Study of volatility_and_its_factors_on_indian_stock_market

MBA Volatility & Affecting Factors in Indian Stock Market

An investor with a heavy concentration of stocks in an investment portfolio might
be feeling some unease these days. The market is behaving a lot different now then
over recent years.

Stock market volatility is all about uncertainty. How macroeconomic events and
trends will affect the future profitability (dividends, cash flows) of listed companies
and hence their market valuations?. Typical examples of such variables in the
current environment are: geo-political tensions, energy prices, inflation
expectations, interest rate policies, instability of exchange rates, p-notes, RBI and
Government policies, sub prime crises, investors sentiment etc. These uncertainties
in some form or another are always present and some times it is much higher than in
other periods. Furthermore, volatility increases with the financial leverage (debt) of
companies. In addition, volatility is correlated with interest rate movements and
increases during economic recessions.

Stock markets in general have treated investors well over the past few years with no
major setbacks. In general markets followed one direction only, namely upwards
(in the long run). However, during this year (FY 2007-2008) volatility once again
has come to the fore as more investors and traders were piling into the markets.

The main objective of this study is to analyse the causes of
stock market volatility. This report approaches to study:
• the various causes that results in volatility in stock market
• the reactions of stock market to these causes
• using the above information to manage the future volatility in the stock
market

This study makes a detailed analysis of various issues causing volatility in stock
market there by reflecting it on the market movements i.e., response and behaviour
of market.

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TMU New Satara College of Engg. & Mgmt. Pandharpur


During the past years, Indian Capital Market has undergone metamorphic reforms.
Every segment of Indian Capital Market viz primary and secondary markets,
derivatives, institutional investment and market intermediation has experienced
impact of these changes. Our market, today, is being recognized as one of the most
transparent, efficient and clean markets. Several techniques /instruments are used by
academicians, policy makers, practitioners and investors to test the extent of
efficiency of the market. An attempt has been made to analyse characteristics of
stock indices in India and compare them with some of the mature as well as
emerging capital markets around the globe.

In the recent past there have been perceptions that volatility in the market has gone
up; Inter and Intra-day volatility. News items and some clinical research papers also
provided figures to evidence this argument. SEBI undertook a comprehensive and
deep analysis of volatility by using several statistical techniques to measure and
analyse it. 18 countries covering almost all continents- developed as well as
emerging markets and young and old markets- have been analysed. The results
show that the volatility has gone up in the recent past as it has been perceived.

Indian stock market provides a very high rate of return and comparatively high
volatility. Efficiency of Indian market appear to have improved in the past few
years owing to contraction in settlement cycles, introduction of derivative products,
improvement in corporate governance practices etc.

Financial markets play an important role in the process of economic growth and
development by facilitating savings and channeling funds from savers to investors.
While there have been numerous attempts to develop the financial sector, growing
economies are also facing the problem of high volatility in numerous fronts
including volatility of its financial sector.

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Volatility may impair the smooth functioning of the financial system and adversely
affect economic performance. Similarly, stock market volatility also has a number
of negative implications. One of the ways in which it affects the economy is
through its effect on consumer spending. The impact of stock market volatility on
consumer spending is related via the wealth effect. Increased wealth will drive up
consumer spending. However, a fall in stock market will weaken consumer
confidence and thus drive down consumer spending. Stock market volatility may
also affect business investment and economic growth directly. A rise in stock
market volatility can be interpreted as a rise in risk of equity investment and thus a
shift of funds to less risky assets. This move could lead to a rise in cost of funds to
firms and thus new firms might bear this effect as investors will turn to purchase of
stock in larger, well known firms.

While there is a general consensus on what constitutes stock market volatility and,
to a lesser extent, on how to measure it, there is far less agreement on the causes of
changes in stock market volatility. Some economists see the causes of volatility in
the arrival of new, unanticipated information that alters expected returns on a stock .
Thus, changes in market volatility would merely reflect changes in the local or
global economic environment. Others claim that volatility is caused mainly by
changes in trading volume, practices or patterns, which in turn are driven by factors
such as modifications in macroeconomic policies, shifts in investor tolerance of risk
and increased uncertainty.

The causes and the degree of stock market volatility can help forecasters predict the
path of an economy’s growth and the structure of volatility can imply that
“investors now need to hold more stocks in their portfolio to achieve
diversification” there by minimizing risk with maximum returns.

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Indian Stock Market:

The ever-growing and fast-maturing 'India Market' is a lucrative business
destination for developed countries. With 7-8% of GDP growth, huge analytical,
young and English speaking work force the 'pull' for opportunities are luring. The
bandwidth of 'India Market' is enviably wide and very deep.

'Markets in India' are well protected by legal guidelines and efficient
administrators. With a liberal and proactive government at the center the road ahead
for 'Markets of India' is very rosy. 'Market India' has witnessed exponential growth
over past one and half decade. Liberal and transparent financial policies has
effected free-in-flow of FII and as a result of which 'India Market' has grown to a
colossal monster in the international market. Foreseeing sure and substantial returns
on investments (ROI) companies are pro- actively listing on the stock market
indexes. Government agencies once much hated for red tape and bribes has shed its
image. Professionalism is their new mantra. Public Enterprises like IOC, ONGC,
BHEL, NTPC, SAIL, MTNL, BPCL, HPCL and GAIL, SBI, LIC, Hindustan
Antibiotics Limited, Air India etc. to name a few, are giving Private Indian
companies a good run for their money. Private giants like Reliance Industries
Limited, Infosys, Tata, Birla Corporation, Jet Airways, Ranbaxy, Biocon, Bajaj
Auto, ICICI are breaking their own records every financial years.

'Markets in India' has witnessed meteorite rise of the Indian Software,
Telecommunication and Banking Industry. This has propelled growth of Urban
Indian class which, in turnas increased consumerism. Today, each and every type of
industry of 'Market India' like Infrastructure, Pharmaceutical & Biotechnology,
Banking & Insurance, Electronics, FMCG etc. has tremendous growth potential.
Retail Industry along with Agriculture & Food industry are yet to contribute their
share to the growth story of 'Market India'.

