at an agreed price; these are securities listed on a stock

exchange as well as those only traded privately. The size of the stock market is estimated at

about $51 trillion. The world derivatives market has been estimated at about $480 trillion face or

nominal value, 30 times the size of the U.S. economy. and 12 times the size of the entire world

economy. It must be noted though that the value of the derivatives market, because it is stated in

terms of notional values, and cannot be directly compared to a stock or a fixed income security,

which traditionally refers to an actual value. Many such relatively illiquid securities are valued as

marked to model, rather than an actual market price.

The stocks are listed and traded on stock exchanges which are entities a corporation or mutual

organization specialized in the business of bringing buyers and sellers of stocks and securities

together. The stock market in the United States includes the trading of all securities listed on the

NYSE, the NASDAQ, the Amex, as well as on the many regional exchanges, e.g. OTCBB

and Pink Sheets. European examples of stock exchanges include the Paris Bourse, now part of

Euronext, the London Stock Exchange and the Deutsche Borse.


http://en.wikipedia.org/wiki/Deutsche_Borse

http://en.wikipedia.org/wiki/London_Stock_Exchange

http://en.wikipedia.org/wiki/Euronext

http://en.wikipedia.org/wiki/OTC_Bulletin_Board

http://en.wikipedia.org/wiki/American_Stock_Exchange

LITERATURE REVIEW:

Varying evidences of causal links of stock returns and macro variables have been found in the

literature using various asset pricing specifications. In the literature, widely popular CAPM has

been severely challenged since returns can be predicted from other financial factors. This has led

to the development and testing of various alternative asset pricing specifications, such as the

Arbitrage Pricing Theory (APT) and Present Value Model (PVM). In the context of macro

dynamics of stock returns, APT assumes that returns are generated by a number of

macroeconomic factors. It allows multiple risk factors to explain asset returns. Chen, Roll and

Ross (1986) have argued that stock returns should be affected by any factor that influences future

cash flows or the discount rate of those cash flows. In an empirical investigation they found that

the yield spread between long and short term government bonds, expected inflation, unexpected

inflation, nominal industrial production growth and the yield spread between corporate high and

low grade bonds significantly explain stock market returns. An alternative way of linking

macroeconomic variables and stock prices is the discounted cash flow or present value model

(PVM). This model relates the stock price to future expected cash flows and the future discount

rate of the cash flows. Again, all macroeconomic factors that influence future expected cash

flows or the discount rate by which the cash flows are discounted should have an influence on

the stock price. The advantage of the PVM model is that it can be used to focus on the long run

relationship between the stock market and macroeconomic variables.

In the literature, various theoretical reasons have been explained linking behaviour of stock

prices and key macro economic variables. For instance, Friedman (1988) suggests ‘wealth effect

and substitution effect’ as the possible channels through which stock prices might directly effect

money demands in the economy. Friedman (1988) expected that the wealth effect will dominate


and thus the demand for money and stock prices to be positively related. The theoretical basis to

examine the link between stock prices and the real variables are well established in economic

literature, e.g., in Baumol (1965) and Bosworth (1975). The relationship between stock prices

and real consumption expenditures, for instance, is based on the life cycle theory, developed by

Ando and Modigliani (1963), which states that individuals base their consumption decision on

their expected life time wealth. Part of their wealth may be held in the form of stocks linking

stock price changes to changes in consumption expenditure. Similarly, the relationship between

stock prices and investment spending is based on the ‘q’ theory of James Tobin (1969), where q

is the ratio of total market value of firms to the replacement cost of their existing capital stock at

current prices.

In retrospect of the literature, a number of hypotheses also support the existence of a causal

relation between stock prices and exchange rates. For instance, ‘goods market approaches’

(Dornbusch and Fischer, 1980) suggest that changes in exchange rates affect the competitiveness

of a firm as fluctuations in exchange rate affects the value of the earnings and cost of its funds as

many companies borrow in foreign currencies to fund their operations and hence its stock price.

An alternative explanation for the relation between exchange rates and stock prices can be

provided through ‘portfolio balance approaches’ that stress the role of capital account

transaction. Like all commodities, exchange rates are determined by market mechanism, i.e., the

demand and supply condition. A blooming stock market would attract capital flows from foreign

investors, which may cause an increase in the demand for a country’s currency. The reverse

would happen in case of falling stock prices where the investors would try to sell their stocks to

avoid further losses and would convert their money into foreign currency to move out of the

country. There would be demand for foreign currency in exchange of local currency and it would


lead depreciation of local currency. As a result, rising (declining) stock prices would lead to an

appreciation (depreciation) in exchange rates. Moreover, foreign investment in domestic equities

could increase over time due to benefits of international diversification that foreign investors

would gain. Furthermore, movements in stock prices may influence exchange rates and money

demand because investors’ wealth and liquidity demand could depend on the performance of the

stock market.

Economic theories suggest causal relations between stock prices and exchange rates, existing

evidence also provides relatively stronger relationship between stock price and exchange rate.

Ma and Kao (1990) find that a currency appreciation negatively affects the domestic stock

market for an export-dominant country and positively affects the domestic stock market for an

import-dominant country, which seems to be consistent with the goods market theory. Bahmani

and Sohrabian (1992) found a bi-directional causality between stock prices measured by the

Standard & Poor's 500 index and the effective exchange rate of the dollar, at least in the short

run. The co-integration analysis revealed no long run relationship between the two variables.

Similarly, Abdalla and Murinde (1996) investigate interactions between exchange rates and stock

prices in the emerging financial markets of India, Korea, Pakistan and the Philippines. The

results of the granger causality tests results show uni-directional causality from exchange rates to

stock prices in all the sample countries, except the Philippines. Ajayi and Mougoue (1996), using

daily data for eight countries, show significant interactions between foreign exchange and stock

markets, while Abdalla and Murinde (1997) document that a country’s monthly exchange rates

tends to lead its stock prices but not the other way around. Pan, Fok & Lui (1999) used daily

market data to study the causal relationship between stock prices and exchange rates and found

that the exchange rates Granger-cause stock prices with less significant causal relations from


stock prices to exchange rate. They also find that the causal relationship have been stronger after

the Asian crisis.

