Stock Market Movements in Present

8/7/2019 Stock Market Movements in Present

1/56

Chapter- 1

AN

INTRODUCTIOn

CAPITAL MARKET AND ECONOMIC GROWTH:-

1


2/56

It is needless to say that the securities markets, finance, economic growth There have a

number of studies, starting from World Bank and IMF to various scholars, which have

established robust relationship not only one way, but also the both ways, between the

development in the securities market and the economic growth. As market gets

disciplined / developed/ efficient, it avoids the allocation of scarce savings to low

yielding enterprises and forces the enterprises to focus on their performance which is

being continuously evaluated through share prices in the market and which faces the

threat of takeover. Thus securities market converts a given stock of investible resources

to a larger flow of goods and services.

The securities market fosters economic growth to the extent that it:-

(a) Augments the quantities of real savings and capital formation from any given level of

national income.

(b) Increases net capital inflow from abroad.

(c) Raises the productivity of investment by improving allocation of investible funds.

(d) Reduces the cost of capital.

The securities market facilitates the internationalization of an economy by linking it withthe rest of the world. This linkage assists through the inflow of capital in the form of

portfolio investment. Moreover, a strong domestic stock market performance forms the

basis for well performing domestic corporate to raise capital in the international market.

This implies that the domestic economy is opened up to international competitive

pressures, which help to raise efficiency.

In as much as the securities market enlarges the financial sector, promoting additional

and more sophisticated financing, it increases opportunities for specialization, division of

labour and reductions in costs in financial activities. The securities market and its

institutions help the user in many ways to reduce the cost of capital. They provide a

convenient market place to which investors and issuers of securities go and thereby avoid

the need to search a suitable counterpart. The market provides standardized products and

2


3/56

thereby cuts the information costs associated with individual instruments. The market

institutions specialize and operate on large scale which cuts costs through the use of

tested procedures and routines.

CAPITAL MARKET:-

Progress on developing Indias capital market, which is becoming more competitive,

deep and developed as on international markets standards. Business in the countrys

oldest stock exchange, namely the Bombay Stock Exchange (BSE) dating back to 1875,

which is also one of the oldest stock exchanges in the world,continued to thrive. The

National Stock Exchange (NSE), which emerged in the mid-1990s and catalyzedimprovements in trading systems to provide the necessary depth and choice to investors,

made sustained progress. With the BSE and NSE emerging as the two apex institutions of

the countrys capital market, restructuring of other stock exchanges went apace. Overseen

by Securities and Exchange Board of India (SEBI), an independent statutory regulatory

authority, the countrys capital market dealt in scrips of a large number of listed

companies with a wide geographical outreach, providing a world class trading and

settlement system, a wide range of product availability with a fast growing derivatives

market, and well laid down corporate governance and investor protection measures.

As a part of the on-going financial and regulatory reforms of the primary and secondary

market segments of the capital market, a number of initiatives were taken in 2007-08 and

the current year so far. These measures are designed to attain the stability in current

turmoil and to keep the pace of economic growth and keep the confidence of investors

(both domestic and foreign) in the countrys capital market. The stock market scaled new

peaks year after year since 2003, with the BSE and NSE indices crossing the 20,000 and5,000 marks, respectively, in January 2008 but after it came under the direct impact

global slowdown and stock index have shown the steep downfall to 8000 and 2700

respectively and failure ofUS investment banks also contributed to downfall.

3


4/56

The informational efficiency of major stock markets has been extensively examined

through the study of causal relations between stock price indices and macroeconomic

aggregates. The findings of these studies are important since informational inefficiency in

stock market implies on the one hand, that market participants are able to develop

profitable trading rules and thereby can consistently earn more than average market

returns, and on the other hand, that the stock market is not likely to play an effective role

in channeling financial resources to the most productive sectors of the economy.

FUNCTIONS OF CAPITAL MARKET:

The securities market allows people to do more with their savings than they would

otherwise. It also allows people to do more with their ideas and talents than would

otherwise be possible. The peoples savings are matched with the best ideas and talents in

the economy. Stated formally, the securities market provides a linkage between the

savings and the preferred investment across the entities, time and space. It mobilizes

savings and channelises them through securities into preferred enterprises.

The securities market enables all individuals, irrespective of their means, to share the

increased wealth provided by competitive enterprises. The securities market allows

individuals who cannot carry an activity in its entirety within their resources to investwhatever is individually possible and preferred in that activity carried on by an

enterprise. Conversely, individuals who cannot begin an enterprise they likecan attract

enough investment form others to make a start and continue to progress and prosper. In

either case, individuals who contribute to the investment share the fruits.

The securities market also provides a market place for purchase and sale of securities and

thereby ensures transferability of securities, which is the basis for the joint stock

enterprise system. The liquidity available to investors does not inconvenience the

enterprises that originally issued the securities to raise funds. The existence of the

securities market makes it possible to satisfy simultaneously the needs of the enterprises

for capital and of investors for liquidity.

4


5/56

The liquidity the market confers and the yield promised or anticipated on security

encourages people to make additional savings out of current income. In the absence of

the securities market, the additional savings would have been consumed otherwise. Thus

the provision of securities market results in net savings.

The securities market enables a person to allocate his savings among a number of

investments. This helps him to diversify risks among many enterprises, which increases

the likelihood of long term overall gains.

ROAD AHEAD FOR CAPITAL MARKET:

The securities market promotes economic growth. More efficient is the securities market,

the greater is the promotion effect on economic growth. It is, therefore, necessary to

ensure that our securities market is efficient, transparent and safe. In this direction, SEBI

has been working since its inception and would continue to work to continuously

improve market design to bring in further efficiency and transparency to market and

make available newer and newer products to meet the varying needs of market

participants, while protecting investors in securities. The aim is to make Indian securities

market a model for other jurisdictions to follow and make SEBI the most dynamic and

respected regulator globally.

Some of the initiatives on which SEBI is working are:

A.) Introducing exchange traded interest rate derivatives

B.) Promoting an index to comprehensively reflect the level of corporate governance

C.) Setting up a central listing authority to dynamise listing requirements

D.) Facilitating demutualization of stock exchangesE.) Building a cadre of securities market professionals through training and certification

F.) Constructing a central registry of securities market participants and professionals

G.) Rationalizing margin trading, securities lending and short selling

H.) Promoting secondary market for corporate debt securities

5


6/56


7/56

transforming India as an important 'back office' destination for global companies for the

outsourcing of their customer services and technical support. India is a major exporter of

highly-skilled workers in software and financial services, and software engineering.

1. OVERALL ECONOMY:

Advance estimates of GDP for the year 2008-09 shows that GDP is slated to grow by 8.5

per cent. This growth will be primarily led by the industry, manufacturing and services

sectors. The Industrial growth is expected to remain at about 10 per cent for the current

fiscal, manufacturing sector and the services sector are likely to achieve 11.3% and

11.18% growth respectively. However, the agriculture sector will expand by a merge 2.7

per cent as per the most of forecasted figures.

Advance estimates of GDP for the year 2008-09 shows that GDP is slated to grow by 8.5

per cent. This growth will be primarily led by the industry, manufacturing and services

sectors. The Industrial growth is expected to remain at about 10 per cent for the current

fiscal with the manufacturing sector and the services sector likely to achieve 11.3 per cent

and 11.18 per cent growth. However, the agriculture sector will expand by a merge 2.7

per cent in 2008-09

Table 1: Real GDP Growth (%)

Sector First Half Year

(April-September)

2007-08 2008-09

Agriculture 4.5 2.9Industry 9.1 5.0Services 10.6 9.9Overall 9.3 7.8

2. INDUSTRIAL GROWTH:

The General Index stands at 267.2, which is 2.4% higher as compared to the level in the

month of November 2007. The cumulative growth for the period April-November 2008-

09 stands at 3.9% over the corresponding period of the pervious year. The Indices of

7


8/56

Industrial Production for the Mining, Manufacturing and Electricity sectors for the month

of November 2008 stand at 175.0, 285.7, and 217.5 respectively, with the corresponding

growth rates of 0.5%, 2.4% and 3.1% as compared to November 2007. The cumulative

growth during April-November, 2008-09 over the corresponding period of 2007-08 in the

three sectors have been 3.4%, 4.0% and 2.9% respectively, which moved the overall

growth in the General Index to 3.9%.In terms of industries, as many as ten (10) out of the

seventeen (17) industry groups (as per 2-digit NIC-1987) have shown positive growth

during the month of November 2008 as compared to the corresponding month of the

previous year. The industry group Rubber, Plastic, Petroleum and Coal Products have

shown the highest growth of 30.7%, followed by 14.5% in Beverages, Tobacco and

Related Products and 8.7% in Wood and Wood Products; Furnitureand Fixtures. On

the other hand, the industry group Other Manufacturing Industries have shown anegative growth of 16.9% followed by 13.1% in Leather and Leather & Fur