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The unpredictable behavior of the market gave it a tag – ‘a volatile market.’ The
factors that affected the market in the past were good monsoon, Bharatiya Janatha
Party’s rise to power etc. The result of a cricket match between India and Pakistan
also affected the movements in Indian stock market. The National Democratic
Alliance led by BJP, during 2004 public elections unsuccessfully tried to ride on the
market sentiments to power. NDA was voted out of power and the sensex recorded
the biggest fall in a day amidst fears that the Congress-Communist coalition would
stall economic reforms. Later prime minister Man Mohan Singh’s assurance of
‘reforms with a human face’ cast off the fears and market reacted sharply to touch
the highest ever mark of 8500.

India, after United States hosts the largest number of listed companies. Global
investors now ardently seek India as their preferred location for investment. Once
viewed with skepticism, stock market now appeals to middle class Indians also.
Many Indians working in foreign countries now divert their savings to stocks. This
recent phenomenon is the result of opening up of online trading and diminished
interest rates from banks. The stockbrokers based in India are opening offices in
different countries mainly to cater the needs of Non Resident Indians. The time
factor also works for the NRIs. They can buy or sell stock online after returning
from their work places.
The recent incidents that led to growing interest among Indian middle class are the
initial public offers announced by Tata Consultancy Services, Maruti Udyog
Limited, ONGC and big names like that. Good monsoons always raise the market
sentiments. A good monsoon means improved agricultural produce and more
spending capacity among rural folk.
The bullish run of the stock market can be associated with a steady growth of
around 6% in GDP, the growth of Indian companies to MNCs, large potential of
growth in the fields of telecommunication, mass media, education, tourism and IT
sectors backed by economic reforms ensure that Indian stock market continues its
bull run.

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Bull and Bear Markets:
Bull market refers to a market that is on the rise, it has sustained increase in market
share prices.In such times, participants have faith that the uptrend will continue in
the long term.Typically,country's economy is strong and employment levels are
high. Bear market is one that is in decline,share prices are continuously
dropping,resulting in a downward trend that participants believe will continue in the
long run,having a spiraling effect. During a bear market,the economy typically
slows down and unemployment may rise as companies begin laying off workers.

Bear and Bull markets are named after the way in which each animal attacks its
victims. It is characteristic of the Bull to drive its horns UPWARDS into the
air,therefore upward moving markets are termed Bull Markets. Bear on the other
hand,swipes its paws DOWNWARDS upon its unfortunate prey,therefore
downward moving markets are termed Bear Markets.

Exchanges are an organised marketplace, either corporation or mutual organisation,
where members of the organisation gather to trade company stocks and other
securities. The members may act either as agents for their customers, or as
principals for their own accounts.

Stock exchanges also facilitates for the issue and redemption of securities and other
financial instruments including the payment of income and dividends. The record
keeping is central but trade is linked to such physical place because modern markets
are computerised. The trade on an exchange is only by members and stock broker
do have a seat on the exchange.

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List of Stock Exchanges In India:

• Bombay Stock Exchange
• National Stock Exchange
• Regional Stock Exchanges
 Ahmedabad Stock Exchange
 Bangalore Stock Exchange
 Bhubaneshwar Stock Exchange
 Calcutta Stock Exchange
 Cochin Stock Exchange
 Coimbatore Stock Exchange
 Delhi Stock Exchange
 Guwahati Stock Exchange
 Hyderabad Stock Exchange
 Jaipur Stock Exchange
 Ludhiana Stock Exchange
 Madhya Pradesh Stock Exchange
 Madras Stock Exchange
 Magadh Stock Exchange
 Mangalore Stock Exchange
 Meerut Stock Exchange
 OTC Exchange Of India
 Pune Stock Exchange
 Saurashtra Kutch Stock Exchange
 Uttar Pradesh Stock Exchange
 Vadodara Stock Exchange

The working of stock exchanges in India started in 1875. BSE is the oldest stock
market in India. The history of Indian stock trading starts with 318 persons taking
membership in Native Share and Stock Brokers Association, which we now know

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by the name Bombay Stock Exchange or BSE in short. In 1965, BSE got permanent
recognition from the Government of India. National Stock Exchange comes second
to BSE in terms of popularity. BSE and NSE represent themselves as synonyms of
Indian stock market. The history of Indian stock market is almost the same as the
history of BSE.

The 30 stock sensitive index or Sensex was first compiled in 1986. The Sensex is
compiled based on the performance of the stocks of 30 financially sound benchmark
companies. In 1990 the BSE crossed the 1000 mark for the first time. It crossed
2000, 3000 and 4000 figures in 1992. The reason for such huge surge in the stock
market was the liberal financial policies announced by the then financial minister
Dr. Man Mohan Singh.

The up-beat mood of the market was suddenly lost with Harshad Mehta scam. It
came to public knowledge that Mr. Mehta, also known as the big-bull of Indian
stock market diverted huge funds from banks through fraudulent means. He played
with 270 million shares of about 90 companies. Millions of small-scale investors
became victims to the fraud as the Sensex fell flat shedding 570 points.
To prevent such frauds, the Government formed The Securities and Exchange
Board of India, through an Act in 1992. SEBI is the statutory body that controls and
regulates the functioning of stock exchanges, brokers, sub-brokers, portfolio
managers investment advisors etc. SEBI oblige several rigid measures to protect the
interest of investors. Now with the inception of online trading and daily settlements
the chances for a fraud is nil, says top officials of SEBI.
Sensex crossed the 5000 mark in 1999 and the 6000 mark in 2000. The 7000 mark
was crossed in June and the 8000 mark on September 8 in 2005. Many foreign
institutional investors (FII) are investing in Indian stock markets on a very large
scale. The liberal economic policies pursued by successive Governments attracted
foreign institutional investors to a large scale. Experts now believe the sensex can
soar past 14000 mark before 2010.

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Bombay Stock Exchange (BSE):

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 corporatised and demutualised 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, 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

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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 provides an efficient and transparent market for trading in equity, debt
instruments and derivatives. It has a nation-wide reach with a presence in more than
450 cities and towns of India. BSE has always been at par with the international
standards. The systems and processes are designed to safeguard market integrity
and enhance transparency in operations. BSE is the first exchange in India and the
second in the world to obtain an ISO 9001:2000 certification. It is also the first
exchange in the country and second in the world to receive Information Security
Management System Standard BS 7799-2-2002 certification for its BSE On-line
Trading System (BOLT).