Bodie [1976], Fama [1981], Geske and Roll [1983], and Pearce and Roley [1983], Pearce [1985]

document a negative impact of inflation and money growth on equity values. Many experts

however believe that positive effects will outweigh the negative effects and stock prices will

eventually rise due to growth of money supply (e.g., Mukherjee and Naka, 1995). They argue

that a change in the money supply provides information on money demand, which is caused by

future output expectations. If the money supply increases, it means that money demand is

increasing, which, in effect, signals an increase in economic activity. Higher economic activity

implies higher cash flows, which causes stock prices to rise. Bernanke and Kuttner (2005) argue

that the price of a stock is a function of its monetary value and the perceived risk in holding the

stock. A stock is attractive if the monetary value it bears is high. On the other hand, a stock is

unattractive if the perceived risk is high. The authors argue that the money supply affects the

stock market through its effect on both the monetary value and the perceived risk. Money supply

affects the monetary value of a stock through its effect on the interest rate. The authors believe

that tightening the money supply raises the real interest rate. An increase in the interest rate

would in turn raise the discount rate, which would decrease the value of the stock as argued by

the real activity theorists. The impact of real sector macro variables on equity returns has been

much more difficult to establish. Mukherjee and Naka (1995) reveal that cointegration relation

existed and positive relationship was found between the Japanese industrial production and stock

return. However, Cutler, Poterba, and Summers [1989] (CPS) find that Industrial Production

growth is significantly positively correlated with real stock returns over the period 1926-1986,

but not in the 1946- 85 sub-period. In Indian context, Bhattacharya and Mukherjee (2002)


studied the nature of the causal relationship between stock prices and macro aggregates for the

period of 1992-93 to 2000- 2001.Their results show that there is no causal relationship between

stock price and macro economic variables like money supply, national income and interest rate

but there exists a two way causation between stock price and rate of inflation. Their results also

indicate index of industrial production lead the stock price.

As discussed above, literature reveals differential causal pattern between key macro economic

variables and stock prices. This relationship varies in a number of different stock markets and

time horizons in the literature. This paper will add to the existing literature by providing robust

result, which is based on more than one technique, about causal links for the longer period, i.e.,

2000-2009 monthly data.

OBJECTIVE OF STUDY

Almost everyone in this developing nation has heard the name of share market. But very few

people have knowledge about it. Even those who are investing in this bulls and bears market are

not fully aware about it.

With the starting of this year 2008, this market becomes the favourite place for most of the

investors in this nation as the sennsex crossed 21000 mark in its all time history. But no one at

that time have thought in a dream about the present bearish market. Today most of them are

either sit after getting huge losses or are waiting for to stablize this volatile market.


I met many people and noticed that people are confused about the reasons behind this bearish

run. Everyone are having different views and not even have confirmation about their answers.

So, I think that it is valuable and urgent to study about the effects of local and global issues on

indian share which is not only favourable for those who have already put their money in risk but

also for students and people those who are thinnnking of investing in share market but having no

or less time to study it.

Presently, the movement in stock market in India is viewed and analysed carefully by large

number of global players. Understanding macro dynamics of Indian stock market may be useful

for policy makers, traders and investors. Results may reveal whether the movement of stock

prices is the outcome of something else or it is one of the causes of movement in other macro

dimension in the economy.

The study also expects to explore whether the movement of stock market are associated with real

sector of the economy or financial sector or the external factors or all the above three. In this

context, the objective of this paper is to explore such causal relations for India as there is a little

work for this period. To the best of my knowledge no in-depth such analysis of macro dynamics

is available in the literature for the period of 1995 to 2007.

1. TO FIND OUT THE LEVEL OF DEPENDENCY OF SENSEX PERFORMANCE

ON DIFFERENT ECONOMIC VARIABLES (Foreign Exchange Rate, Inflation and

Index of Industrial production).

2. TO FIND OUT THE INFLUENCE OF EXTERNAL FACTORS (FDI, FII,

Sentiments) ON THE PERFORMANCE OF STOCK.


HYPOTHESIS

H0: Stock performance is not dependent on inflation.

H1: Stock performance has significant dependence on inflation.

H0: Stock performance is not dependent on foreign exchange rate.

H1: Stock performance has significant dependence on foreign exchange rate.

H0: Stock performance is not dependent on iip.

H1: Stock performance has significant dependence on iip.


INDIAN STOCK MARKET OVERVIEW

The Bombay stock exchanges (BSE) and the National Stock Exchange of India Ltd

(NSE) are the two primary exchange in India. In addition, there are 22Regional Stock

Exchanges However, the BSE and NSE have established themselves as the two leading

exchanges and account for about 90% of the equity volume traded in India.

The average daily turnover at the exchanges has increased from Rs. 851 crore in

1997-98 to Rs. 1,2804 crore in 1998-99 and further to Re. 2273 crore in 1999-2000

(April- August 1999). NSE has around 1500 shares listed with a total market

capitalization of around Rs. 921500 crore (Rs. 9215 Bln). The BSE has over 6000 stocks

listed and has a market capitalization of around Rs. 968000 crore (9680 Bln). Most key

stocks are traded on both the exchanges and hence the investor could buy them on either

exchange. Both exchanges have a different settlement cycle, which allows investors to

shift their positions on the bourse. The primary index of BSE is BSE Sensex comprising

30 stocks. NSE has the S&P NSE 50 index (Nifty) which consists of fifty stocks.

The BSE Sensex is the older and more widely followed index. Both these indices are calculated on the basis of market capitalization and

contain the heavily traded shares from key sectors. The markets are closed on Saturdays and Sundays. Both the exchanges have switched over from the

open outcry trading system to a fully automated computerized mode of trading known as BOLT (BSE On Line Trading) and NEAT (National Exchange

Automated Trading) System. It facilitates more efficient processing, automatic order matching, faster execution of trades and transparency.


The Scripts traded on the BSE have been classified into ‘A’, ‘B1’, ‘B2’, ‘C’, ‘F’ and ‘Z’

groups. The ‘A’ group shares represent those, which are in the carry forward system

(Badla). The ‘F’ group represents the debt market (fixed income securities) segment. The

‘Z’ group scripts are the blacklisted companies. The ‘C’ group covers the odd lot

secutities in ‘A’, ‘B1’& ‘B2’ groups and Rights renunciations. The key regulator

governing Stock Exchanges, Brokers, Depositories, Depository participants, Mutual

Funds, FIIs and other participants in Indian secondary and primary market is the

Securities and Exchange Board of India (SEBI) Ltd.

Organization of stock exchanges in India

The first organised stock exchange in India was started in Bombay in 1875 with the

formation of the ‘Native Share and Stock Broker’s Association’. Thus the Bombay Stock

Exchange in India is the oldest one in the country. With the growth of joint stock

companies, the stock exchanges also made a steady growth and at present these are 23

recognised stock exchanges with about 6000 stock brokers.

ABOUT NSE

The Organization


The National Stock Exchange of India Limited has genesis in the report of the High

Powered Study Group on Establishment of New Stock Exchanges, which recommended

promotion of a National Stock Exchange by financial

Institutions (FIs) to provide access to investors from all across the country on an equal

footing. Based on the recommendations, NSE was promoted by leading Financial

Institutions at the behest of the Government of India and was incorporated in November

1992 as a tax-paying company unlike other stock exchanges in the country.

On its recognition as a stock exchange under the Securities Contracts (Regulation) Act,

1956 in April 1993, NSE commenced operations in the Wholesale Debt Market (WDM)

segment in June 1994. The Capital Market (Equities) segment commenced operations in

November 1994 and operations in Derivatives segment commenced in June 2000.