Productsand 11.4% in Wool, Silk and Man-made Fibre Textiles .As per Use-based

classification, the Sectoral growth rates in November 2008 over November 2007 are

2.3% in Basic goods, (-)2.3% in Capital goods and 2.6% in Intermediate goods. The

Consumer durables and Consumer non-durables have recorded growth of (-)4.2% and

7.3% respectively, with the overall growth in Consumer goods being 4.4%.Alongwith the

Quick Estimates of IIP for November 2008, the indices for October 2008 have undergone

the first revision and those for August 2008 have undergone the second (final) revision in

the light of the updated data received from the source agencies. (It may be noted that

revised indices (first revision) in respect of September 2008 have already been released

in December 2008 and these indices shall undergo final (second) revision in February

2009).Statements giving Quick Estimates of the Index of Industrial Production at

Sectoral, 2-digit level of National Industrial Classification (NIC)-1987 and by Use-based

classification for the month of November 2008, along with the growth rates over the

corresponding month of previous year, including the cumulative indices and growth rates,

are enclosed.

INDEX OF INDUSTRIAL PRODUCTION

(Growth at 2-digit level)

8


9/56

(Base: 1993-94=1

Industry Description Weight Index Cumulative Index Percentage growth

code Nov'2007 Nov'2008 Apr-Nov Nov'2008 Apr-Nov

2007-2008 2008-2009 2008-2009

20-21 Food Products 90.8 166.6 172.9 149.6 149.0 3.8 -

22

Beverages, Tobacco and

Related Products 23.8 508.3 581.9 488.4 575.6 14.5 1

23 Cotton Textiles 55.2 153.9 153.8 163.0 161.3 -0.1 -

24

Wool, Silk and man-made

fibre textiles 22.6 286.0 253.3 276.1 268.4 -11.4 -

25

Jute and other vegetable

fibre Textiles (except

cotton) 5.9 114.6 120.5 119.1 114.5 5.1 -

26

Textile Products

(including WearingApparel) 25.4 272.4 288.8 292.4 303.8 6.0

27

Wood and Wood

Products; Furniture and

Fixtures 27.0 108.8 118.3 127.0 119.7 8.7 -

28

Paper & Paper Products

and Printing, Publishing &

Allied Industries 26.5 255.8 256.2 251.7 262.0 0.2

29

Leather and Leather & Fur

Products 11.4 167.7 145.8 166.0 156.5 -13.1 -

30

Basic Chemicals &

Chemical Products

(except products of

Petroleum & Coal) 140.0 297.9 291.5 313.6 325.1 -2.1

31

Rubber, Plastic, Petroleum

and Coal Products 57.3 241.3 315.4 243.1 246.2 30.7

32

Non-Metallic Mineral

Products 44.0 304.9 311.9 320.1 320.8 2.3

33

Basic Metal and Alloy

Industries 74.5 307.1 324.2 304.7 323.4 5.6

34

Metal Products and Parts,

except Machinery and

Equipment 28.1 160.3 146.3 164.6 165.4 -8.7

9


10/56

35-36

Machinery and Equipment

other than Transport

equipment 95.7 387.8 409.2 379.5 409.6 5.5

37

Transport Equipment and

Parts 39.8 389.7 355.1 369.4 394.3 -8.9

38

Other Manufacturing

Industries 25.6 430.1 357.3 342.4 335.3 -16.9 -

1 Mining & Quarrying 104.7 174.2 175.0 162.3 167.8 0.5

2-3 Manufacturing 793.6 278.9 285.7 276.7 287.9 2.4

4 Electricity 101.7 210.9 217.5 216.4 222.6 3.1

General Index 1000.0 261.0 267.2 258.6 268.7 2.4

INDEX OF INDUSTRIAL PRODUCTION : USE-BASED

(Base : 1993-94=10

Basic goods Capital goods Intermediate goods

Month (355.65) (92.57) (265.14)

2007-2008 2008-2009 2007-2008 2008-2009 2007-2008 2008-2009Apr 212.8 221.3 278.4 313.0 249.2 25

May 223.6 230.4 334.7 349.0 264.2 26

Jun 215.8 220.5 358.3 386.3 260.1 26

Jul 216.7 228.2 317.4 374.3 264.1 27

Aug 217.6 226.0 368.6 372.0 273.3 25

Sep 214.0 223.8 389.1 461.3 264.8 25

10


11/56

Oct 227.2 234.3 350.8 361.1 260.5 25

Nov* 220.8 225.9 392.1 383.2 255.7 26

Dec 230.0 420.5 271.7

Jan 235.2 340.0 266.6

Feb 226.4 356.8 259.4

Mar 246.3 543.4 279.3Average

Apr-Nov 218.6 226.3 348.7 375 261.5 26

Growth over the corresponding period of previous year

Nov 5.2 2.3 24.2 -2.3 5.5

Apr-Nov 8.4 3.5 20.9 7.5 9.8

* Indices for Nov 2008 are Quick Estimates.

NOTE : Indices for the months of Aug'2008 and Oct'2008 incorporate updated production data.

INDEX OF INDUSTRIAL PRODUCTION : USE-BASED

(Base : 1993-94=100)Consumer goods Consumer durables Consumer non-durables

Month (286.64) (53.65) (232.99)

2007-2008 2008-2009 2007-2008 2008-2009 2007-2008 2008-2009

Apr 290.9 315.6 341.8 352.9 279.2 307.0

May 288.8 310.3 380.3 391.0 267.7 291.7

Jun 266.9 293.2 357.9 374.4 246.0 274.5

Jul 274.5 290.8 351.5 400.5 256.8 265.6

Aug 266.8 283.9 379.7 394.5 240.8 258.4

Sep 273.4 293.2 388.9 445.7 246.8 258.1

Oct 280.6 274.5 431.9 418.7 245.8 241.3Nov* 273.5 285.6 368.4 353.1 251.7 270.0

Dec 320.8 353.7 313.2

Jan 335.2 383.4 324.1

Feb 327.6 389.6 313.3

Mar 324.0 408.4 304.6

Average

11


12/56

Apr-Nov 276.9 293.4 375.1 376.2 254.4 270.8

Growth over the corresponding period of previous year

Nov -2.9 4.4 -5.5 -4.2 -2 7.3

Apr-Nov 5.3 6 -1.9 4.3 8.1 6.4

* Indices for Nov 2008 are Quick Estimates.

3. TELECOMMUNICATIONS:

The telecommunication sector is growing at a phenomenal rate. Soon, in a months time,

This rise in the total phone subscription to 400 million is on the back of additions seen in

the mobile phones growing at the rate of 4-5% every month.15.41 million wireless

subscribers added in the January 2009 Teledensity already achieved 34.5 mark this

month.

Net addition of wireless and fixed line subscribers in the January 2009 was 15.26 million,

which is almost 1.5 times greater as compared to the addition of 10.66 million in the

corresponding period of last year.

Table-3.1 - Growth of the telecommunication network (in million) April-January

Fixed line

(including WLL

fixed)

Cellular mobile

phones

(including WLL

mobile)

Total phones

1997-98 17.8 0.9 18.71998-99 21.6 1.2 22.81999-00 26.8 1.9 28.72000-01 33.0 3.6 36.62001-02 39.1 6.4 45.62002-03 41.5 13.0 54.5

12


13/56

2003-04 42.6 33.6 76.22004-05 45.9 52.2 98.12005-06 49.7 90.0 139.82006-07 40.4 156.3 196.7

2007-08 37.70 362.30 400Source: Telecom Regulatory Authority of India

4. INFLATION TRENDS:

Wholesale price index (WPI), fell by more than half from its intra-year peak of 12.91 per

cent on August 2, 2008 to 5.60 per cent by January 10, 2009. While prices of primary

articles and manufactured products increased, fuel prices declined (Table 2). In terms ofrelative contribution to decelerating headline inflation between August 2, 2008 and

January 10, 2009, petroleum and basic metals (combined weight of 13.2 per cent in WPI)

together accounted for 79.4 per cent, followed by oilseeds, edible oils & oil cakes (16.4

per cent). Clearly, the fall in commodity prices reflecting global trends has been the key

driver of the sharp fall in WPI inflation although effective management of domestic

demand too has contributed to this moderation.