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

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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.

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BSE also has a wide range of services to empower investors and facilitate smooth
transactions:

Investor Services: The Department of Investor Services redresses grievances of
investors. BSE was the first exchange in the country to provide an amount of
Rs.1 million towards the investor protection fund; it is an amount higher than
that of any exchange in the country. BSE launched a nationwide investor
awareness programme- 'Safe Investing in the Stock Market' under which 264
programmes were held in more than 200 cities.

The BSE On-line Trading (BOLT): BSE On-line Trading (BOLT) facilitates
on-line screen based trading in securities. BOLT is currently operating in
25,000 Trader Workstations located across over 450 cities in India.

BSEWEBX.com: In February 2001, BSE introduced the world's first
centralized exchange-based Internet trading system, BSEWEBX.com. This
initiative enables investors anywhere in the world to trade on the BSE platform.

Surveillance: BSE's On-Line Surveillance System (BOSS) monitors on a real-
time basis the price movements, volume positions and members' positions and
real-time measurement of default risk, market reconstruction and generation of
cross market alerts.

BSE Training Institute: BTI imparts capital market training and certification, in
collaboration with reputed management institutes and universities. It offers
over 40 courses on various aspects of the capital market and financial sector.
More than 20,000 people have attended the BTI programmes

Awards:
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• The World Council of Corporate Governance has awarded the Golden
Peacock Global CSR Award for BSE's initiatives in Corporate Social
Responsibility (CSR).
• The Annual Reports and Accounts of BSE for the year ended March 31,
2006 and March 31 2007 have been awarded the ICAI awards for excellence
in financial reporting.
• The Human Resource Management at BSE has won the Asia - Pacific HRM
awards for its efforts in employer branding through talent management at
work, health management at work and excellence in HR through technology
• Drawing from its rich past and its equally robust performance in the recent
times, BSE will continue to remain an icon in the Indian capital market.

National Stock Exchange (NSE):

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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 Novem The most popular index is the Nifty 50, followed by the CNX
Nifty Junior, CNX 100, S&P CNX 500, Nifty Midcap 50, CNX Midcap, S&P CNX
Defty, S&P CNX Industry indices (for 72 industries) and CNX
IT. These indices are monitored and updated dynamically and are reviewed
regularly. These are maintained professionally to ensure that it continues to be a
consistent benchmark of the equity markets, which involves inclusion and exclusion
of stocks in the index, day-to-day tracking and giving effect to corporate actions on
individual stocks.

Meaning of Volatility:

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Volatility refers to the amount of uncertainty or risk about the size of changes
in a security's value. A higher volatility means that a security's value can potentially
be spread out over a larger range of values. This means that the price of the security
can change dramatically over a short time period in either direction. A lower
volatility means that a security's value does not fluctuate dramatically, but changes
in value at a steady pace over a period of time.
Volatility most frequently refers to the standard deviation of the change in value of
a financial instrument with a specific time horizon. It is often used to quantify the
risk of the instrument over that time period. Volatility is typically expressed in
annualized terms, and it may either be an absolute number ($5) or a fraction of the
mean (5%).
One measure of the relative volatility of a particular stock to the market is its beta.
A beta approximates the overall volatility of a security's returns against the returns
of a relevant benchmark.
Volatility is often viewed as a negative in that it represents uncertainty and risk.
However, volatility can be good in that if one shorts on the peaks, and buys on the
lows one can make money, with greater money coming with greater volatility. The
possibility for money to be made via volatile markets is how short term market
players like day traders hope to make money, and is in contrast to the long term
investment view of buy and hold.
In today's markets, it is also possible to trade volatility directly, through the use of
derivative securities such as options and variance swaps.

Scope of the study:

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The existence of volatility is not surprising: stock market volatility depends on the
overall health of the economy, and real economic variables themselves tend to
display existence of volatility. The persistence of stock market return volatility has
two interesting implications. First, volatility is a proxy for investment risk.
Persistence in volatility implies that the risk and return tradeoff changes in a
predictable way over the business cycle. Second, the persistence in volatility can be
used to predict future economic variables.

Some of the facts of stock market volatility are:

• The volatility of daily returns of the Sensex has come down sharply
from the levels they were at in 1992.

• Daily return volatility of Sensex and Nifty in 2003 was comparable to
volatility of a few of the indices in developed markets.

• Daily return volatility of Sensex and Nifty increased in 2004 compared
to 2003.

• Despite increase in volatility in 2004, Sensex and Nifty continue to be
slightly less volatile than market indices in Brazil and South Africa.
Brazil and South Africa are two of the many emerging markets that are
competing with India for FII flows. Volatility in markets in Brazil and
South Africa also increased in 2004.

• Nifty and Sensex suffered a fall of 12 per cent in a single day in May
2004.

• We also need to consider margins. Margin- money collected from
traders facilitates smooth settlement of trades. When the market is
caught in a frenzy, however, these margins accentuate volatility.
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• Stock markets globally have experienced weak starts in 2008, many
realising substantial falls during the month of January. Although many
markets have bounced back since that point, confidence remains fragile
and volatility remains.

• The current market turmoil has its roots in the US housing market, and
is an illustration of how “globalised” financial markets have become.

• The impact of rising oil prices, the outcome of the US
Presidential election and increase in interest rates in the US also caused
volatility in Nifty and Sensex.

• The January 2008 stock market volatility was a sharp decrease in non-
U.S. stock market prices on Monday, January 21, 2008, and to a lesser
extent on Tuesday, January 22, 2008. Some called it "Black Monday"
and a "global shares crash," even though the effects were quite different
in different markets and the Dow Jones Industrial Average never closed
worse than a 1.6% decrease from the previous Friday, and indeed closed
up for the week.

• In the first three weeks of 2008, the Dow Jones Industrial Average fell
9%.

