In many ways it is the barometer through which the economy of a country is perceived by many people even though there are other economic tools to judge the actual health of the economy. Stock exchanges are places through which the public at large take part as investors. In India, the BSE and the NSE have been attracting thousands of investors each year. Worldwide, there are millions of transactions that take place every day. Stock market is one of the major economic reflectors. Indian economy is currently emerging as a global super power.
Due to low labor Cost and skillful manpower sectors like textile, garments, manufacturing, banking and insurance has made a significant contribution to foster the growth potentials of the economy but there are several factors which directly or indirectly affect the performance of BSE Sensex and NSE Nifty such as inflation, exchange ate, crude oil, interest rate structure, gold price etc. 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 ariables 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 subprime 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 compan ies. 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 ofSEBl, 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. BSE- BOMBAY STOCK EXCHANGE The BSE SENSEX, also called the BSE 30 or simply the SENSEX, is a free-float market capitalization -weighted stock market index of 30 well-established and financially sound companies listed on Bombay Stock Exchange (BSE). The 30 component companies, Some of the largest and most actively traded stocks, are representative of various industrial sectors of the Indian economy.
Published since January 1, 1986, the SENSEX is regarded as the pulse of the omestic stock markets in India. The base value of the SENSEX is taken as 100 on April 1, 1979, and its base year as 1978-79. (BSE CURRENT VALUE) HOW BSE SENSEX IS CALCULATED? The BSE constantly reviews and modifies its composition to be sure it reflects current market conditions. The index is calculated based on a free float capitalization method, a variation of the market capitalization method.
Instead of using a company’s outstanding shares it uses its float, or shares that are readily available for trading. The free-float method, therefore, does not include restricted stocks, such as those held by promoters, government nd strategic investors. Initially, the index was calculated based on the ‘full market capitalization method”. However this was shifted to the free float method with effect from September 1, 2003. Globally, the free float market capitalization is regarded as the industry best practice.
As per free float capitalization 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 multiplied by a free float factor to determine the free float market capitalization. Free float factor is also referred as adjustment factor. Free float factor represents the percentage of shares that are readily available for trading.
The calculation of SENSEX involves dividing the free float market capitalization of 30 companies in the index by a number called index divisor. The divisor is the only link to original base period value of the SENSEX. It keeps the index comparable over time and is the adjustment point for all index adjustments arising out of corporate actions, replacement of scrips, etc. What are the objectives of SENSEX? The SENSEX is the benchmark index with wide acceptance among individual investors, institutional investors, foreign investors and fund managers.
The objectives of the index are: To measure Market Movements Given its long history and its wide acceptance, no other index matches the SENSEX in reflecting market movements and sentiments. SENSEX is widely used to describe the mood in the Indian Stock markets. Benchmark for Funds Performance The inclusion of Blue chip companies and the wide and balanced industry representation in the SENSEX makes it the ideal benchmark for fund anagers to compare the performance of their funds.
For Index Based Derivatives Products Institutional investors, money managers and small investors all refer to the SENSEX for their specific purposes The SENSEX is in effect the proxy for the Indian stock markets. Since SENSEX comprises of leading companies in all the significant sectors in the economy, we believe that it will be the most liquid contract in the Indian market and will garner a predominant market share. MACRO ECONOMIC FACTORS A factor that is pertinent to a broad economy at the regional or national level and affects a large population rather than a few select individuals.
Macroeconomic factors such as economic output, unemployment, inflation, savings and investment are key indicators of economic performance and are closely monitored by governments, businesses and consumers. The interplay or relationship between various macroeconomic factors is the subject of a great deal of study in the field of macroeconomics. VARIABLES USED Regression models involve the following variables: The unknown parameters, denoted as ?, which may represent a scalar or a vector. The independent variables X. The dependent variable, Y.
In various fields of application, different terminologies are used in place f dependent and independent variables. Regression model relates Y to a function of X and p. In our analysis we have 3 unknown parameters Dependent variable is food prices (CPI) Independent variables are as follows: GOLD PRICES Gold is the oldest precious metal known to man and for thousands Of years it has been valued as a global currency, a commodity, an investment and simply an object of beauty. Gold is primarily a monetary asset and partly a commodity. Gold is the world’s oldest international currency.
It is an important element of global monetary reserves. With regards to investment alue, more than two-thirds of gold’s total accumulated holdings is with central banks’ reserves, private players, and held in the form of high-karat jewellery. Less than one- third of gold’s total accumulated holdings are used as “commodity” for jewellery in the western markets and industry. EXCHANGE RATE Apart from factors such as interest rates and inflation, the exchange rate is one of the most important determinants of a country’s relative level of economic health.
Exchange rates play a vital role in a country’s level of trade, which is critical to every free market economy in the world. For this reason, xchange rates are among the most watched analyzed and governmentally manipulated economic measures. A higher currency makes a countrys exports more expensive and imports cheaper in foreign markets; a lower currency makes a country’s exports cheaper and its imports more expensive in foreign markets. A higher exchange rate can be expected to lower the country’s balance of trade, while a lower exchange rate would increase it.
But exchange rates matter on a smaller scale as well: they impact the real return of an investor’s portfolio. The exchange rate of the currency in which a portfolio holds the bulk of its nvestments determines that portfolio’s real return. A declining exchange rate obviously decreases the purchasing power of income and capital gains derived from any returns. FOREIGN EXCHANGE RESERVES Foreign exchange reserves (also called FOREX reserves) in a strict sense are only the foreign currency deposits held by central banks and monetary authorities.