Table 2: Annual Inflation Rate (%)

Wholesale Price Index (WPI) January 12, 2008

(y-o-y)

January 10, 2009

(y-o-y)

WPI - All Commodities 4.36 5.60WPI - Primary Articles 4.49 11.64WPI - Fuel Group 3.69 -1.32WPI - Manufactured Products 4.57 5.90WPI - Excluding Fuel 4.55 7.53WPI - Excluding Food and Fuel 5.21 6.52Consumer Price Index (CPI) December 2007

(y-o-y)

December 2008

(y-o-y)

1. CPI for Industrial Workers* 5.51 10.452. CPI for Agricultural Labourers 5.90 11.143. CPI for Rural Labourers 5.63 11.144. CPI for Urban Non-Manual Employees* 5.06 10.79* Pertains to November.

13
http://rbi.myiris.com/scripts/NotificationUser.aspx?Id=4796&Mode=0#t2%23t2http://rbi.myiris.com/scripts/NotificationUser.aspx?Id=4796&Mode=0#t2%23t2


14/56

On the other hand, inflation based on various consumer price indices (CPIs) is still in

double digits due to the firm trend in prices of food articles and the higher weight of food

articles in measures of consumer price inflation (Table 2). As the decline in input prices

percolates over time to the prices of manufactured and other products, consumer price

inflation too is expected to soften in the months ahead. For its overall assessment of

inflation outlook for policy purposes, the Reserve Bank continues to monitor the full

Array of price indicators.

5. MONETARY INDICATORS:

Growth in key monetary aggregates reserve money and money supply (M3) in 2008-

09 so far has reflected the changing liquidity positions arising from domestic and global

financial conditions and the monetary policy response to the evolving macroeconomic

developments. Reserve money variations during 2008-09 have largely reflected increase

in currency in circulation and reduction in the cash reserve ratio (CRR) of banks.

Reduction in the CRR has three inter-related effects on reserve money. First, it reduces

reserve money as bankers required cash deposits with the Reserve Bank fall. Second, the

money multiplier rises. Third, with the increase in the money multiplier, M3expands with

a lag. While the initial expansionary effect is strong, the full effect is felt in 4-6 months.

Reflecting these changes, while the year-on-year increase in reserve money as on January

2, 2009 was lower, it was significantly higher when adjusted for the first round effect of

CRR reduction. The annual M3 growth as on January 2, 2009 though lower compared

with last year, was higher than the trajectory projected in the Annual Policy Statement

(Table 4).

14
http://rbi.myiris.com/scripts/NotificationUser.aspx?Id=4796&Mode=0#t2%23t2http://rbi.myiris.com/scripts/NotificationUser.aspx?Id=4796&Mode=0#t4%23t4http://rbi.myiris.com/scripts/NotificationUser.aspx?Id=4796&Mode=0#t2%23t2http://rbi.myiris.com/scripts/NotificationUser.aspx?Id=4796&Mode=0#t4%23t4


15/56

Table 4: Annual Variations in Monetary Aggregates (%)

Item Annual Variations (y-o-y)

January 4, 2008 January 2, 2009Reserve Money 28.8 7.4

Reserve Money(adjusted for CRR changes)

18.1 19.4

Currency in Circulation 15.6 16.6Money Supply (M3) 22.6 19.6M3 (Policy Projection)* 17.0-17.5 16.5-17.0Money Multiplier 4.66 5.20* Policy projections are for the financial year as indicated in the Annual

Policy Statements of the respective financial years.

Since September 2008, monetary conditionshave been evolving following changes in monetary policy in response to global

developments and also due to slackening of domestic demand conditions. As the Reserve

Bank had to provide dollar liquidity, its net foreign exchange assets (NFEA) contracted.

The Reserve Bank sought to compensate the fall in NFEA by expanding its net domestic

assets (NDA) through: (i) buy-back of securities held under the market stabilisation

scheme (MSS); (ii) purchase of oil bonds; (iii) enlargement of the refinance window; and

(iv) repo operations under the liquidity adjustment facility (LAF). Thus, a notable feature

of monetary operations during the third quarter of 2008-09 was the substitution of foreign

assets by domestic assets to keep the overall liquidity conditions comfortable. Liquidity

conditions have indeed improved since mid-November 2008 as reflected in daily

absorption under the LAF reverse repo and moderation in market interest rates.

7. FISCAL TRENDS:

As a proportion of the budget estimates (BE), both tax and non-tax revenue receipts of

the Central Government for the period April-November 2008 were lower than those inthe corresponding period of the previous year. On the other hand, both revenue

expenditure and total expenditure, as a proportion to the BE, were higher than a year ago.

Consequently, the revenue deficit and the gross fiscal deficit (GFD) were significantly

15


16/56

higher during April-November 2008 as compared with the corresponding period of the

previous year (Table 3).

Table 3: Fiscal Position of the Central Government

Item April-November

Percentage to BudgetEstimates Growth (%)2007-08 2008-09 2007-08 2008-091. Revenue Receipts 56.5 52.2 24.2 14.72. Gross Tax Revenue 55.5 52.0 25.2 17.53. Tax Revenue (Net) 54.6 50.0 24.5 15.14. Non-Tax Revenue 65.7 64.1 22.7 13.25. Total Expenditure 60.5 65.8 22.2 20.1

(58.7) (11.7) (31.5)

6. Revenue Expenditure 61.8 69.3 12.7 32.47. Capital Expenditure 54.5 40.7 116.3 -43.4

(37.8) (1.2) (21.0)

8. Revenue Deficit 97.9 256.2 -17.2 102.09. Fiscal Deficit 63.8 132.4 -11.0 83.3(63.0) (-12.2) (85.7)

Note : Figures in parentheses are net of transactions relating to transfer of the

Reserve Banks stake in State Bank of India to the Government.

For 2008-09, the Central Government had budgeted gross market

borrowing of Rs.1,78,575 crore and net market borrowing of Rs.99,000 crore.

Subsequently, the Government presented two supplementary demands, as a result ofwhich the market borrowing programme of the Central Government was raised to

Rs.2,52,154 crore (gross) and Rs.1,75,374 crore (net). Against this enhanced borrowing

programme, market borrowing of the Central Government was Rs.2,22,154 crore (gross)

and Rs.1,51,697 crore (net) during 2008-09 so far (up to January 23, 2009). The weighted

average yield and weighted average maturity of central government dated securities

issued during 2008-09 (up to January 23, 2009) were at 8.03 per cent and 14.59 years

respectively as compared with 8.10 per cent and 14.38 years in 2007-08. The State

Governments have borrowed a net amount of Rs.46,327 crore up to January 23, 2009.

The evolving scenario raises some concerns on the extent of stress on the fisc in the

current year emanating from several factors. First, the Centre is expected to suffer

revenue losses from lower direct tax collection on account of the economic slowdown.

16


17/56

Second, the Centre is likely to lose further revenues worth about 0.6 per cent of GDP due

to cuts in excise and customs duties. Third, there has been a disproportionate growth in

expenditure of the Central Government during April-November 2008, particularly in

respect of revenue expenditure arising out of increase in subsidies, disbursements as well

as implementation of the recommendations of the Sixth Pay Commission and the farm

debt waiver scheme. The net cash outgo indicated in supplementary demands for grants

would be of the order of 2.8 per cent of GDP (Rs.1,50,310 crore). Thus, additional

expenditure coupled with foregone revenue would raise the fiscal deficit from the budget

estimate of 2.5 per cent to at least 5.9 per cent of

GDP. In addition, special bonds for Rs.44,000 crore and Rs.14,000 crore, amounting to

1.1 per cent of GDP, have been issued to oil marketing companies and fertiliser

companies respectively during 2008-09 (up to January 23, 2009). In its latestReview of

the Economy (January 2009), the Economic Advisory Council to the Prime Minister has

placed the consolidated fiscal deficit of the Central Government, including full issuances

of oil and fertiliser bonds, at 8.0 per cent of GDP for 2008-09.

The consolidated budgeted revenue surplus of the States in 2008-09 may not, in fact,

materialise. Consequently, the consolidated fiscal deficit of the States is expected to rise

to 2.6 per cent of GDP. While some of the increase in the revenue and fiscal deficits is on

account of post-budget expenditure commitments such as payment of arrears resulting

from the Sixth Pay Commission Award, a substantial increase is also due to the economic

downturn arising from the impact of the global financial crisis. Although the fiscal

stimulus packages have meant deviation from the roadmap laid out by the Fiscal

Responsibility and Budget Management (FRBM) Act, reversing the consolidation

process of the last several years, they were warranted under the prevailing circumstances.