• On Monday the biggest falls since September 11, 2001 occurred in
Asian stock markets. "India's benchmark stock index tumbled 7.4%,
while Hong Kong's blue chip Hang Seng Index plummeted 5.5% to
23,818.86" Over the course of two days, the BSE Sensex in India

• dropped from 19,013 on Monday morning to 16,370 by Tuesday
evening or a two day fall of 13.9%. In the first 21 days of 2008, Japan's
Nikkei has lost 13% of its value and Hong Kong's Hang Seng 14%.The
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Asian crash is thought to have been caused by the fallout from general
economic fear stemming from the 2007 subprime mortgage financial
crisis triggered by a drop in the U.S. housing market and fears of a U.S.

• India's Sensex registered its biggest ever gain of 1,139.92 points
(6.62%) on the 25th January, 2008 recovering much of its losses from
the 21st January, but fell by 4% again on reopening on the 28th January.

• Many commentators have declared that the global “bull market” in
equities which has been in place since 2003 is now over. The most
important factor to focus on for investors is what the prospects for
equity markets are from here.

However, what happens to equity markets over the short term is a lot more difficult
to predict. There’s no doubt that the recent market movement resembles a period of
panic, which differentiates it from most stockmarket corrections in a bull market.
And there’s also no doubt that the economic backdrop is more troubling than it has
been since the start of the bull run in 2003 – a US recession seems likely, a global
downturn is possible.

1. Background:

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Due to the ever changing Global Economy and its effects, the Indian Economy is
also becoming volatile. Hence the stock markets in India are having too many ups
and downs. Hence many Investors are facing the problem of deciding and
analyzing their investment pattern in equity market to minimize the risk and
maximize the returns.

2. Statement of the problem:

STUDY OF VOLATILITY AND ITS FACTORS IN INDIAN
STOCK MARKET

3. Objectives of the study:

• To know the causes of volatility in Indian Stock Market

• To make a detailed study of each and every cause of volatility

• To know the Market reaction to various causes of volatility

• To put the investors and traders at ease to play in the Indian Stock market

• To increase the return and reduce the risk of the investors and traders

• To help investors and traders in managing future volatility

• To suggest the steps to be taken by investors and traders during volatility

4. Methodology of the study:

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Research Design:
Descriptive Research design:

1. Survey: Personal Interaction with investors

2. Observation: Personal Observation of
Secondary data

Research Type:

• Stratified Random Sampling Type.

Data Collection tool:

• Practical observation

Data Collection Methods:

• Primary Survey
• Secondary Survey

Duration of the Project:

• 2 months

Analysis Technique:

• Mean
• Mode
• Standard deviation
• Co-variance
• Co-efficient of variation

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Presentation tools to be used:

• Date wise presentation of stock market data

5. Scope of the Report:

The study mainly focuses on the BSE markets for the year
2007-08.

• To know the movement of BSE SENSEX.

• To make a detailed study of the causes of volatility.

• To help the investors and traders in analyzing markets easily.

• To study various factors that effects the movement of
markets and market response

• The study mainly concentrates on the recent year i.e., FY
2007-08

6. Limitation of the Study:

• The study is limited to Bombay Stock exchange.

• What is true in case of BSE may not be the same for other
stock exchanges.

• The period of the study is limited to the year 2007-08.

• The study does not include other small factors which
indirectly results in volatility.

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7. Chapter Scheme:

Executive Summary
Chapter 1 Introduction
Chapter 2 Review of Literature
Chapter 3 Methodology
Chapter 4 Data Analysis & Interpretation
Chapter 5 Findings & Conclusion
Bibliography
Annexure

8. Contribution from the Study:

• To learn the practical aspects of equity market.

• To help the investors and traders to take right decisions at
different circumstances.

• To help the investors and traders to make maximum profits
at minimum risk.

• To help in analyzing and ascertaining the future movements
in the market.

• To help investors in analyzing stop loss, support and
resistance levels

• To help the investors and traders with the tricks of playing
in volatile markets.

Vision and Principles:
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Relax Investments was born out of a vision to explore the immense investment opportunities
in the Indian financial market, to benefit the investors. The firm is built on the pillars of
financial expertise, professionalism, exemplary ethics and a commitment to provide ultimate
customer satisfaction. Relax constantly strives to meet the changing market needs and trends.
The guiding principles of Relax Investments are:

• Serve the clients with the highest level of responsiveness and integrity.

• Place the client's interests and protection of their investments as the top
priorities.

• Operate on predefined and constantly updated service standards. Be customer
driven, rather than deal driven.

• Adopt futuristic technology to gather vital information on real time basis to
optimize investor protection and investor returns.

• Set up most modern trading facilities for its clients at par with global
standards.

Business profile:

The company began as a sub-brokerage house in the year 2007. The financial
expertise and professionalism coupled with ethics and a commitment has made
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Relax Investments one of the major players in market.

Relax Investment caters efficiently to the diverse and complex needs of over
20,000 customers, most of whom are individual traders, institutions and money
managers.

The vision of the Relax Investment is to be a financial player in Market. It aims to
provide all types of financial services to its clients at one place to save them from
going from place to place to meet their investment needs.

With the opening up of the Indian economy and the advent of IT enabled trading,
the Indian capital market has become a whole new ball game. From floor trading,
the custom is fast shifting to Internet trading. Equally fast is the role of the financial
service provider, which is being redefined. Earlier, a financial service provider's
responsibility was limited to executing customer's instructions to buy and sell. Now,
the whole operational paradigm has progressively shifted with the opening of more
and more avenues to offer strategic customer supports.