Corporate Structure

NSE is one of the first de - mutualised stock exchanges in the country, where the

ownership and management of the Exchange is completely divorced from the right to

trade on it. Though the impetus for its establishment came from policy makers in the

country, it has been set up as a public limited company, owned by the leading

institutional investors in the country.

From day one, NSE has adopted the form of a demutualised exchange - the ownership,

management and trading is in the hands of three different sets of people. NSE is owned

by a set of leading financial institutions, banks, insurance companies and other financial

intermediaries and is managed by professionals, who do not directly or indirectly trade on


http://www.nseindia.com/content/us/us_promoters.htm

http://www.nseindia.com/content/us/us_promoters.htm

the Exchange. This has completely eliminated any conflict of interest and helped NSE in

aggressively pursuing policies and practices within a public interest framework.

The NSE model however, does not preclude, but in fact accommodates involvement,

support and contribution of trading members in a variety of ways. Its Board comprises of

senior executives from promoter institutions, eminent professionals in the fields of law,

economics, accountancy, finance, taxation, etc, public representatives, nominees of SEBI

and one full time executive of the Exchange.

While the Board deals with broad policy issues, decisions relating to market operations

are delegated by the Board to various committees constituted by it. Such committee

includes representatives from trading members, professionals, the public and the

management. The day-to-day management of the Exchange is delegated to the Managing

Director who is supported by a team of professional staff.

ABOUT BSE


http://www.nseindia.com/content/us/us_mgmtteam.htm

http://www.nseindia.com/content/us/us_committees.htm

http://www.nseindia.com/content/us/us_board.htm

Bombay Stock Exchange is the oldest stock exchange in Asia with a rich heritage, now

spanning three centuries in its 133 years of existence. What is now popularly known as

BSE was established as "The Native Share & Stock Brokers' Association" in 1875.

BSE is the first stock exchange in the country which obtained permanent recognition (in

1956) from the Government of India under the Securities Contracts (Regulation) Act

1956. BSE's pivotal and pre-eminent role in the development of the Indian capital market

is widely recognized. It migrated from the open outcry system to an online screen-based

order driven trading system in 1995. Earlier an Association Of Persons (AOP), BSE is

now a corporatized and demutualized entity incorporated under the provisions of the

Companies Act, 1956, pursuant to the BSE (Corporatizations and Demutualization)

Scheme, 2005 notified by the Securities and Exchange Board of India (SEBI). With

demutualization, BSE has two of world's best exchanges, Deutsche Börse and Singapore

Exchange, as its strategic partners.

Over the past 133 years, BSE has facilitated the growth of the Indian corporate sector by

providing it with an efficient access to resources. There is perhaps no major corporate in

India which has not sourced BSE's services in raising resources from the capital market.

Today, BSE is the world's number 1 exchange in terms of the number of listed companies

and the world's 5th in transaction numbers. The market capitalization as on December 31,

2007 stood at USD 1.79 trillion. An investor can choose from more than 4,700 listed

companies, which for easy reference, are classified into A, B, S, T and Z groups.


The BSE Index, SENSEX, is India's first stock market index that enjoys an iconic

stature , and is tracked worldwide. It is an index of 30 stocks representing 12 major

sectors. The SENSEX is constructed on a 'free-float' methodology, and is sensitive to

market sentiments and market realities. Apart from the SENSEX, BSE offers 21 indices,

including 12 sectoral indices. BSE has entered into an index cooperation agreement with

Deutsche Börse. This agreement has made SENSEX and other BSE indices available to

investors in Europe and America. Moreover, Barclays Global Investors (BGI), the global

leader in ETFs through its iShares® brand, has created the 'iShares® BSE SENSEX India

Tracker' which tracks the SENSEX. The ETF enables investors in Hong Kong to take an

exposure to the Indian equity market.

BSE has tied up with U.S. Futures Exchange (USFE) for U.S. dollar-denominated futures

trading of SENSEX in the U.S. The tie-up enables eligible U.S. investors to directly

participate in India's equity markets for the first time, without requiring American

Depository Receipt (ADR) authorization. The first Exchange Traded Fund (ETF) on

SENSEX, called "SPIcE" is listed on BSE. It brings to the investors a trading tool that

can be easily used for the purposes of investment, trading, hedging and arbitrage. SPIcE

allows small investors to take a long-term view of the market.

BSE continues to innovate. In recent times, it has become the first national level stock

exchange to launch its website in Gujarati and Hindi to reach out to a larger number of

investors. It has successfully launched a reporting platform for corporate bonds in India

christened the ICDM or Indian Corporate Debt Market and a unique ticker-cum-screen

aptly named 'BSE Broadcast' which enables information dissemination to the common

man on the street.


In 2006, BSE launched the Directors Database and ICERS (Indian Corporate Electronic

Reporting System) to facilitate information flow and increase transparency in the Indian

capital market. While the Directors Database provides a single-point access to

information on the boards of directors of listed companies, the ICERS facilitates the

corporates in sharing with BSE their corporate announcements.

FUNDAMENTAL ANALYSIS

Economic Analysis:

GDP:

GDP is the market value of all the final goods and services provided in the domestic

economy during a year. It includes income earned by foreigners minus income earned by

the national abroad. GDP at factor cost at current prices in the year 2008-09 is estimated

at Rs. 43,03,654 crore, showing a growth rate of 13.6 per cent over the Quick Estimates

of GDP for the year 2007-08 of Rs. 43,03,654 crore, released on 31st January 2008.

Per Capita Income :

Total GNP of a country divided by the population. The per capita income is often used as

economic indicator of the levels of living and development. It however, can be biased

index because it takes no account of income distribution. The per capita income at current

prices during 2008-09 is estimated to attain a level of Rs.33,299 as compared to the

Quick Estimates for the year 2007-08 of Rs.29,642, showing a rise of 12.3 per cent.

Industrial Growth :


Industry registered a growth of 7% in the month of April 2008 as compared to 11%

growth registered in the same month of the previous year. In March 2008 industrial

growth recorded was 3.9% lowest in 6 years. In April 2008 growth slipped sharply in the

manufacturing and electricity sector to 7.5% and 1.4% respectively from a high 12.4%

and 8.7% respectively clocked in April 2007 (barring the mining sector that accelerated

in April 2008).

In the light of development taken place in the recent past, particularly the tightening of

monetary policy by the RBI and incessant increase in the raw material prices including

the prices of oil and oil products. GDP growth is likely to moderate in the present fiscal.

Expected GDP growth in the year 2009-10 to be in the range of 8-10%.

Core infrastructure industries :

The overall infrastructure industry grew at 3.6% in April 2008 as against 5.9% growth

posted in the corresponding month of the previous year. Production of crude oil,

petroleum refinery and electricity sector has slowed the overall infrastructure industries

growth. Growth in the remaining set of infrastructure industries namely coal, cement and

finished steel was higher compared to the previous year.