It is critically important, however, that the Centre and States re-anchor to a revised

FRBM mandate once the immediacy of the crisis is behind us

8. FOREIGN TRADE :

Indias current account deficit (CAD) of the balance of payments (BoP) widened in

the first half of 2008-09 in comparison with the corresponding period of the previous

year due to a large trade deficit, reflecting high oil prices even as private transfers and

17


18/56

software export earnings were sustained. As net capital flows declined sharply, the

overall balance of payments position turned marginally negative during the first half

of 2008-09 as against a large surplus in the corresponding period of the previous year

(Table 12). Import growth had moderated during October-November 2008 reflecting

the fall in international oil prices and slowing domestic demand. During the same

period, export growth turned negative reflecting slowing global demand. Going

forward, it is expected that imports may slow down faster than exports.

Table 12: Indias Balance of Payments(US $ billion)

April-September 2007-08 2008-09

Exports 72.6 96.7Imports 115.9 165.9Trade Balance - 43.2 - 69.2Invisibles, net 32.3 46.8Current Account Balance - 11.0 - 22.3Capital Account* 51.4 19.8Change in Reserves# (-) 40.4 (+) 2.5# On a BoP basis (excluding valuation): (-) indicates increase; (+) indicates decrease.

* Including errors and omissions.

The reversal of capital flows has raised concerns about management of

the BoP, particularly with reference to outstanding external debt with residual maturity of

less than one year. These concerns are somewhat misplaced as the following analysis will

show. Indias external debt with residual maturity of less than one year as at end-March

2008 was estimated at around US $ 85 billion (as per revised data), which would mature

during the financial year 2008-09. Sovereign debt and commercial borrowings are most

likely to be rolled over during 2008-09. Indeed, the BoP data for the first half of the year

(April-September 2008) indicate net positive accretions beyond roll-over under both

these heads. Current trends indicate that under NRI deposits, not only will the maturing

debt be rolled over but there will be net accretions as a result of the upward adjustment in

interest rate ceilings on such deposits. Here again, available data up to December 2008

show net accretions. That leaves trade credit of the order of US $ 43.2 billion to be repaid

18


19/56

during 2008-09. Of this, as much as US $ 28.1 billion has already been disbursed during

April-November 2008 leaving a balance of US $ 15.1 billion. There are reports that large

inflows are in the pipeline on account of commitments of buyers credit by the importers

and oil companies. Even conservatively projecting that only a small portion of this

balance would be rolled over, Indias external payment situation remains stable.

The overall approach to the management of Indias foreign

exchange reserves takes into account the changing composition of the balance of

payments and endeavours to reflect the liquidity risks associated with different types of

flows and other requirements. As capital inflows during 2007-08 were far in excess of the

normal absorptive capacity of the economy, there was substantial accretion to foreign

exchange reserves by US $ 110.5 billion. The foreign exchange reserves declined by US$ 23.4 billion from US $ 309.7 billion as at end-March 2008 to US $ 286.3 billion by

end-September 2008 largely reflecting valuation effects. Excluding valuation effects, the

decline was US $ 2.5 billion. Between October 2008 and January 16, 2009 foreign

exchange reserves declined by US $ 34.1 billion to US $ 252.2 billion, including

valuation effects. Indias current level of foreign exchange reserves remains comfortable.

9. CAPITAL INFLOWS:

Net capital flows during 2008-09 were lower than those in the corresponding period of

2007-08, mainly on account of outflows by foreign institutional investors ($7.3 billion)

during 2008-09 (up to October 10, 2008) in contrast to net FII inflows ($ 18.9 billion)

during the corresponding period of 2007-08. On the other hand, net FDI flows into India

were placed higher at $16.7 billion during April-August 2008 against $8.5 billion during

April-August 2007. The funds raised through issuances of ADRs/GDRs abroad were at

$1.1 billion during April-August 2008 ($2.8 billion in April-August 2007). NRI deposits

recorded a net inflow of $273 million during April-August 2008 mainly due to inflows

under the rupee deposit accounts as against a net outflow ($168 million) during April-

August 2007, said the report.

19


20/56

With net capital flows being higher than the current account deficit, the overall balance of

payments recorded a surplus of $2.2 billion during the first quarter of 2008-09 ($11.2

billion in the first quarter of 2007-08).

10. CREDIT CONDITION

The year-on-year (y-o-y) growth in non-food bank credit at 23.9 per cent as on January

2, 2009 was higher than that of 22.0 per cent as on January 4, 2008 (Table 5). Increase in

total flow of resources from the banking sector to the commercial sector (i.e., non-food

bank credit together with investments in shares/bonds/debentures and commercial papers

issued by public sector/private sector companies) was also higher at 23.4 per cent as

compared with 21.7 per cent a year ago. Despite the expansion in bank credit, there was a

perception of lack of credit availability. This could be attributed to reduced flow of funds

from non-bank sources, notably the capital market and external commercial borrowings.

During 2008-09 so far, the total flow of resources to the commercial sector from banks

and other sources was marginally lower than in the previous year reflecting contraction of

funds from other sources (Table 6).

Table 5: AnnualVariations in Banking Indicators (%)Item January 4, 2008

(y-o-y)

January 2, 2009

(y-o-y)

Aggregate Deposits 25.1 21.2Bank Credit 21.4 24.0Non-food Bank Credit 22.0 23.9Total flow of Resources from

Banks to the Commercial Sector

21.7 23.4

SLR Investments 25.8 19.2

Incremental Credit-Deposit Ratio 63.1 81.4

Table 6: Flow of Financial Resources to the Commercial Sector(Rs. crore)

Item 2007-08 2008-09(Up to January (Up to January

20


21/56

4, 2008) 2, 2009)From Banks 2,24,921 2,93,243From Other Sources* 2,74,563 1,91,470Total Resources 4,99,484 4,84,713* Includes borrowings from financial institutions and NBFCs as well as

resources mobilised from the capital market and by way of ECBs, FCCBs,ADRs/GDRs, FDI and short-term credit as per the latest available data,

adjusted for double counting.

At a disaggregated level, the year-on-year increase in bank credit to industry as of

December 2008 was sharply higher than that in the previous year reflecting the

substitution effect of other sources of funding by bank credit (Table 7).

Table 7: Annual Sectoral Flow of Credit

Sector As on December 21, 2007As on December 19, 2008

(y-o-y) (y-o-y) Amount Variations Amount Variations (Rs. crore) (%) (Rs. crore) (%)

Agriculture 38,139 19.3 53,612 22.7Industry 1,56,192 24.9 2,36,064 30.2Real Estate 13,621 35.8 24,827 48.1Housing 31,780 14.6 21,989 8.8

NBFCs 22,953 59.6 24,668 40.1Overall

Credit

3,54,802 21.8 4,90,199 24.8

There has been a noticeable variation in credit expansion across bank groups. Expansion

of credit by public sector banks was much higher this year than in the previous year,

while credit expansion by foreign and private sector banks was significantly lower. The

relatively slower pace of credit expansion by foreign and private sector banks has also

added to the perception of inadequate credit flow in the system. There has also been

perceptible deceleration in growth of deposits with private and foreign banks (Table 8).

Table 8: Bank Group-wise Deposits and Credit

Bank Group Annual Growth (y-o-y) (%) As on January As on January

2, 2009

21


22/56

4, 2008

Deposits

Public Sector Banks 24.2 24.2Foreign Banks 34.1 12.1Private Sector Banks 26.9 13.4

Scheduled CommercialBanks *

25.1 21.2

CreditPublic Sector Banks 19.8 28.6Foreign Banks 30.7 16.9Private Sector Banks 24.2 11.8Scheduled Commercial Banks * 21.4 24.0* Including regional rural banks (RRBs).

Commercial banks holdings of SLR securities became more liquid on account of two

factors. First, banks were permitted to use SLR securities to the tune of 1.5 per cent of

their net demand and time liabilities (NDTL) under the LAF to meet the funding

requirements of mutual funds, non-banking finance companies (NBFCs) and housing

finance companies (HFCs). Second, the reduction in SLR by one percentage point to 24.0

per cent of NDTL in November 2008 released funds for credit deployment. Commercial

banks SLR holdings declined from 27.8 per cent (28.4 per cent adjusted for LAF) of

NDTL in March 2008 to 25.8 per cent (28.1 per cent adjusted for LAF) in mid-October

2008 reflecting the banks reliance on the repo facility under the LAF as liquidity

conditions tightened. Reversing this trend by early January 2009, banks SLR holdings

increased to 28.9 per cent of NDTL (27.1 per cent adjusted for LAF) reflecting improved

liquidity conditions and increased government market borrowings. Bank deposit and

lending rates, which had firmed up during the current financial year up to October 2008,

started easing from November 2008. Between November 2008 and January 2009, all

public sector banks, several private sector banks and some foreign banks reduced theirdeposit and lending rates. The magnitude of reduction by public sector banks was larger

than that by foreign and private sector banks (Table 9).