However, the term foreign exchange reserves in popular usage commonly includes foreign exchange and gold, SDRs and IMF reserve position as this total figure is more readily available and it is accurately deemed as official reserves or international reserves TESTS CONDUCTED 1. R square (coefficient of determination) Once a multiple regression equation has been constructed, one can check how well the sample regression line fits the data. R SQUARE always lies between O and 1. 2.
T- test It is conducted to test the hypothesis about an individual partial coefficient. 3. Confidence interval construction 4. F- test regression It is conducted to test the overall significance of the model using the ANOVA table. A significant F indicates a linear relationship between Y and at least one of the X’s. CHAPTER 2 SCOPE AND REVIEW OF LITERATURE SCOPE OF THE RESEARCH To help investors make wise investment decisions. TO understand the impact Of macro-economic variables on stock market.
LITERATURE REVIEW Many researchers and authors have conducted studies and researches in an effort to find reliable and significant relationships between the stock markets and various macro economic factors. A brief overview of these studies is presented in this section. Prof. Mohi-u-Din Sangmi and Mohd . Mubasher Hassan examined the effect of macroeconomic variables on the stock price movement in Indian Stock Market in their research.
In the study six variables of macro-economy (inflation, exchange rate, Industrial production, Money Supply, Gold price, interest rate) are used as independent variables and Sensex, Nifty and BSE 1 00 are indicated as dependent variable. It uses monthly time series data, gathered from RBI handbook over the period of April 2008 to June 2012. Multiple regression analysis is applied in this paper to construct a quantitative model showing the relationship between macroeconomics and stock price.
The result of this paper indicates that significant relationship is occurred between macroeconomics variable’s and stock price in India. Samveg Patel in his paper investigates the effect of macroeconomic eterminants on the performance of the Indian Stock Market using monthly data over the period January 1991 to December 2011 for eight macroeconomic variables, namely, Interest Rate, Inflation, Exchange Rate, Index of Industrial Production, Money Supply, Gold Price, Silver Price & Oil price, and two stock market indices namely Sensex and CNX Nifty.
By applying Augmented Dickey Fuller unit root test, Johansen Cointegration test, Granger Causality test and Vector Error Correction Model (VECM), the study found the long run relationship between macroeconomic variables and stock market indices. The study also revealed the causality run from exchange rate to stock market indices to II? and Oil Price. Aggregate Economic Variables and Stock Markets in India” a research paper by Shahid Ahmed investigates the nature of the causal relationships between stock prices and the key macro economic variables representing real and financial sector of the Indian economy for the period March, 1995 to March, 2007 using quarterly data. These variables are the index of industrial production, exports, foreign direct investment, money supply, exchange rate, interest rate, NSE Nifty and BSE Sensex in India.
Johansen’s approach of cointegration and Toda and Yamamoto Granger causality test have been applied to explore the long-run relationships while BVAR modeling for variance decomposition and impulse response functions has been applied to examine short run relationships. The results of the study reveal differential causal links between aggregate macro economic variables and stock indices in the long run. However, the revealed causal pattern is similar in both markets in the short run. The study indicates that stock prices in India lead economic activity except movement in interest rate.
Interest rate seems to lead the stock prices. The study indicates that Indian stock market seems to be driven not only by actual performance but also by expected potential performances. The study reveals that the movement of stock prices is not only the outcome of behaviour of key macro economic variables but it is also one of the causes of movement in other macro dimension in the economy. P. Bhanu Sireesha attempts to investigate the impact of select macroeconomic factors upon the movements of the Indian stock market index, Nifty along with gold and silver prices by using linear regression echnique.
The behavior of nominal and real returns at various levels of inflation, GDP, IIP and Money Supply is studied. The interdependence of the returns on stock, gold and silver is also identified. His paper titled ‘Effect of select Macro economic variables on Stock Returns in India’ concludes that as stock returns are significantly influenced by inflation, GDP, IJSD-INR and JPY- INR stock returns can be used to hedge against these variables.
Another dissertation by Tony G. Malayil states that the Indian stock market is more driven by domestic macroeconomic factors rather than global factors. In the study twelve macroeconomic variables -Foreign Direct Investment, GDP, Gold Price, Silver Price, Index of Industrial Production, Exchange Rate, Interest Rate, Inflation, Export, Import, Oil Price and Call Money are used as independent variables and the BSE Sensex is indicated as the dependent variable.
The study concludes that Call Money, Import, Exchange Rate, and Export cause BSE sensex to change. And other variables like Silver Price, Oil, IP, Gold Price, GDP, FDI gets influenced by BSE sensex. Interest and Inflation has no relation with BSE sensex. Dharmendra Singh in his research paper ‘Causal Relationship Between Macro-Economic Variables and Stock Market: A Case Study for India’ attempted to explore the relation especially the causal relation between stock market index i. e.
BSE Sensex and three key macro economic variables of Indian economy by using correlation, unit root stationarity tests and Granger causality test. Monthly data has been used from April, 1 995 to March, 2009 forall the variables, like, BSE Sensex, wholesale price index (WPI), index of industrial production(llP) and exchange rate(Rs/$). Results showed that the stock market index, the industrial production index, exchange rate, and holesale price index contained a unit root and were integrated of order one.