SWOT ANALYSIS

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Strength – Advantage inside the Company
• A very good team of employees
• Very good Infrastructure
• Good and uninterrupted terminal set up and
broadband connection
• Good communication setup among various branches
• This indicates that company is very transparent in its
transactions
• Good services to clients who are satisfied with the
company so far
• Growth in no. of Clients and services
• Betterment of services and upgradation of
technology at regular intervals.
• Margin provided by the Company to Customers

Weakness – Disadvantage inside the company
• Satellite Signal problems
• Convincing of uneducated clients which is a very
difficult task
• Educating the unknown clients about the advantages
and disadvantages of various investment options
• Communication Gap among clients and employees
• Restrictions on intra-day margin to clients

Opportunities – Advantages outside the company
• More no. of people opting for trading options
25


• Increase in investments
• Increase in job opportunities which has blown up
savings
• Entry of foreign companies
• Increase in FII
• Dematerialization which has reduced complexities
of trading in Stock Market
• New investment opportunities such as currency
trading

Threats – Disadvantages outside the company
• Large no. of Competitors
• Volatility in the Stock market
• Strict regulations from SEBI
• Strict regulations from Government
• Change in technology
• Increase in Taxes

26


Stock market is the barometer of the economy and is the sensitive segment of the
economy. Volatility of stock market is caused due various reasons. It may be caused
by Arbitrage. Arbitrage is the simultaneous or almost simultaneous buying and
selling of an asset to profit from price discrepancies. Arbitrage causes markets to
adjust prices quickly. This has the effect of causing information to be more quickly
assimilated into market prices. This is a curious result because arbitrage requires no
more information than the existence of a price discrepancy.

Another obvious reason for market volatility is technology. This includes more
timely information dissemination, improved technology to make trades and more
kinds of financial instruments. The faster information is disseminated, the quicker
markets can react to both negative and positive news.

Most people would say that new information in general causes volatility. News
digests of the day’s market performance almost always include a reason the market
is up or down. Often, different writers give different reasons for market changes

Volatility is difficult to analyze because it means different things to different
people. People are rarely precise when they talk about volatility. Also, there is a
lot of misinformation about volatility. Hence it is very important to know the
various factors that cause volatility in the stock market.

When the stock market goes up one day, and then goes down for the next five, then
up again, and then down again, that’s what you call stock market volatility.

In layman’s terms, volatility is like car insurance premiums that go up along with
the likelihood of risky situations, such as if you have a poor driving record or if you
keep the car in a high-theft area.

Some cynics say volatility is a polite way of referring to investors’ nervousness.

27


Investors may think volatility indicates a problem. But many analysts believe that
increased volatility can indicate a rebound.

Success in the market does not depend on predicting the future—predictions only
measure the short term. Volatility is more dependent on mass hysteria—fear and
greed—than on underlying economic or financial events. Those are not reliable
emotions on which to base long-term investment decisions.

Some of the Important factors that cause
volatility are:

1. Foreign Institutional Investors:
2. Impact of Global Economy:
3. Inflation:
4. RBI Policies
5. Government policies and budget
6. Other factors

Foreign Indirect Investments:-

Mutual funds, insurance companies, pension funds, university funds, investment
trusts, endowment funds and charitable trusts incorporated outside India but
investing in equity and debt securities in the country are known as FIIs. They
28


collect money from individuals and corporates (primarily from countries belonging
to the European and American continents), and invest it in financial instruments
worldwide, with India being one of the targeted markets.

FIIs were first allowed to transact in Indian markets in 1993. SEBI lays down
parameters relating to eligibility, investments and taxation. Chief among these
relates to investment limits. The collective FII holding in a listed company cannot
exceed 40 per cent of its equity capital.

FIIs wanting to invest in equity and debt securities in India have to register with
SEBI (Securities and Exchange Board of India) under the Securities and Exchange
Board of India (Foreign Institutional Investors) Regulations, 1995. They also have
to get approval from the RBI (Reserve Bank of India) to operate foreign currency
accounts (to bring in and take out funds) and rupee bank accounts (to pay for
transactions).

Typically FIIs invest either directly or as sub accounts (through participatory notes)
or as domestic entities. Participatory Notes (P Notes) are used by FIIs for foreign
funds, not yet registered.

The key benefits of FII investments include reduced cost of capital, imparting
stability to India's balance of payments, institutionalizing the market, improving
market efficiency and strengthening corporate governance. FIIs have been termed
as speculators, arbitrageurs and fair weather friends. FII inflows, globally, are
considered hot money.

In the past four years there has been more than $41 trillion worth of FII funds
invested in India. This has been one of the major reasons on the bull market
witnessing unprecedented growth with the BSE Sensex rising 221% in absolute

29


terms in this span. The present downfall of the market too is influenced as these FIIs
are taking out some of their invested money.

On the basis of some elementary analysis, It was basically found that correlation
between FII flows (net) and the Sensex, from January 2006 to September 2007. The
coefficient was very low at 0.18, which can hardly be said to be a strong correlation.
Further, the regression analysis between the two variables found that FII flows
explain only 3% of the Sensex movements. However, this 3% was
STATISTICALLY significant. It's a bit difficult to reach at a final conclusion when
such issues are concerned. At times markets over-react to FII flows. However, FIIs
are more than just money. They represent something unquantifiable known as
investors' sentiment. Thats why we get a bit anxious when there are sudden FII
outflows, since such behavior may reflect a change in investor sentiment.

Macro-economic importance of FII flows for India:

A survey of literature on portfolio investments revealed the importance of such
investments for a developing economy like India’s. Foremost, FII investments are
non-debt creating flows, also a reason why Indian policy makers sought to liberalize
such flows in the wake of the BoP crisis in 1990-91. Theoretically, FII investments
bring in global liquidity into the equity markets and raise the price-earning
ratio and thereby reduce the cost of capital domestically. FII inflows help
supplement domestic savings and smoothen inter-temporal consumption.
Studies indicate a positive relationship between portfolio flows and the growth
performance of an economy, though such specific studies for India were not found.

India, in the recent past few years seems to have received a disproportionately large
part of its foreign investment flows via the FII investments in the equity markets.

The large build-up of foreign exchange reserves through FII inflows poses a
potential threat of destabilization of the economy. Portfolio flows are most often
30


referred to as “hot money” that can be notoriously volatile when compared to other
forms of capital flows. The Mexican crisis and the East Asian crisis are classic
examples of the damage that sudden outflows of portfolio money can do to an
economy.

Without immediately implicating any significant withdrawal of funds out of India
of crisis precipitating proportions, it needs to be noted that outflows of FII capital
from the market could adversely impact the value of the Indian currency, as FII
inflows form the most significant part of foreign inflows into the economy. Indeed,
the recent soft trends in FII inflows in May had led the Indian currency to
depreciate against the US dollar The risk of a large depreciation is even more as we
are in a situation where the higher international price of crude oil has led to a
significant weakening of the current account deficit. In other words, in the event of
a significant tapering off of FII inflows, $/Re could depreciate sharply in
consonance to a widening current account deficit, as the other forms of capital
inflows into the economy are not significant enough.