22


23/56

Table 9: Deposit and Lending Rates of Banks (%)Bank Group/Maturity

Domestic Deposit Rate

October 2008 January 2009

Public Sector Banks61-90 days 5.25-6.00 5.25-6.00180 days 1 year 8.00-8.75 7.25-8.001-3 years 9.50-10.50 8.00-9.00> 3 years 8.75-9.75 8.25-8.50Private Sector Banks61-90 days 4.00-6.25 4.00-5.50

180 days 1 year 8.00-9.00 7.75-8.001-3 years 9.00-10.10 8.00-9.00> 3 years 8.50-9.75 8.00-8.75Foreign Banks61-90 days 6.00-8.50 5.25-7.00180 days 1 year 7.00-9.50 7.50-9.001-3 years 7.50-9.00 7.50-8.50> 3 years 7.50-10.00 7.50-7.75Benchmark Prime Lending Rate

(BPLR)Public Sector Banks 13.75-14.00 12.00-12.50Private Sector Banks 15.25-17.25 14.75-16.75Foreign Banks 14.25-15.50 14.25-15.50Note: Data relate to five major public sector banks, four private sector

banks and three foreign banks.

The interest rate response to monetary policy easing has been faster in the money and

bond markets as compared to the credit market because of several structural factors. First,

the administered interest rate structure on small savings could potentially constrain the

reduction in deposit rates below some threshold. Second, a substantial portion of bank

deposits is mobilised at fixed interest rates with an asymmetric contractual relationship.

During the upturn of the interest rate cycle, depositors have the flexibility to prematurely

terminate the existing deposits and re-deposit the funds at higher interest rates. However,

in the downturn of the interest rate cycle, banks have to necessarily carry these deposits at

23


24/56

higher rates of interest till their maturity. Third, competition among banks for wholesale

deposits for meeting the higher credit demand in the upswing leads to an increase in the

cost of funds. Fourth, linkage of concessional lending rates to banks BPLRs makes

overall lending rates less flexible. Fifth, persistence of the large market borrowing

programme of the government hardens interest rate expectations. Sixth, with increase in

risk aversion, lending rates tend to be high even during a period with falling credit

demand. From the real economy perspective, however, for monetary policy to have

demand inducing effects, lending rates will have to come down.

Notwithstanding the various factors that impede monetary transmission, market interest

rates do respond to changes in policy interest rates. As such, current deposit and lending

rates have significant room for further reduction. Interest rates in the money and bond

markets have already declined perceptibly since their peaks in October 2008 (Table 10).Major public sector banks have also reduced their term deposit rates in the range of 50-

150 basis points. Benchmark prime lending rates (BPLRs) of major public sector banks

have come down by 150-175 basis points. Major private sector banks have reduced their

BPLRs by 50 basis points, while major foreign banks are yet to do so. As a result of

several measures initiated by the Reserve Bank since mid-September 2008, banks cost of

funds would come down. This should encourage banks to reduce their lending rates in the

coming months.

OVER ALL SCENARIO

At the heart of the global financial crisis lie the non-functional and frozen financial

markets. In sharp contrast to their international counterparts, the financial system in India

has been resilient and stable. Barring some tightness in liquidity during mid-September to

24


25/56

early October, the money, foreign exchange and government securities markets have

been orderly as reflected in market rates, spreads and transaction volumes relative to

those observed during normal times. Indias banking system remains healthy, well-

capitalised, resilient and profitable. Credit markets have been functioning well and banks

have been expanding credit, notwithstanding the perceptions in some quarters of lack of

adequate credit from the banks to the commercial sector. Over the last five years, India

clocked 8.8 per cent average annual growth, driven largely by domestic consumption and

investment even as the share of net exports rose. While the benign global environment,

easy liquidity and low interest rates helped, at the heart of Indias growth have been its

growing entrepreneurial spirit and rise in productivity. These fundamental strengths

continue to be in place. Nevertheless, the global crisis will dent Indias growth trajectory

as investments and exports slow. Clearly, there is a period of painful adjustment ahead ofus. However, once the global economy begins to recover, Indias turnaround will be

sharper and swifter, backed by our strong fundamentals and the untapped growth

potential. Meanwhile, the challenge for the Government and the Reserve Bank is to

manage the adjustment with as little pain as possible.

Since September 2008, international developments have largely circumscribed domestic

policy responses. There have been severe disruptions in the international money and

foreign exchange markets since September 2008. Policymakers in governments, central

banks and in other regulating agencies of financial institutions around the world

responded to the crisis with aggressive, radical and unconventional measures to restore

calm and confidence in financial markets and bring them back to normalcy. The

immediate challenge was to maintain financial stability, which moved up in the hierarchy

ofobjectives.

FINANCIAL MARKET:

It is needless to say that the financial markets (banks and the securities markets) finance

economic growth. They channelise savings to investments and thereby decouple these

two activities. As a result, savers and investors are not constrained by their individual

25


26/56

abilities, but by the economys ability to invest and save respectively, which inevitably

enhances savings and investment in the economy. To the extent the growth of an

economy depends on the rate of savings and investment, financial markets promote

economic growth.

TYPES OF FINANCIAL MARKETS:

1. Money Market

2. Capital Market

a) Primary Market

b) Secondary Market

i. Regional Stock Exchanges

ii. OTCEI

1. MONEY MARKET: Money market is a market for debt securities that pay off in

the short term usually less than one year, for example the market for 90-days treasury

bills. This market encompasses the trading and issuance of short term non equity debt

instruments including treasury bills, commercial papers, bankers acceptance, certificates

of deposits, etc.

2. CAPITAL MARKET: Capital market is a market for long-term debt and equityshares. In this market, the capital funds comprising of both equity and debt are issued and

traded. This also includes private placement sources of debt and equity as well as

organized markets like stock exchanges. Capital market can be further divided into

primary and secondary markets.

a.) PRIMARY MARKET: The primary is that part of the capital markets that

deals with the issuance of new securities. Companies, governments or public

sector institutions can obtain funding through the sale of a new stock or bond

issue. This is typically done through a syndicate of securities dealers. In the

case of a new stock issue, this sale is an initial public offering (IPO).

26


27/56

b.) SECONDARY MARKET: Secondary Market refers to a market where

securities are traded after being initially offered to the public in the primary market

and/or listed on the Stock Exchange. Majority of the trading is done in the secondary

market. Secondary market comprises of equity markets and the debt markets.

For the general investor, the secondary market provides an efficient platform for

trading of his securities. For the management of the company, Secondary equity

markets serve as a monitoring and control conduitby facilitating value-enhancing

control activities, enabling implementation of incentive-based management contracts,

and aggregating information (via price discovery) that guides management decisions.

Secondary market could be either auction or dealer market. While stock exchange is

the part of an auction market, Over-the-Counter (OTC) is a part of the dealer market.

(i) REGIONAL STOCK EXCHANGES: A stock exchange in India is

recognized by the Central Government under section 4 of Securities Contracts

(Regulation) Act, 1956 (SCRA). Over a period of time, stock exchanges came

to be set up almost in every State. These stock exchanges set up regionally

were known as the Regional Stock Exchanges (RSEs). The objective of

establishing the RSEs was to enable regional companies in the respective

geographical locations to raise capital and to help spread the equity cultamongst investors across the length and breadth of the country.

(ii)OTCEI: Over the Counter Exchange of India was incorporated in 1990 as a

Section 25 company under the Companies Act 1956 and is recognized as a

stock exchange under Section 4 of the Securities Contracts Regulation Act,

1956. The Exchange was set up to aid enterprising promoters in raising

finance for new projects in a cost effective manner and to provide investors

with a transparent & efficient mode of trading.

Modelled along the lines of the NASDAQ market of USA, OTCEI introduced

many novel concepts to the Indian capital markets such as screen-based

nationwide trading, sponsorship of companies, market making and scripless

trading. As a measure of success of these efforts, the Exchange today has 115

listings.