Inflation:

India’s 2008 Economic Survey Report targeted a drop in India’s Inflation Rate – but with

food, oil and commodity price rises worldwide, the opposite is happening. According to

the 2008 Economic Survey Report, India’s inflation rate was targeted by the Reserve

Bank of India (RBI) to be 4.1%, down from a rate of 5.77% in 2007. Inflation rates for

many investment goods have decreased dramatically in recent years. The price of basic

goods such as lentils, vegetables, fruits and poultry were expected to slow their rise. The


price of various manufactured goods also fell in 2007, and this contributed to a reduced

inflation rate. However, the beginning of 2008 has seen a dramatic rise in the price of rice

and other basic food stuffs. There has also been a no-less alarming rise in the price of oil

and gas. When coupled with rises in the price of the majority of commodities, higher

inflation was the only likely outcome. Indeed, by July 2008, the key Indian Inflation

Rate, the Wholesale Price Index, has risen above 11%, its highest rate in 13 years. This is

more than 6% higher than a year earlier and almost three times the RBI’s target of

4.1%.Inflation has climbed steadily during the year, reaching 8.75% at the end of May.

There was an alarming increase in June, when the figure jumped to 11%. This was driven

in part by a reduction in government fuel subsidies, which have lifted gasoline prices by

an average 10%.

The Indian method for calculating inflation, the Wholesale Price Index, is different to the

rest of world. Each week, the wholesale price of a set of 435 goods is calculated by the

Indian Government. Since these are wholesale prices, the actual prices paid by consumers

are far higher. In times of rising inflation this also means that cost of living increases are

much higher for the populace. Cooking gas prices, for example, have increased by around

20% in 2008. With most of India’s vast population living close to – or below – the

poverty line, inflation acts as a ‘Poor Man’s Tax’. This effect is amplified when food

prices rise, since food represents more than half of the expenditure of this group.

The dramatic increase in inflation will have both economic and political implications for

the government, with an election due within the year.The effect of the price spurt was

seen on the bourses on Friday. The BSE sensitive index (Sensex) tanked over 350 points

in intra-day trading and sank further to close 517 points lower at 14,571. Average


inflation recorded during 2007-08 was 4.66% lower than the average inflation rate

computed for 2006-07. In the year 2007-08 dearer food articles mainly contributed to

high inflation. The government later imposed ban on few essential commodities and

employed fiscal measures to check high inflation caused due to manufactured items.

Increase in the price of petroleum products, inflation crossed the double-digit level and

was high at 12.01 % for the week ending Aug 26 2008. The recent fiscal and

administrative measures taken by the government brought inflation down to current

0.26% on the week ending 28th of March 2009. The bumper agri production in 2007-08

and its repeat performance in 2008-09 has significant role in bringing inflation low. Apart

from performance of agricultural sector the measures taken by RBI of reducing interest

rate also played an important role and reduction in the price of crude oil in international

market brought down cost pull inflation significantly. As the year progresses it is

expected that average inflation for the year 2009-10 would be in the range of 2-5%.

Monetary Indicators:

The recent policy measures taken by the RBI to control inflation and to compete with

global recession includes decreasing the CRR and repo rate (rate at which commercial

banks borrow from the central bank). The step has been taken due to worries over high

inflation.

RBI decreased the repo rate from 8.5% to 5% and CRR decreased from 8.5% to 5%.The

resetting in CRR lead to downward revision in PLR between 12.75% to 13.25%(making

borrowings cost-effective) and also decrease the rate of interest of deposits.

Fiscal Trends:


Government provisional accounts for the last fiscal show total expenditure slightly in

excess of the targeted amount, mainly due to the non-plan category. However, total

receipts surpassed the targeted receipts for 2007-08 keeping the fiscal deficit at 90.4 % of

the targeted figure for the year and thereby showing an improvement in the fiscal

situations in 2007-08 over the previous year.

Foreign Trade:

Merchandise exports of USD 200 billion for the 2008-09 have been targeted. Last year

mainly saw Rupee’s battle against the USD, where Rupee turned in a manner that was

disadvantage the exporters. Since April 2008 Rupee against USD recoiled in favor of

exports however it also raised the import bill concerns at a time when oil prices are at its

peak.

During the April – May period of this fiscal merchandise exports recorded a growth of

21.7% in USD terms over the 20.3% rise recorded in the same period of previous year.

Imports however slowed to 31.7% during the two month period against the 33.0% growth

recorded in the previous year.

Foreign Exchange Reserves:

Total foreign exchange reserves have declined since May 2008 by about USD 45 billion.

In June country’s forex stood at USD 295.92 billion. The alterations observed in reserves

are due to dollar selling by the central bank and revaluation in the currencies. However

no change was observed in the GDR/ SDR, value of gold and reserve tranche position in

the IMF.

Exchange Rates:


The value of Rupee depreciated against US dollar, Pound Sterling, Euro and Japanese

Yen in Feb 2009 over Feb, 2008.

U.S. RECESSION

A recession is a decline in a country's gross domestic product (GDP) growth for two or

more consecutive quarters of a year. A recession is also preceded by several quarters of

slowing down.

An economy which grows over a period of time tends to slow down the growth as a part

of the normal economic cycle. An economy typically expands for 6-10 years and tends to

go into a recession for about six months to 2 years. A recession normally takes place

when consumers lose confidence in the growth of the economy and spend less. This leads

to a decreased demand for goods and services, which in turn leads to a decrease in

production, lay-offs and a sharp rise in unemployment. Investors spend less as they fear

stocks values will fall and thus stock markets fall on negative sentiment. The economy

and the stock market are closely related. The stock markets reflect the buoyancy of the

economy. In the US, a recession is yet to be declared by the Bureau of Economic

Analysis, but investors are a worried lot. The Indian stock markets also crashed due to a

slowdown in the US economy.

The Sensex crashed by nearly 13 per cent in just two trading sessions in January. The

markets bounced back after the US Fed cut interest rates. However, stock prices are now

at lowest in India with little cheer coming to investors.


Impact of a US recession on India

A slowdown in the US economy is bad news for India. Indian companies have major

outsourcing deals from the US. India's exports to the US have also grown substantially

over the years. The India economy is likely to lose between 1 to 2 percentage points in

GDP growth in the next fiscal year. Indian companies with big tickets deals in the US

would see their profit margins shrinking. The worries for exporters will grow as rupee

strengthens further against the dollar. But experts note that the long-term prospects for

India are stable. A weak dollar could bring more foreign money to Indian markets. Oil

may get cheaper brining down inflation. A recession could bring down oil prices to $70.

Between January 2001 and December 2002, the Dow Jones Industrial Average went

down by 22.7 per cent, while the Sensex fell by 14.6 per cent. If the fall from the record

highs reached is taken, the DJIA was down 30 per cent in December 2002 from the highs

it hit in January 2000. In contrast, the Sensex was down 45 per cent.