There are likely to be repercussions on the growth momentum of the Indian
economy if FII inflows significantly slow down. This is because a large extent of
buoyancy in consumption was possible due to the positive wealth effects of a
booming stock market and a decline in the interest rates due to a large overhang of
rupee liquidity in the system (also a byproduct of large FII inflows over the last few
years). Therefore, if FII inflows were to slow down, it will reduce the wealth
generated by the stock market, the Indian currency will depreciate and RBI will

have to draw down on the foreign exchange reserves or hike interest rates to prevent
wild swings in the exchange rate.

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FIIs are the most dangerous people for the Indian markets. Unlike mutual funds,
they don’t sit on their investments in difficult times. They just sell their shares and
go to another country for better options. But this correction is good for fresh
investments and real investors.

There is little doubt that FII inflows have significantly grown in importance over
the last few years. In the absence of any other substantial form of capital inflows,
the potential ill effects of a reduction in the FII flows into the Indian economy can
be severe. Thus, FII inflows are per-se bad, there is possibly a need to gear up
macro-economic policies to target other form of foreign investments into the
economy and reduce the over-reliance of the economy on portfolio flows.

The swings in the market forced several FIIs to withdraw from India and invest
their dollars in other emerging markets. Some of the other markets include
Uruguay, Russia, the Ukraine, and several other former Soviet countries. Though
there have been swing’s in the past too but FII response this time was different
because of margin pressures back home as even they have to provide regular returns
to their investors.

The Indian markets are not seen as a good short-term bet any more. India is seen as
a good investment for the medium to long term. FIIs seem to fear the pace of
growth and the fundamentals of the markets.

Most FIIs are looking at corporate governance and execution abilities, which could
be significant drivers in creating a strong portfolio of Indian stocks. Recent action
taken by the market regulator indicates that the Indian government would like to
moderate the inflow of FII money.

32


Some of the volatile dates and events Caused by the FII on Indian
Stock Market are:

Friday, July 27, 2007:

This is the day everyone is waiting for. IT was a wonderful opportunity
for entering into good stocks. This selling was mainly due to
withdrawal of funds by FIIs. Heavy selling was seen in all the global
markets with 2-5% loss in various indices.

Local Political Crises

Thursday, August 23, 2007

Communist parties are doing their best to dampen the spirits of
bulls. Before this political uncertainty, India was the last option for
withdrawal of money by FIIs due to the strong fundamentals. But India
is now the first choice for FIIs to withdraw money in case of crisis
due to political uncertainty. Uncertainty is always more dangerous
than real thing. Communists may not withdraw support to UPA
Government but they will cause enough damage to the investors by
their comments.

Monday, October 8, 2007

This is the single most major reason for stock market crash in
October 2007 also. Investors especially FIIs never like political

33


instability and they will book profits and go to another country. Even
though political turmoil will have no significant impact on the growth
of companies, stock markets always negatively respond to political
instability

Wednesday, October 17, 2007

All hell broke loose in the stock markets for a few minutes on
Wednesday, hours after SEBI announced the previous night that it
planned to impose restrictions on ‘participatory notes’ (PNs), which
could effect the in-flow of FII money. In less than three minutes, the
Sensex, the benchmark index on the Bombay Stock Exchange, plunged
by over 1,500 points, shedding nine per cent and triggering off lower
circuit-breakers and forcing the authorities to stop trading for an hour.
It was only after Finance Minister P. Chidambaram’s assurance
that the government had no plans to ban PNs, and SEBI’s objective was
merely to moderate capital inflows that the markets bounced back.
Chidambaram also clarified the government would not discourage FIIs
from investing in the capital markets.

Wednesday, January 9, 2008

Huge foreign capital has been a key driver to the surge in Indian
stock market, but a possible outflow of FIIs has a potential to send the
benchmark Sensex crashing down to 14,000 points within a quarter, a
report said on Wednesday. "This would imply a level of 14,000 for
Sensex, which was the level around a year ago"

34


HBJ Capital Report:-
Friday, March 21, 2008

FII Investments In Indian Companies & Its Negative Impact.

Just look at the above chart, as on today FII has investment of
close to $200bn in India companies (20-30% of Mcap of BSE
which is $0.75 to $1 trillion). During last 3 months they have
withdrawn just $3bn (3-4% of total Investments) and Indian
Stock Market tanked 30% down.

35


Impact of Global Economy:-

Markets across the world are seeing a lot of short term volatility (frequent rise or
fall in stock market) mainly driven by news and events in the global markets. For
example, news/rumours related to economic recession in USA, soft/hard landing
and estimation of losses due to sub-prime crisis in USA, speculation over interest
rates cut by FED, rise in global commodities prices, fluctuation in global crude oil
prices etc. These are some fundamental reasons why global markets, especially the
Indian stock market behave in a volatile manner based on developments in global
markets.

Indian economy is increasingly exposed to global markets post liberalization in the
early 90s. We are seeing fast economic growth in last few years and as a result we
have seen large fund inflows into Indian market from across the world. Most of
these foreign funds are large momentum players and their activity in the market
results in large volatility in stock markets.

Investment decisions of these funds are driven and depend on the
development/events in foreign markets, or their own local markets. As a result, we
are seeing our markets are getting more and more integrated with movement in
global (especially American) stock markets. Market analysts track and talk about
these global events and global market movements very closely.

USA economy is the largest economy in the world. A lot of small and large
countries mainly depend on exporting to American markets (for example China). As
a result, analysts track the news related to USA very closely (for example weekly
USA employment numbers, sub-prime crisis of USA, FED interest rate movement
etc). Whenever we see any negative news triggered from the American markets it
triggers a tsunami in global markets especially in short term.

Indian economy is mainly driven by the domestic consumption, but post
liberalization the share of Indian trade as part of global trade is growing at a rapid
36


pace. India's economy has grown over USD 1 trillion and ranked as the eleventh
largest economy in the world. A large number of Indian companies are getting
involved in exporting their products to global markets, raising funds by listing on
foreign stock exchange (NYSE, London Stock exchange and NASDAQ etc). The
percentage revenue of Indian companies coming from foreign markets is growing
year over year. Therefore, share price movements of these companies are more
likely to be affected by the development in world economy.