27


28/56

BOMBAY STOCK EXCHANGE

VISION: Emerge as the premier Indian stock exchange by establishing global

benchmarks

28


29/56

INTRODUCTION:Bombay Stock Exchange Limited is the oldest stock exchange in

Asia with a rich heritage. Popularly known as "BSE", it was established as "The Native

Share & Stock Brokers Association" in 1875. It is the first stock exchange in the country

to obtain permanent recognition in 1956 from the Government of India under the

Securities Contracts (Regulation) Act, 1956.The Exchange's pivotal and pre-eminent role

in the development of the Indian capital market is widely recognized and its index,

SENSEX, is tracked worldwide. Earlier an Association of Persons (AOP), the Exchange is

now a demutualised and corporatised entity incorporated under the provisions of the

Companies Act, 1956, pursuant to the BSE (Corporatisation and Demutualisation)

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

demutualisation, the trading rights and ownership rights have been de-linked effectively

addressing concerns regarding perceived and real conflicts of interest. The Exchange is

professionally managed under the overall direction of the Board of Directors. The Board

comprises eminent professionals, representatives of Trading Members and the Managing

Director of the Exchange. The Board is inclusive and is designed to benefit from the

participation of market intermediaries. The Exchange has a nation-wide reach with a

presence in 417 cities and towns of India. The systems and processes of the Exchange are

designed to safeguard market integrity and enhance transparency in operations. During

the year 2004-2005, the trading volumes on the Exchange showed robust growth and inJanuary 2008 it scaled new heights of 20000 mark then it started crashing sharply due to

global recession and negative market sentiments which led it back to 8000 mark. The

Exchange provides an efficient and transparent market for trading in equity, debt

instruments and derivatives. The BSE's On Line Trading System (BOLT) is a proprietory

system of the Exchange and is BS 7799-2-2002 certified. The surveillance and clearing &

settlement functions of the Exchange are ISO 9001:2000 certified.

SENSEX - BAROMETER OF INDIAN CAPITAL MARKETS

INTRODUCTION: For the premier Stock Exchange that pioneered the stock

broking activity in India, 128 years of experience seems to be a proud milestone. A lot

29


30/56

has changed since 1875 when 318 persons became members of what today is called "The

Stock Exchange, Mumbai" by paying a princely amount of Re1Since then, the country's

capital markets have passed through both good and bad periods. The journey in the 20th

century has not been an easy one. Till the decade of eighties, there was no scale to

measure the ups and downs in the Indian stock market. The Stock Exchange, Mumbai

(BSE) in 1986 came out with a stock index that subsequently became the barometer of

the Indian stock market.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.The Index was initially calculated based on the "FullMarket Capitalization" methodology but was shifted to the free-float methodology with

effect from September 1, 2003. The "Free-float Market Capitalization" methodology of

index construction is regarded as an industry best practice globally.

SENSEX Calculation Methodology

SENSEX is calculated using the "Free-float Market Capitalization" methodology. As perthis methodology, the level of index at any point of time reflects the Free-float 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. This market capitalization is further multiplied by the free-float

factor to determine the free-float market capitalization.

.

NATIONAL STOCK EXCHANGE

ORIGIN: The National Stock Exchange of India 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. In April 1993, it was recognized as a stock exchange

30


31/56

under the Securities Contracts (Regulation) Act, 1956. NSE commenced operations in the

Wholesale Debt Market (WDM) segment in June 1994. The Capital Market (Equities)

segment of the NSE commenced operations in November 1994, while operations in the

Derivatives.

The National Stock Exchange of India Limited (NSE), is a Mumbai-based stock

exchange. It is the largest stock exchange in India and the third largest in the world in

terms of volume of transactions. NSE is mutually-owned by a set of leading financial

institutions, banks, insurance companies and other financial intermediaries in India but its

ownership and management operate as separate entities. As of 2006, the NSE VSAT

terminals, 2799 in total, cover more than 1500 cities across India. In March 2008, the

NSE indices started crashing due to global meltdown and sentiments and it led it from

6000 mark to back it at 2600 mark. It is the second-largest stock market in South Asia interms of market-capitalization.

INDICES: NSE also set up as index services firm known as India Index Services &

Products Limited (IISL) and has launched several stock indices, including:

S&P CNX Nifty

CNX Nifty Junior

CNX 100 (= S&P CNX Nifty + CNX Nifty Junior)

S&P CNX 500 (= CNX 100 + 400 major players across 72 industries)

CNX Midcap (introduced on 18 July 2005 replacing CNX Midcap 200)

S&P CNX Nifty: The S&P CNX Nifty (nicknamed Nifty 50 or simply Nifty) (Ticker

NSE:^NSEI), is the leading index for large companies on the National Stock Exchange of

India. S&P CNX Nifty is a well diversified 50 stock index accounting for 22 sectors of

the economy. It is used for a variety of purposes such as benchmarking fund portfolios,

index based derivatives and index funds.

CURRENT STATUS OF CAPITAL MARKETS IN INDIA:

31


32/56

The overnight interest rates generally ruled above the ceiling of the LAF rate corridor at

the beginning of October 2008 when the domestic money and foreign exchange markets

came under pressure. The overnight interest rates eased in mid-October 2008 in response

to the successive monetary easing measures by the Reserve Bank which alleviated the

liquidity pressures. The overnight interest rates have remained below the upper bound of

the LAF corridor since November 3, 2008. Interest rates on various other segments of the

money market and government securities market have also softened markedly (Table 10).

Table 10: Interest Rates (%)

Segment/Instrument October 2008January 23, 2009

Call Money 9.90 4.21CBLO 7.73 3.85

Market Repo 8.40 4.24Commercial Paper 14.17 10.98*Certificates of Deposit 10.00 8.85*91-day Treasury Bills 7.44 4.6710-year Government Securities 7.45 5.87* Pertains to December 2008.

The rupee had appreciated against major currencies in 2007-08 due to large capital

inflows. It depreciated during 2008-09 so far reflecting extraordinary developments in

international financial markets and portfolio outflows by foreign institutional investors

(FIIs). It has remained range-bound since November 2008 (Table 11).

Table 11: Rupee Exchange RateRupee per Unit of Range AprilNovemberJanuary*

2008 2008 2009US Dollar Maximum40.46 50.52 49.19

Minimum39.89 47.18 48.37Euro Maximum63.80 64.68 68.09

Minimum62.25 60.57 63.60Pound Sterling Maximum79.94 80.26 74.42

Minimum78.66 72.14 67.61100 Japanese Yen Maximum39.58 53.12 55.58

Minimum38.36 47.31 51.90* Up to January 23, 2009.

32


33/56

Equity markets weakened sharply till end-October 2008 in tandem with global stock

markets, particularly Asian markets, reflecting further deterioration in the global financial

market sentiment, FII outflows, slowdown in industrial growth and lower corporate

profits. The BSE Sensex declined from an all-time high of 20873 on January 8, 2008 to a

low of 8451 on November 20, 2008. The equity market has since remained generally

range-bound; the BSE Sensex was at 8674 on January 23, 2009. The outlook for the

domestic financial markets will be determined largely by the developments in global

financial markets and domestic liquidity conditions. The banking system has been in

surplus liquidity mode since mid-November 2008. The pressure on the exchange rate of

the rupee has eased due to moderation in capital outflows. In addition, the decline in

global commodity prices, particularly crude oil, is expected to further ease the pressureon foreign currency on account of oil imports.

Chapter- 3

Review

33


34/56

of

LITERATURE

Indian Capital Market since liberalizations has undergone tremendous changes and has

evolved as a vibrant system of investment flows. A dynamic capital market is an

important segment of the financial system of any country as it plays a significant role in

mobilizing savings and channeling them for productive purposes.In recent times, studies

on the relationship between macroeconomic variables and national stock market have

been the cornerstone of most economic literature. Among the many macroeconomic

variables, the relationship between money supply and stock prices has been widely

studied because of the belief that money supply changes have important direct effects

through portfolio changes, and indirect effects through their effect on real economic

activity, which in turn postulated to be the fundamental determinants of stock prices.Despite extensive investigations, the precise nature of the relationship between money

supply and the stock market remains ambiguous.Other macroeconomic variables apart

from money supply are equally important because there is a strong relationship between

stock returns with other macroeconomic variables, notably, inflation and national output

as well as industrial production. The inflation rate is an important element in determining

34


35/56

stock returns due to the fact that during the times of high inflation, people recognize that

the market is in a state of economic difficulty. People are laid off work, which could

cause production to decrease. When people are laid off, they tend to buy only the

essential items. Thus production is cut even further. This eats into corporate profits,

which in turn makes dividends diminish. When dividends decrease, the expected return of

stocks decrease, causing stocks to depreciate in value.

CHAPTER- 4

RESEARCH

METHODOLOGY

35


36/56

OBJECTIVES:

To know that whether the Indian stock market acts as a barometer of the Indian

economys growth and development or not.

To find out the correlation between macroeconomic variables and stock market

indices.