The whole of Asia would be hit by a recession as it depends on the US economy. Asia is

yet to totally decouple itself (or be independent) from the rest of the world, says experts.

Fears about a possible U.S. recession are also stoking the uncertainty in the Indian

markets. "If the U.S. is headed for a recession, then of course a lot of growing firms in

India, particularly those in the IT sector, are going to take a bit of a hit because they are

still very heavily dependent on the U.S. market."

Brief of Current Scenario:-


1) Foreign investors are exiting from market because of US recession.

2) Indian MFs are sitting on huge cash and waiting with patience to enter once the market

stabilizes.

3) Retail investors are out of market in fear of more down trends.

4) Indian Economic Fundamentals are still intact. No recession predicted in India.

So now even though FIIs get out of the market now, the market becomes the trading

ground for Indian investors. The current Stock values can go more down maximum of

10% till March end of 2008 . The Indian Mutual funds cant keep the cash surplus without

earning penny from it and they would start investing in those company stocks who have

given good FY results. This will lead in true investments and actual stock evaluations.

The retailers will then return to the market as the Sensex will slowly start moving

positive. Now, if the FIIs return back to Indian Markets, it’s a win-win situation for all

Indian investors as they are already in market before the FIIs and they can book good

profit once the FIIs start investing.

But what about the current inflation rate that could hamper the industrial growth? Mr.

Chidambaram has requested the Reserve Bank of India to take monetary steps to

maintain price stability.

FII (Foreign Institutional Investors)

FII's have a major role in the Indian stock markets and there is no way denying this .That

becomes crystal clear from this figures. FII's have a share of around $300 billion in the


Indian equity market which has a size of around $1,500 billion. So, that is cool 20%

share. And when this is tampered it's obvious that it will reflect in the indices.

Foreign institutional investors have pulled out over 5,307 crore (Rs 53.07 billion) from

the stock market in the six days in year 2008, amid the Bombay Stock Exchange's

benchmark index Sensex's continuous downward journey during that period. With

economic integration with the world economy over the past 17 years, Indian economy

cannot remain immune to this crisis. Already the Indian stock markets have been affected

adversely by the sudden pullout by the FIIs. However, the impact on the real economy is

likely to be moderate due to a number of reasons. Firstly, India’s dependence on exports

as a driver of growth is still rather low.

Furthermore, a substantial geographical diversification has taken place over the past

decade with East Asian economies emerging as our important trade partners. India’s

services exports especially of software and Bpo's are still dominated by the US. But a US

recession may actually increase the need for the US companies to cut costs to stay

competitive and may actually increase the outsourcing of business processes thus

benefiting Indian service providers.

Secondly, the effect of the US slowdown may be limited to FII inflows rather than FDI

inflows. In so far as the former type of flows bring volatility on the stock markets and

tend to put an upward pressure on the rupee’s exchange rate, their decline may not be a

matter of concern. What may affect the growth prospects is whether the flow of FDI is


affected. Emergence of India as a fast growing large economy is attracting the attention

of MNCs from all around and hence this type of flows may not be affected significantly.

Thirdly, a major driver of India’s growth rates is domestic consumption and investment.

These two variables are unlikely to be adversely affected by the financial turmoil in the

US.

Crude Oil Price Rise

Crude oil prices will significantly disrupt world stock markets in recent days. Countries

struggled a lot in inflation rate due to rising crude prices. US Federal Reserve decides to

slash interest rates with responsibility to made dollar strong. According to OPEC

chairman, crude oil price may touch $ 200 in year 2008 and came down to $ 23 per barrel

in recent months which is a surprise package for the most of the countries facing

inflation.

Rising inflation due to high crude oil prices decreased spending power of people. There

will be a significant slowdown in economy due to reduced growth rates and rising

inflation but the global fall in crude oil prices will help countries to hit back the recession

or slow down in economy.


http://nvkrishna-tagging.jiglu.com/tags/topics/crude-oil-price!overlay

http://nvkrishna-tagging.jiglu.com/tags/topics/rising-crude-price!overlay

http://nvkrishna-tagging.jiglu.com/tags/topics/world-stock-markets!overlay

http://nvkrishna-tagging.jiglu.com/tags/topics/crude-oil-price!overlay

METHODOLOGY

Research Methodology used by me in this project is conclusive one in which I used

secondary data from different sources like www.financeyahoo.com internet, information

from the Economic Times was gathered and Business magazines helped to fulfill the

gaps wherever necessary

First, I collected the Sensex data from 2000-2009 and I also collected the data of foreign

exchange rate, inflation and iip (index of industrial production).Keeping Sensex data

dependent and other three independent I did regression analysis to find out cause and

effect relationship between stock performance and economic variables. I used SPSS to

derive the relationship.

Regression model was used to derive the relationship and formula to compute the

relationship is given below.

Re t=α +β1 X 1+ β2 X 2+β3 X 3Where,

Ret-Return on Sensex

α= intercept.

β1 =slope of inflation

β2 =slope of forex.

β3 =slope of iip.

X1= inflation


http://www.financeyahoo.com/

X2= forex

X3= iip

The monthly returns of economic variables (in percentage) are determined as:

Where:

Rt is monthly return of variables,

P1 is closing price for the month,

P0 is opening price for the month

FINDINGS

Output which I got is different than the earlier findings. Earlier study shows

that there is great degree of association between performance of sensex and the economic

variables. But in the research work carried by me a different result came which shows

that the degree of association is quite low as the value of R2 (coefficient of determination)

is quite low i.e. 0.123 which shows that the interdependence between these two variables

is quite low which contradicts the previous economic literature and the research paper

findings. On the basis of my finding I can say that only 12.3% of relationship can be

established between the two and the rest is driven by some other factor.

Output Summary:


Rt=(P1−P0 )

P0

∗100

(α )

Inflation

(β 1 )

IIP

(β 2 )

Forex

(β 3 )

(R2

)

1.378 -0.08 -0.049 -1.698 0.123

T value 2.159* -1.652 -1.32 -3.054*

Note-* significant at 5 percent level of significance.


Inflation and stock exchange performance.

General rise in the price of goods and services

– Demand Prices

– EFFECT - prices rise => money buys less =>Decrease in the standard of

living

We take W.P.I to calculate the Inflation, Which includes 435 commodities prices. To

calculate inflation we use 1993-94 as a base year and by comparing current price with

base year we calculate inflation in the economy.


STOCK PERFORMANCE(VALUE OF STOCK)INFLATION

Causes of Inflation

Demand –Pull Inflation Cost –Push Inflation

-Government expenditure -Fluctuation in Supply.

Agriculture –Monson failure.

Industry – Power breakdown.

-Black Money -Indirect Tax

-Population Growth -Oil Prices.

Stock performance is inversely related with the inflation. Inflation in the

economy rises, stock starts showing bearish trend and if inflation in the economy remains

low the between 2%-4% the stock market shows the bullish trend.