Turmoil in the global financial currency markets has started affecting Indian
companies and the stock market. While ICICI Bank has lost as much as $264
million until January due to its exposure to the overseas credit derivatives markets,
other banks too are facing significant losses. Analysts note that the total mark-to-
market losses of corporate India’s exposure to the foreign exchange derivatives
market may be in the region of $5 billion.

Us Economy

Recession:

The fear of a recession looms over the United States. And as the clich goes,
whenever the US sneezes, the world catches a cold. This is evident from the way
the Indian markets crashed taking a cue from a probable recession in the US and a
global economic slowdown. Weakening of the American economy is bad news, not
just for India, but for the rest of the world too.

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.

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.

37


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 a low ebb in India with little cheer coming to investors.

During a full recession, US companies in health care, financial services and all
consumer demand driven firms are likely to cut down on their spending. Among
other sectors, manufacturing and financial institutions are moderately vulnerable.

Worst affected because of US recession will be the service industry of India. Under
service industries come BPO, KPO, IT, ITeS etc. Service industry contributes about
52% to India's GDP growth. Now if that is going to get hurt then it will also hurt
India's overall growth but very slightly.

Subprime lending:

The defaults on sub-prime mortgages (home loan defaults) have led to a major crisis
in the US. Sub-prime is a high risk debt offered to people with poor credit
worthiness or unstable incomes. Major banks have landed in trouble after people
could not pay back loans.

Recession and GDP:

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.

The whole of Asia would be hit by a recession as it depends on the US economy.
Even though domestic demand and diversification of trade in the Asian region will

38


partly counter any drop in the US demand, one simply can't escape a downturn in
the world's largest economy. The US economy accounts for 30 per cent of the
world's GDP.

If the service sector takes a serious hit, India may have to revise its GDP to about 8
to 8.5 per cent or even less.

Some of the volatile dates and events Caused by the impact of
Global Economy on Indian Stock Market are:

Wednesday, July 25, 2007:

Indian stocks will see heavy selling in the initial session due to
fall down in global markets. If late buying is not seen in the late
session, today will become black Wednesday. Capital goods will see
heavy selling due to vertical rise in the recent days. This correction is
good for markets and real investors who are waiting in the sidelines for
fresh investments. New inexperienced investors should stay away from
markets until RBI announced credit policy. Weakness in global
markets, rising rupee, drop in earnings, derivative expiry, crude price
will make the stock markets a dangerous territory in the coming day.s

Wednesday, July 18, 2007

Indian share Markets are in bearish phase:

Bears will dominate Indian stock markets in the following
sessions due to weak global markets and profit booking. There was be a
clear slow down in the growth of most sectors and failed to justify their
very high valuations. This was a very opportunistic period for new
investors who want to enter into good stocks.

39


Tuesday, March 18, 2008:

Finance Minister P Chidambaram said that the fallout of the US
subprime crisis on the global credit and housing markets would impact
India. “When crisis (has) moved from the subprime mortgage market to
the housing market, and now the housing market to the credit market,
there is an impact on India. There is an impact in terms of credit flows
and financial flows. But at the moment, the impact is second-order
impact and a moderate impact.

40


Inflation:-
Most analyses of accelerating inflation in India emphasise the role of “imported
inflation” in driving Indian prices upwards.

With the annual rate of inflation in India having touched 7 per cent on a point-to-
point basis during the week-ending March 22, 2008, the search for policies to
combat the price rise has begun. One factor seen as making that search difficult is
the ostensible role of “imported inflation” in driving the rise in domestic prices.

There is an obvious reason why such an argument arises. Among the products
primarily responsible for the current inflation are food products of different kinds,
including cereals, intermediates like metals and the universal intermediate, oil.

While the disruption caused by the US occupation of Iraq, other geopolitical factors
and the speculation that followed have played a role in the case of oil, what explains
the recent increase in other global commodity prices, especially food articles and
metals? Chart 3 (based on IMF data) shows that, except for agricultural raw
materials whose prices have increased very little, all the other commodity groups
have shown sharp rises in price.

The rise in price levels for metals was the earliest in the recent surge, with the
weighted average of metals prices increasing sharply from the last quarter of 2005,
and almost doubling in the two-year period to February 2008. Coal prices more than
doubled last year, thereby showing a faster rise than even the oil price. Food prices,
like agricultural raw materials, had shown only a modest increase until early 2007.
But since then they have zoomed, such that the IMF data show more than 40 per
cent increase in world food prices over 2007.

41


The FAO food price index, which includes national prices as well as those in cross-
border trade, suggests that the average index for 2007 was nearly 25 per cent above
the average for 2006. Apart from sugar, nearly every other food crop has shown
very significant increases in price in world trade over 2007, and the latest evidence
suggests that this trend has continued and even accelerated in the first few months
of 2008. The net result is that globally the prices of many basic commodities have
been rising faster than they ever did during the last three decades.

Forces behind the rise in inflation:

To understand this, it is necessary to examine the forces behind the price rises for
different commodities. In the case of food, there are more than just demand forces
at work, although it is certainly true that rising incomes in Asia and other parts of
the developing world have led to increased demand for food. Five major aspects
affecting supply conditions have been crucial in changing global market conditions
for food crops.

42


First, there is the impact of high oil prices, which affect agricultural costs directly
because of the significance of energy as an input in the cultivation process itself
(through fertiliser and irrigation costs) as well as in transporting food. Across the
world, governments have reduced protection and subsidies on agriculture, which
means that high costs of energy directly translate into higher costs of cultivation,
and therefore higher prices of output.

Second, there is the impact of both oil prices and government policies in the US,
Europe, Brazil and elsewhere that have promoted bio-fuels as an alternative to
petroleum. This has led to significant shifts in acreage as well as use of certain
grains. For example, in 2006 the US diverted more than 20 per cent of its maize
production to the production of ethanol; Brazil used half of its sugarcane production
to make bio-fuel, and the European Union used the greater part of its vegetable oil
production as well as imported vegetable oils, to make bio-fuel. This has naturally
reduced the available land for producing food.