SCOPE: The scope of the study includes BSE Sensitive Index, S&P CNX NIFTY andthe macroeconomic variables, viz.,

Index of industrial production

Agriculture production

Service sectors contribution towards GDP

Money supply

Per capita income

Net domestic savings

Market capitalization

Exchange rate of Indian Rupee vis--vis US Dollar

TECHNIQUES USED:

36


37/56

Correlation test has been applied to establish the relationship between the Indian stock

indices and macroeconomic variables.

Trend of movement of the stock indices against the macroeconomic variables has

been examined with the help of line charts.

PERIOD: The data for the purpose is restricted to the period between 1995-96 to

2008-09.

CHAPTER- 5

analysisand

37


38/56

interpretation

1.) CAUSAL RELATIONSHIP BETWEEN THE STOCK MARKET

INDICES AND THE GDP AT FACTOR COST.

38


39/56

GDP:(SENSEX,NIFTY)

-100-80

-60

-40

-20

0

20

40

60

80

100

120

140

160

180

200

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

YEARS

PERCENTAGE

NIFTY

GDP

SENSEX

Source: Economic Survey 2008

CORRELATION:

SENSEX S&P CNX NIFTYGDP AT FACTOR COST 0.721198776 0.740981009

Moderate degree of positive correlation.

INTERPRETATION:

Does Sensex trace GDP growth?

39


40/56

An answer to this question is that in the series of fourteen years of data of growth rate of

GDP and both indices, there is a clear correlation between them.

On an annual basis in the last ten years the BSE Sensex and S&P CNX NIFTY have had

a very volatile trend but GDP at factor cost has been growing at a steady rate because

GDP of the economy is the collective output of the agriculture, industrial and services

sector.

Economy goes through cycles of recovery, peak, slowdown and depression over the

longer period of time. Similarly, stock markets also have cycles, depending on how the

economy is performing. Therefore, even if India's GDP grows at 12% in one year, the

Sensex may not gain a similar percentage during the year. However, the relationship may

hold true over the longer-term.The often repeated story of developments in stock markets continues to be breath-taking.

From quarterly average of 3138 points in Oct-Dec 2001, within about six years, the

Sensex has reached an average level of 20000 points in Dec 2008. Nobody should think

that the Sensex is up simply because India's GDP has accelerated to 9% in the first half of

the year.


INDICES AND THE AGRICULTURE PRODUCTION.

40


41/56

-120

-100

-80

-60

-40

-20

0

20

40

60

80

100

120140

160

180

200

PERCENTAGE

YEARS

AGRICULTURE;(SENSEX,NIFTY)

NIFTY

SENSE

AGRICTURE


CORRELATION:

SENSEX S&P CNX NIFTYAGRICULTURE

PRODUCTION

0.635073379 0.656944965

AGRICULTURE SENSEX: Moderate degree of positive correlation.

AGRICULTURE NIFTY: Moderate degree of positive correlation.

INTERPRETATION:

There is a moderate degree of correlation between the agriculture production and the

stock market indices. It did not come out with a high degree of correlation simply

because agriculture sector of the economy indirectly helps in the growth of the market

indices. As we all know that farmers do not go to capital market or they do not invest

41


42/56


43/56

-150

-100

-50

0

50

100

150

200

250

percentage

years

Industry(sensex,nifty)

nifty

INDUST

SENSE


CORRELATION:

SENSEX S&P CNX NIFTYINDUSTRIAL

PRODUCTION

0.671820723 0.695490596

INDUSTRY SENSEX: Moderate degree of positive correlation.

INDUSTRY NIFTY: Moderate degree of positive correlation.

INTERPRETATION:

There is a clear correlation between the stock market indices and the industrial

production in the economy. It means industrial production puts a direct impact on the

capital market. It could be because of two main reasons. Firstly, it has been growing at a

43


44/56

faster rate than the agriculture sector. Its growth rate is estimated at 11.1 per cent in the

2007-08 as compare to 9.58 per cent in the 2005-06. Secondly, capital market includes

number of manufacturing companies. So, with the growth rate in the industrial sector,

capital market also grows.

In November, the index of industrial production (IIP) showed very dismal performance as

people bought less cars, mobiles, houses, and consumer durables. With salary growth

reducing, expenditure across sectors, consumption is decling; businessmen, responding to

decrese in demand for their goods, are investing less in factories and industrial

capacities, pushing demand down to lower level.

As countries develop economically, the structures of economic and social organisationschange. At first, the industrial sector tends to grow at the expense of the agriculture

sector, and subsequently the service sector increases as a share of the economy. As the

population becomes more urbanised, traditional social structures may become less

important, and the distribution of income may change.

4.) CAUSAL RELATIONSHIP BETWEEN THE STOCK MARKETINDICES AND THE SERVICE SECTORS CONTRIBUTION

TOWARDS GDP.

44


45/56

SERVICE SECTOR (SENSEX,NIFTY)

-100

-50

0

50

100

150

200

250

1995

-96

1996

-97

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

2008

-09

YEARS

PERCENTAGE

NIFTY

SERVICE SECTOR

SENSEX


CORRELATION:

SENSEX S&P CNX NIFTYSERVICE SECTOR 0.619711 0.699453

SERVICE SECTOR-SENSEX: Moderate degree of positive correlation.

SERVICE SECTOR-NIFTY: Moderate degree of positive correlation.

INTERPRETATION:

There has been a moderate degree of correlation between stock market indices and

service sectors contribution in the economys GDP. It is so because the contribution of

the service sector is highest, as compare to other sectors, in the GDP of the economy and

it has been growing at the fast rate too.

45


46/56

The services sector has been the key driver of our growth, registering growth rates of

11.98, 11.2% over the last two years. We expect the growth rate to moderate marginally

to 14% this year since some of the sub-sectors such as communication which saw very

rapid growth in recent years are likely to confront subdued demand.


INDICES AND THE MONEY SUPPLY.

46


47/56

CORRELATION:

SENSEX S&P CNX NIFTYBROAD MONEY 0.82411 0.836771

BROAD MONEY-SENSEX: High degree of positive correlation.

BROAD MONEY-NIFTY: High degree of positive correlation.

INTERPRETATION:

47


48/56

Last ten year data of broad money and indices show a clear correlation between them.

Where broad money includes: Currency with the public + Demand deposits with banks +

Time deposits with banks + Other deposits with RBI.

Despite having a steady growth in the broad money, indices have had a volatile trend in

the last ten years. In this data we can easily trace out that broad money has been

increasing continously.Correlation shows that money supply does put an impact on the

stock market because if broad money increases in the economy, it would increase the

money in the hands of the public which would increase the purchasing power or the real

money of the public. No doubt at all that it will also lead to an inflation in the economy

but this issue is often well being taken care by the government with the help of monitory

policy.

Increase in the broad money supply up to September 2008 was 13%. During this period

both commercial and government borrowings also increased by 4.3% and 9.2%

respectively. Aggregate deposits of scheduled commercial banks rose by 9.2%

But recent reduction in the Repo rate might lead to rise in the money supply growth and

decline in lending rates in the coming months.


INDICES AND THE PER CAPITA INCOME

48


49/56

Source: India 2008

CORRELATION:

SENSEX S&P CNX NIFTYPER CAPITA INCOME 0.77701817 0.790154883

PCI SENSEX: High degree of positive correlation.

PCI NIFTY: High degree of positive correlation.

INTERPRETATION:

49


50/56

There is a very high degree of correlation between Sensex and per capita income

although per capita income is known to be better measure for the economic development

but above drawn graph shows that this macroeconomic variable does affect the growth

rate of capital market indices.

. The per capita income at current prices is estimated at Rs. 38084 during 2008-09 as

against Rs. 33284 in the previous year, a growth of 14 per cent.

But the per capita income has a 0.953515 correlation with the GDP at factor cost which

means high degree of positive correlation.


INDICES AND THE NET DOMESTIC SAVINGS (Till 31, March 2008).

50


51/56

Source: Reserve Bank of India2008

CORRELATION:

SENSEX S&P CNX NIFTYNET DOMESTIC

SAVINGS

0.921193844 0.933032683

SAVINGS SENSEX: High degree of positive correlation

SAVINGS NIFTY: High degree of positive correlation.

INTERPRETATION:

51


52/56

This data shows that there is high degree of correlation between the net domestic savings

and the stock market indices. As we know that the increase in savings depends on higher

economic growth rate and a declining dependency ratio which means domestic savings is

the good indicator of the economy growth.