From the output of SPSS I analyzed that inflation has inverse relationship with the stock

market or performance of the stock. When inflation in the economy rises it directly

influences the performance of the stock. Stock market starts showing the bearish trend.

When inflation in the economy comes down and remains stable between 2%-5% that is

considered as the best situation in the economy and stock starts showing bullish trend.\


IIP STOCK PERFORMANCE

(VALUE OF STOCK)

IIP (Index Of Industrial Production)

Index of industrial production (IIP) is one of the Prime indicators of the economic

development for the measurement of trend in the behavior of the Industrial Production

over a period of time with reference to a chosen base year.

It indicates the relative change of physical production in the field of

industries during a specified year as compared to previous year.

After analysis of data with the help of SPSS I found that iip has inverse relation with the

performance of the stock. When value of iip will rise the stock will show bearish trend

and when the value of iip will decrease stocks will show bullish trend.

Data Source

1. The annual IIP and summary results are prepared on the basis of Annual Survey of

Industries (ASI) returns received from NSSO (FOD), Govt. of India.

2. For preparation of Monthly IIP, the department collects monthly production data

directly from selected industrial units in the State through its District Statistical Officers.

3. Methodology followed : as suggested by CSO, New Delhi

Usage and Importance of Index of Industrial Production

1. State level


(a) Used by the Government and Planners at different level for different Policy decisions

(b) Used by the department for preparation of state income estimates of manufacturing

sector.

2. Central Government

(a) Used by the Government and Planners at different level for different Policy decisions

and other purposes in context to Haryana.

Revision of Base year of IIP

To capture the changes in the industrial sector, the State series of IIP is revised

from time to time by dropping obsolete items, including the new items in the

basket and also shifting the base year to a more recent one.

The State is now revising the current series of State IIP by shifting its base year

from 1993-94 to 1999-2000.

Steps involved for revision of base year are

o Selection of items basket

o Weighting Diagram

o Selection of industrial units for data collection.

Statistical methods are applied to arrive at IIP after finalization of items basket,

weighting diagram and collecting production data from the selected industrial

units.

Summary Results of ASI


This also compiles district wise and group wise various characteristics of ASI returns i.e

output, input, depreciation, net value added and number of workers on annual basis.

Foreign Exchange (Forex):

The foreign exchange (currency, forex or FX) market is where currency trading takes

place. FX transactions typically involve one party purchasing a quantity of one currency

in exchange for paying a quantity of another. The FX market is one of the largest and

most liquid financial markets in the world, and includes trading between large banks,

central banks, currency speculators, corporations, governments, and other institutions.


STOCK PERFORMANCE(VALUE OF STOCK)

FOREX

The average daily volume in the global forex and related markets is continuously

growing. Traditional turnover was reported to be over US$ 3.2 trillion in April 2007 by

the Bank for International Settlement. Since then, the market has continued to grow.

According to Euro money’s annual FX Poll, volumes grew a further 41% between 2007

and 2008.

After analyzing the output what I got from SPSS I came to know that the forex and stock

performance has inverse relationship. Rise in exchange rate will have negative impact

over the stock market, whereas decrease in exchange rate with respect to domestic

currency will have positive impact on the stock market.

Market size and liquidity

The foreign exchange market is unique because of

its trading volumes,

the extreme liquidity of the market,

the large number of, and variety of, traders in the market,

its geographical dispersion,

its long trading hours: 24 hours a day except on weekends.

the variety of factors that affect exchange rates.


the low margins of profit compared with other markets of fixed income

(but profits can be high due to very large trading volumes)

the use of leverage

Main foreign exchange market turnover, 1988 - 2007, measured in billions of USD.

As such, it has been referred to as the market closest to the ideal perfect competition,

notwithstanding market manipulation by central banks. According to the Bank for

International Settlements, average daily turnover in global foreign exchange markets is

estimated at $3.98 trillion. Trading in the world's main financial markets accounted for

$3.21 trillion of this. This approximately $3.21 trillion in main foreign exchange market

turnover was broken down as follows:

$1.005 trillion in spot transactions

$362 billion in outright forwards

$1.714 trillion in forex swaps

$129 billion estimated gaps in reporting


http://en.wikipedia.org/wiki/Image:G_foreign_exchange_market_turnover.gif

SENTIMENTS

Factors:

Sentiment indicator is constructed using the following variables.

Dividend to bond yield ratio

A high dividend to bond yield ratio implies that the stocks are over valued

indicating positive and high sentiment.

Price to book value

Extent to which the stocks are overvalued - Positive and high market sentiments

tend to drive up the valuation of stocks.

Turnover

Implies higher liquidity in the market and positive and high sentiment.

Stock bond ratio

This is the ratio of stock return index to bond return index. A large number will

imply that the returns on stocks are much higher then bonds and the market

sentiment is positive.

Implied volatility

Is the volatility of underlying stock implied by option price movements. High

volatility is indicative of negative sentiments.

Put to Call ratio

This is the ratio of number of put order to number of call orders. In instances

when the ratio is large positive number, it implies that investors expect the market

to tumble in the future and hence are short selling. This indicative of low or

negative sentiments.


Open Interest

Is the number of positions in the options market that are still open i.e. number

of options been exercised. When open interest is rising in rising market, it is

considered to be a sign of strengthening sentiments. On the other hand when open

interest is rising in falling markets it is considered that sentiment is starting to

weaken.

Sentiment scale show that Argentina , Brazil, Hong

Kong ,Mexico, Phillippines, Singapore and US are the most localized markets,

i.e., they are not affected by global sentiments. The results also show that UK is

the most global market while Indonesia is not affected by sentiments at all.


Sentiment Scale:

Source:

Research paper by:

Vrinda Gupta, Aujust 2008

E mail –[email protected]


mailto:%E2%80%[email protected]

Reason Behind Sentiments:

• PROPENSITY TO SPECULATE IS HIGHER IN THE STOCK EXCHANGE

WHICH ARE YOUNG WITH LITTLE HISTORY ON PREVIOUS RETURN.

• SMALL CAPITALISATION.

• COUNTRIES WHICH RECENTLY INTRODUCED INVESTMENT IN

FINANCIAL FUTURE AND OPTION ARE ALSO EXPECTED TO BE MORE

SENTIMENTAL

• LACK OF MARKET REGULATION AND POOR GOVERNANCE ALSO

MAKE STOCK MARKET VULNERABLE TO SENTIMENTAL RISK.


CONCLUSION AND RECOMMENDATIONS

STOCK MARKET IS NOT MUCH DEPENDENT ON ECONOMIC

VARIABLES.

STOCK MARKET IS MORE DEPENDENT ON EXTERNAL FACTORS

WITH RESPECT TO ECONOMIC VARIABLES.

ECONOMIC VARIABLES HAS NOT MUCH RELEVANCE IN THE

PRESENT GLOBALIZED WORLD.

LOCAL AND GLOBAL SENTIMENTS ARE PLAYING AN IMPORTANT

ROLE IN PRESENT STOCK MARKET.