In my opinion, high degree of correlation between domestic savings and stock market

indices because securities market channelise savings to investments and thereby decouple

these two activities. As a result, savers and investors are not constrained by their

individual abilities, but by the economys ability to invest and save respectively, which

inevitably enhances savings and investment in the economy.

But it could also be possible that whole of the savings are not mobilizing towards theinvestments in the capital market but channelising in some other investment alternatives

like real estate and gold. It could be because of the inefficiency of the capital market in

terms of inadequate information, illiteracy etc.

Gross domestic savings as a proportion of GDP continued with its upward trend. The

savings ratio increased to 45 in FY2008 compared to 22% in FY2009. Savings from

private corporate and household sector led the surge in domestic savings rate whereas

public sector savings witnessed a marginal fall.

8.) CAUSAL RELATIONSHIP BETWEEN THE STOCK MARKETINDICES AND THE EXCHANGE RATE OF INDIAN RUPEE VIS--VIS

US DOLLAR.

52


53/56

YEARS BSE Exchange NSE SENSEX Exchange NIFTY

1995 3,618.54 31.375 1071.23 0 0 0

1996 2,931.84 36.48 848.42 -18.97726707 16.27092 -20.79945

1997 3,382.47 35.88 972.65 15.3702112 -1.644737 14.64251

1998 3,224.36 38.915 963.45 -4.674394747 8.458751 -0.94587

1999 3,315.57 42.5 966.2 2.828778424 9.212386 0.285433

2000 5,205.29 43.635 1546.2 56.9953281 2.670588 60.028982001 4,326.72 46.415 1371.7 -16.87840639 6.371032 -11.28573

2002 3,311.03 48.575 1075.4 -23.4748262 4.653668 -21.60093

2003 3,250.38 47.8 1041.85 -1.831756281 -1.595471 -3.119769

2004 5,695.67 43.305 1809.75 75.23089608 -9.403766 73.70543

2005 6,555.94 43.695 2057.6 15.10392983 0.900589 13.69526

2006 6,492.82 43.554 2035.65 16.13816 -0.3226 9.8269

2007 13,075.00 45.25 3822 91.23 3.894 87.81

2008 18,048.00 40.41 5277 19.28 -10.696 38.06

2009 8,842.00 50 2620 -40.42 23.73174 -50.35

Note: Data are based on FEDAI (Foreign Exchange Dealers' Association of India)

indicative rates

CORRELATION:

SENSEX S&P CNX NIFTYEXCHANGE RATE 0.16287582 0.188455009

EXCHANGE RATE-SENSEX: Low degree of positive correlation.

EXCHANGE RATE-NIFTY: Low degree of positive correlation

INTERPRETATION:

There has been a poor correlation between the capital market indices and the exchange

rate of Indian rupee against US dollar. Because mainly exchange rate affects the

international trade, that is, imports and exports. But it may indirectly help in the growth

of the capital market in terms of the following reforms in this area:

53


54/56

Foreign Institutional Investors are allowed to invest in Indian equities subject to

restrictions on maximum holdings in individual companies. Restrictions remain

on investment in debt, but these too have been progressively relaxed.

Indian companies are allowed to raise equity in international markets subject to

various restrictions.

Indian companies are allowed to borrow in international markets subject to a

minimum maturity, a ceiling on the maximum interest rate, and annual caps on

aggregate external commercial borrowings by all entities put together.

Indian mutual funds are allowed to invest a small portion of their assets abroad.

Indian companies are given access to long dated forward contracts and to cross

currency options.

CONCLUSION

The main objective of the project is to determine the lead and lag relationships between

the Indian stock market and key macroeconomic variables. Certain quarters of the

investors believe that the positive growth in the gross national product will result in an

54


55/56

improvement in the performance of the stock markets. The endeavor of the study is to

investigate the question: Can the Indian stock market act as a barometer for the Indian

economys growth and development? This is of course an empirical question. To test this,

the correlation test has been employed and the results are summarized as follows:

i. Moderate degree of positive correlation between GDP at factor cost and all its

three sectors with the SENSEX and S&P CNX NIFTY. Manufacturing sector has

shown the better correlation as compare to others.

ii. High degree of positive correlation between broad money and the S&P CNX

NIFTY.

iii. High degree of positive correlation of per capita income with the SENSEX but it

has shown a high degree of positive correlation with the GDP at factor cost.iv. High degree of positive correlation between net domestic savings and the

SENSEX .

v. Low degree of positive correlation of exchange rate of an Indian rupee against US

dollar and the both indices.

The Indian stock market is influenced by changes in the Indian economy and Indian stock

market acts as a barometer of Indian economy as it is proved by the high degree of

positive correlation between stock market indices and key macroeconomic variables,

such as, Domestic savings, money supply and GDP growth rate. But on the other hand,

other macroeconomic variable such as and Exchange rate have low degree of correlation

with respect to Indian stock market

BIBLIOGRAPHY:

-RBI Bulletin (Volume LXIII Number 2) Monetary Policy Rekha Mishra, Feb.2009,Q3

-Indian capital market. (2006-07). Economic survey

-Current state of indian economy 2008, Federation of Indian Chambers of Commerce and

Industry, New Delhi.

55


56/56

-India-watch: India at a glance. article retrieved on March 28, 2007, from

http://i ndiandata.com.

Latest economic data. (2008). India

-Macroeconomic variables, article retrieved on April 1, 2008, from

http:// rbi.org.in/scripts/annual publications.

-Monthly economic analysis. article retrieved on March 28, 2008, from

http://indianbusiness.nic.in.

-Stock prices, article retrieved on Apri 5, 2008, from http://bseindia.com

-Stock prices, article retrieved on Apri 5, 2008, from http://nseindia.com

-Economic survey 2008

-Economic Indicators

-http://www.tradingeconomics.com/Economics/Inflation CPI.aspx?

Symbol=INRcs.com/Economics/Stock-Market.aspx?Symbol=INR

-http://www.tradingeconomics.com/Economics/GDP-Growth.aspx?Symbol=INR

-http://www.tradingeconomics.com/Economics/GDP.aspx?Symbol=INR

-http://www.tradingeconomics.com/Economics/GDP-Per-Capita.aspx?Symbol=INR

-http://www.tradingeconomics.com/Economics/Industrial-Production.aspx?Symbol=INR

-http://www.tradingeconomics.com/Economics/Government-Budget.aspx?Symbol=INR

-http://pib.nic.in/archieve/others/2007/feb07/r2007020702.pdf-http://exim.indiamart.com/budget-2009-10/
http://indiandata.com/http://indiandata.com/http://indianbusiness.nic.in/http://indianbusiness.nic.in/http://bseindia.com/http://nseindia.com/http://www.tradingeconomics.com/Economics/Inflation%20CPI.aspx?Symbol=INRcs.com/Economics/Stock-Market.aspx?Symbol=INRhttp://www.tradingeconomics.com/Economics/Inflation%20CPI.aspx?Symbol=INRcs.com/Economics/Stock-Market.aspx?Symbol=INRhttp://www.tradingeconomics.com/Economics/GDP-Growth.aspx?Symbol=INRhttp://www.tradingeconomics.com/Economics/GDP.aspx?Symbol=INRhttp://www.tradingeconomics.com/Economics/GDP-Per-Capita.aspx?Symbol=INRhttp://www.tradingeconomics.com/Economics/Industrial-Production.aspx?Symbol=INRhttp://www.tradingeconomics.com/Economics/Government-Budget.aspx?Symbol=INRhttp://pib.nic.in/archieve/others/2007/feb07/r2007020702.pdfhttp://exim.indiamart.com/budget-2009-10/http://indiandata.com/http://indianbusiness.nic.in/http://bseindia.com/http://nseindia.com/http://www.tradingeconomics.com/Economics/Inflation%20CPI.aspx?Symbol=INRcs.com/Economics/Stock-Market.aspx?Symbol=INRhttp://www.tradingeconomics.com/Economics/Inflation%20CPI.aspx?Symbol=INRcs.com/Economics/Stock-Market.aspx?Symbol=INRhttp://www.tradingeconomics.com/Economics/GDP-Growth.aspx?Symbol=INRhttp://www.tradingeconomics.com/Economics/GDP.aspx?Symbol=INRhttp://www.tradingeconomics.com/Economics/GDP-Per-Capita.aspx?Symbol=INRhttp://www.tradingeconomics.com/Economics/Industrial-Production.aspx?Symbol=INRhttp://www.tradingeconomics.com/Economics/Government-Budget.aspx?Symbol=INRhttp://pib.nic.in/archieve/others/2007/feb07/r2007020702.pdfhttp://exim.indiamart.com/budget-2009-10/

Documents

Stock Market Movements in Present