What does all this mean for the Indian capital market? This will reduce the flow of capital

coming to the Indian stock market. India was always considered one of the robust

emerging markets, but definitely with certain political and economic risks.

These risks, in recent times, were not priced into equity valuations as the excess liquidity

was chasing emerging market exposures and India became the investor's darling, after

China. Now, with the sub-prime crisis, excess liquidity will vanish and the market will

correct for the price of risks. Now let us look at domestic fundamentals. Indian markets

will see a correction because of high oil prices, high interest rates, slowing down of

exports because of the slowing down of the US economy and rupee appreciation. This

will definitely have an impact on the GDP growth rate.

The stock market has, in the recent past, rallied largely because of global cues and has

almost completely ignored the local issues. With liquidity drying up, the market will now

focus on local issues, including political uncertainties and corporate earnings. It is natural


to expect that, finally, fundamentals will rule over technicals, and the market will look at

ground realities. A slowdown can be observed in the automobile sector, some slowing

down is already being witnessed in the real-estate segment and, with exports coming

down, and it will not be too long before we see the same in textiles, jewelry and other

areas as well. Perhaps a similar story will unfold in the next couple of months for these

lenders who have lent big money into the sub-prime markets and one or more banks will

fold, just like Enron did, resulting in a huge crisis of confidence. It would be naive to

wish away this major problem inflicting global markets and to presume that the Indian

market is decoupled. If the global super-tanker, the US, which has a 25 per cent share of

global GDP, slows down, it will definitely have an impact on the Indian economy.

The next couple of months are definitely going to be crucial and the best course of action

in these uncertain times should be 'wait and watch'.

For Investors & Speculators: It is recommended to them to keep away from stock market

completely and deposit their money in other investment arena which are safe and secure

during tough market conditions. If one want to do an investment for a year or longer then

he should do an investment in chunks e.g. only a small percentage of total investment at

one particular time when they feel that market is down enough. But if the speculation is

the motive then it is advisable to seize the plans.

For Brokers: During the weak market conditions, brokers face a backlash on their income

because of the decreased volumes of shares. In such a scenario, they can generally advice

to take risk on certain scripts which is not a healthy way of getting profits. This can

damage the loyalty of valuable clients. But instead of doing this, they should be advised


to remain cautious and not develop any new positions in the market. This can give

brokers the better returns when market will be stable. This can give brokers the better

returns when the market conditions improved. This is the time to gain loyalty by giving

safe calls.


REFERENCES

o Abdalla, I. S. A. and V. Murinde (1997), “Exchange Rate and Stock Price

Interactions in Emerging Financial Markets: Evidence on India, Korea, Pakistan,

and Philippines,” Applied Financial Economics 7, 25-35.

o Abdalla, I. S. A. and V. Murinde (1996) Exchange rate and stock prices

interactions in emerging financial markets: Evidence on India, Korea, Pakistan

and Philippines. Applied Financial Economics, 7, 25-35.

o Ando, A. and F. Modigliani (1963), “The Life Cycle Hypothesis of Saving:

Aggregate Implications and tests,” American Economic Review, Vol. 53, No. 1.

o Ajayi, R. A. and M. Mougoue (1996), “On the Dynamic Relation between Stock

Prices and Exchange Rates,” Journal of Financial Research 19, 193-207.

o Bahmani-Oskooee, M. and A. Sohrabian (1992). “Stock Prices and the Effective

Exchange Rate of the Dollar”, Applied Economics, 24, 4, 459-464.

o Baumol, W. (1965), Stock Market and Economic Efficiency, Fordham University

Press, New York.

o Bhattacharya B and Mukherjee J. (2002), “Causal relationship between stock

market and exchange rate, foreign exchange reserves and value of trade balance:

A case study for India” www.igidr.ac.in

o Bosworth, B.(1975), "The Stock Market and the Economy", Brookings Papers on

Economic Activity, Vol. 2.

o Chen, N, R. Roll, and S. Ross (1986), “Economic forces and the stock market”,

Journal of Business 59, 383-403.

o Friedman, M. (1988), “Money and the Stock Market”, Journal of Political

Economy, 96, 2,221-245.

o Mukherjee, T.K. and A. Naka, (1995), “Dynamic relations between

macroeconomic variables and the Japanese stock market: An application of a

vector error correction model”, The Journal of Financial Research, 2, 223-237.

o 1997 Asian Financial Crisis - Wikipedia, the free encyclopedia.mht

o 1997 Asian Financial Crisis - Wikipedia, the free encyclopedia.mht


o Bombay Stock Exchange - Wikipedia, the free encyclopedia.mht

o Economic crisis of 2008 - Wikipedia, the free encyclopedia.mht

o Indian Stock Market Investors loss Worst 6 months in the history.mht

o Moneycontrol com - News, Sensex takes 49 days for journey to 21K

o The Hindu Business Line Sub-prime and side effects.mht


APPENDIX

Month/Year

% change in

% change in

% change in

Sensex Return Inflation IIP Forex

Feb-00 5447.47 4.652575

32.54224 -0.98523 -0.04585

Mar-00 5001.28 -8.92152 28.76821 7.68006 -0.02293Apr-00 4657.55 -7.38006 13.61322 -10.8869 0.1146May-00 4433.61 -5.05096 -9.53102 2.211781 2.085534Jun-00 4748.77 6.63666

63.922071 -3.23941 0.235281

Jul-00 4279.86 -10.9562 -3.92207 0.963708 0.70254Aug-00 4477.31 4.41001

4-22.3144 0.700863 1.762354

Sep-00 4090.38 -9.45951 -13.3531 0.695985 0.587853Oct-00 3711.02 -10.2225 -22.3144 -0.88664 1.529543Nov-00 3997.99 7.17785

7-3.63676 3.684463 0.138867

Dec-00 3972.12 -0.65129 25.95112 5.25494 -0.20302Jan-01 4326.72 8.19558

5-8.96122 -0.99387 -0.70846

Feb-01 4247.04 -1.87613 -6.45385 -2.49864 0.429969Mar-01 3604.38 -17.83 -18.2322 6.472676 0.053616Apr-01 3519.16 -2.4216 -8.33816 -9.90438 0.449247May-01 3631.91 3.10442

78.338161 1.300731 0.29838

Jun-01 3456.78 -5.06628 30.74847 -2.17738 0.106349Jul-01 3329.28 -3.82966 16.25189 0.876649 0.254777Aug-01 3244.95 -2.59881 26.23643 1.115945 -0.02121Sep-01 2811.6 -15.4129 -10.1096 -0.30874 1.473711Oct-01 2989.35 5.94610

9-11.2478 0.308738 0.240046

Nov-01 3287.56 9.070861

15.41507 2.916367 0.052108

Dec-01 3262.33 -0.77337 5.942342 5.872073 0.384756Jan-02 3311.03 1.47084

1-5.94234 -0.11299 0.826878

Feb-02 3562.31 7.05385 5.942342 -3.8023 0.451885Mar-02 3469.35 -2.67946 0 7.846054 0.010246Apr-02 3338.16 -3.93001 -10.1096 -9.80283 0.357965May-02 3125.73 -6.79617 0 1.308763 0.122437


Jun-02 3244.7 3.666595

-11.2478 -1.78896 -0.32683

Jul-02 2987.65 -8.60375 -7.4108 3.313913 -0.41005Aug-02 3181.23 6.08506

80 0.232558 -0.33956

Sep-02 2991.36 -6.34728 9.763847 -0.23256 -0.27868Oct-02 2949.32 -1.42541 -4.7628 1.042279 0.061996Nov-02 3228.82 8.65641

3-13.0053 0.172662 -0.26893

Dec-02 3377.28 4.395845

-11.7783 7.796154 -0.5088

Jan-03 3250.38 -3.90416 6.062462 0.424629 -0.48002Feb-03 3283.66 1.01350

313.72011 -3.55833 -0.27234

Mar-03 3048.72 -7.70618 5.001042 6.789457 -0.34673Apr-03 2959.79 -3.00461 21.82536 -11.3944 -0.31626May-03 3180.75 6.94678

9-8.1678 3.390155 -0.6993

Jun-03 3607.13 11.82048

-6.5958 -1.51136 -1.15497

Jul-03 3792.61 4.890563

-4.652 3.218924 -0.74494

Aug-03 4244.73 10.65133

-30.3682 -0.54765 -0.63051

Sep-03 4453.24 4.682209

-6.66914 1.41769 0

Oct-03 4906.87 9.244794

12.92117 -0.16256 -1.17371

Nov-03 5044.82 2.734488

-6.25204 2.039792 1.358925

Dec-03 5838.96 13.60071

17.69307 7.076247 -0.721

Jan-04 5695.67 -2.51577 56.34694 0.936198 -5.17493Feb-04 5667.51 -0.49687 -6.35134 -3.29043 4.404506Mar-04 5590.6 -1.3757 -23.9673 6.570991 -4.08174Apr-04 5655.09 1.14038

9-6.23188 -10.6046 2.118048

May-04 4759.62 -18.8139 10.71328 1.466763 2.624414Jun-04 4795.46 0.74737

428.56881 -1.04549 0.917738

Jul-04 5170.32 7.250228

13.03452 4.319438 1.017105

Aug-04 5192.08 0.4191 10.5886 -0.45397 -0.21554Sep-04 5583.61 7.01213 -6.5958 2.496385 -0.41081Oct-04 5672.27 1.56304 -8.56349 0.589972 -1.52825


3Nov-04 6234.29 9.01498 3.380985 -0.63929 -1.55197Dec-04 6602.69 5.57954

4-11.0991 8.190049 -2.64901

Jan-05 6555.94 -0.71309 -19.4581 -0.3643 0.252062Feb-05 6713.86 2.35214

9-10.0559 -4.81289 -0.12595

Mar-05 6492.82 -3.40438 7.310947 9.273932 0.263173Apr-05 6154.44 -5.49814 9.210045 -11.2073 -0.25172May-05 6715.11 8.34937

9-6.28479 3.877011 0.091607

Jun-05 7193.85 6.654851

-25.0543 0.281294 -0.38991

Jul-05 7635.42 5.783179

-0.69687 -2.60864 -0.05747

Aug-05 7805.43 2.178099

-15.8824 2.280384 1.256729

Sep-05 8634.48 9.60162 10.37198 2.09164 -0.1136Oct-05 7892.32 -9.40357 14.85049 2.946055 2.525245Nov-05 8788.81 10.2003

6-11.2225 -4.14922 1.801257

Dec-05 9397.93 6.481427

5.544145 7.918286 -1.91215

Jan-06 9919.89 5.261752

-8.68071 2.296019 -2.23266

Feb-06 10370.24 4.342715

-1.23306 -4.55797 0.824817

Mar-06 11279.96 8.064922

-4.56932 10.27615 0.381851

Apr-06 11851.93 4.825965

0.259404 -11.2043 0.848314

May-06 10398.61 -13.9761 20.3258 5.486152 3.16167Jun-06 10609.25 1.98543

77.922924 -1.48214 -0.74583

Jul-06 10743.88 1.253085

-5.8308 0.468186 0.885726

Aug-06 11699.05 8.164509

5.830797 -0.29768 0.107481

Sep-06 12454.42 6.065076

-3.98459 3.638285 -1.27569

Oct-06 12961.9 3.915167

6.68225 -3.97958 -2.04448

Nov-06 13696.31 5.362101

23.14738 6.132825 -0.5903

Dec-06 13786.91 0.65714 -3.21867 5.816273 -1.15725


5Jan-07 14,090.9

22.15748

9-47.3749 0.680275 -0.15834

Feb-07 12,938.09

-8.91036 11.84082 -5.13924 0.282566

Mar-07 13,072.10

1.02516 10.8356 13.65502 -1.60422

Apr-07 13,872.37

5.768805

11.30082 -14.2516 -5.4201

May-07 14,544.46

4.620935

13.7087 4.827718 -1.36538

Jun-07 14,650.51

0.723866

25.9733 -3.00949 0.049086

Jul-07 15,550.99

5.7905 0.418286 -0.11758 -0.81301

Aug-07 15,318.60

-1.51704 4.260931 2.057127 1.30255

Sep-07 17,291.10

11.4076 -2.95759 0.076805 -3.02415

Oct-07 19,837.99

12.83845

-4.08465 0.80291 -1.04991

Nov-07 19,363.19

-2.45208 -7.0483 -0.61116 0.898797

Dec-07 20,286.99

4.553657

-16.7174 8.691559 -0.65748

Jan-08 17,648.71

-14.9489 -49.6159 -0.98836 -0.05075

Feb-08 17,578.72

-0.39815 23.86045 -2.04272 1.336379

Mar-08 15,644.44

-12.364 21.78984 9.885861 0.150169

Apr-08 17,287.31

9.503329

17.60994 -13.536 1.180945

May-08 16,415.57

-5.31045 10.06002 3.0692 5.118825

Jun-08 13,461.60

-21.9437 35.12615 -1.98609 0.853457

Jul-08 14,355.75

6.228515

3.061464 0.777062 -1.08856

Aug-08 14,564.53

1.433483

3.618816 -2.46281 3.014022

Sep-08 12,860.43

-13.2507 -2.53592 4.252813 2.432211

Oct-08 9,788.06 -31.389 -8.82926 -4.93515 0.263567Nov-08 9,092.72 -7.64722 -25.4163 1.77196 0.327598


Dec-08 9,647.31 5.748649

-28.5739 5.560015 2.039813

Jan-09 9,424.24 -2.36698 -21.5795 0.035342 3.922572Feb-09 8,891.61 -5.99025 -49.3002 -3.6708 3.891427


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