Third, the impact of policy neglect of agriculture over the past two decades is
finally being felt. The prolonged agrarian crisis in many parts of the developing
world; the shifts in acreage from food crops to cash crops relying on purchased
inputs; the excessive use of groundwater and inadequate attention to preserving or
regenerating land and soil quality; the lack of attention to relevant agricultural
research and extension; the overuse of chemical inputs that have long-run
implications for both safety and productivity; the ecological implications of both
pollution and climate change, including desertification and loss of cultivable land:
all these are issues that have been highlighted by analysts but largely ignored by
policymakers in most countries.

Reversing these processes is possible but will take time and substantial public
investment, so until then global supply conditions will remain problematic.

43


Fourth, there is the impact of changes in market structure, which allow for greater
international speculation in commodities. It is often assumed that rising food prices
automatically benefit farmers, but this is far from the case, especially as the global
food trade has become more concentrated and vertically integrated.

A small number of agribusiness companies worldwide increasingly control all
aspects of cultivation and distribution, from supplying inputs to farmers to buying
crops and even in some cases to retail food distribution. This means that marketing
margins are large and increasing, so that direct producers do not get the benefits of
increases expect with a time lag and even then not to the full extent. This
concentration also enables greater speculation in food, with more centralized
storage.

Some of the volatile dates and events Caused by the impact of
Inflation on Indian Stock Market are:

Friday, July 20, 2007
Profit booking in the late session

Indian share markets rise in the early session due to strong cues
from global markets. Profit booking will be seen in the late session due
to rise in inflation and unsustainable valuations.

Saturday, March 1, 2008
Inflation continues to rise; touches 5.11 per cent for week
ended. Rise in headline inflation is mainly due to increase in price
of primary articles

44


Friday, March 28, 2008
Inflation at 6.68%. High inflation is a big election problem
and the only way to counter it is high interest rates. Government
continues with fiscal measures to curb inflation. Three major
components aided the rise in inflation i.e. the fuel group, food
articles & manufactures products

Monday, March 31, 2008
Emergency cabinet committee meeting to tackle inflation
The cabinet is likely to have discussions on prices of steel, wheat,
cement, edible oils and food articles including rice and other essential
goods.
Monday, April 7, 2008

Inflation touches 7%; RBI may hike key rates
The current inflation is mainly supply led, with rising prices of metals,
fuel and agriculture commodities being key contributors

The high inflation may prompt RBI to take tough monetary
measures to ease out inflationary pressure in its annual credit policy,
scheduled to be announced on 29 April.

45


RBI Policies:-

The capital market, which has been at the receiving end since the unexpected hike
in the Cash Reserve Ratio and repo rates in end March,2007 to contain the rising
inflation rate, has cheered the Reserve Bank of India for leaving unchanged all the
key rates in the April 24 Annual Policy Statement.

The policy response to the rising inflation and the overheating of the economy has
been to hike the repo rates five times in FY-07 from 6.50 per cent to 7.75 per cent.
As the RBI had already intervened recently via market operations, this time around
the central bank appears to have stayed its hand.

The market correctly did not expect any rate to be raised, reflected in the Bank
Index being up 1.4 per cent just before the Policy announcement. Further, in a
CNBC poll before the policy announcement, 67 per cent of the respondents
predicted `no change' in interest rates.

Predictably, the market welcomed the Monetary Policy wholeheartedly, as evident
from the equity index ending approximately 1.4 per cent up, and the Bank Index
rising more than 4.5 per cent. The bond market also gave a thumbs-up to the policy,
with 10-year yields falling more than 10 basis points.

In an indication that it may hold back a policy rate cut tomorrow, the Reserve Bank
of India (RBI) on Monday said inflation in India was artificially “suppressed” as
higher international oil prices have not been passed on to domestic consumers.

In its report on macro-economic and monetary developments a day before the third
quarterly review of its 2007-08 monetary policy, RBI also said “elevated
international food prices also pose potential inflationary pressures in the period
ahead.”

46


Some of the volatile dates and events Caused by the RBI Policies
on Indian Stock Market are:

Monday, July 23, 2007

With derivative expiry and RBI credit policy are around the corner,
Indian share markets will trade in extreme volatility in the coming
sessions. Indian stocks are in “unclear” zone with Mutual funds and
big domestic investors are waiting for correction, NRIs and FIIs are
pumping money. My advice- does not take long positions and book
profits immediately in high growth stocks. Correction is eminent

Thursday, August 30, 2007

The RBI, for the first time, has given its views on the subprime.

It has said that further deterioration will lead to reassessment of
risk of investors. It added that the emerging markets may face further
outflow of capital. The dominance of hedge funds will add fuel to fire, it
feels. According to the RBI, global financial volatility will impact
growth and stability.

On the issue of inflows, the RBI said that a significant part of FII
inflows is in the form of PNs & sub-accounts. The portfolio flows are
volatile and can reverse direction, the RBI said. India is not immune to
global volatility and risky flows.

RBI has cautioned banks and corporates to be vigilant. It said
that banks and corporates should keep risk strategies in place. They

47


should monitor exposures and hedge them to avoid shocks, the RBI
said.

Friday, October 26, 2007

Trend in inflow from foreign funds dictated the near term trend
on the bourses. The market on Friday, 26 October 2007, shrugged off
Securities & Exchange Board of India (Sebi) directive on restriction of
participatory notes (PNs) that came into effect from 26 October 2007.
Sebi has banned fresh issuance of PNs with derivatives as underlying
and it has also ordered winding up such PNs in 18 months, besides
putting curbs on such issue of PNs in the spot market.

Saturday, November 10, 2007

The policies announced in the Mid-Term Review of the Reserve
Bank of India (RBI) are on expected lines. The policy rates have been
left unchanged. Only the Cash Reserve Ratio (CRR) has been raised by
50 basis points to 7.5 per cent, effective.

Tuesday, January 29, 2008

RBI Credit Policy: Kept all the prime rates unchanged
For the past few days, market participants and players are
desperately waiting for the upcoming announcements among which
RBI’s monetary policy review and ‘two-day’ Federal Reserve meeting
schedules were in top priority. A positive rate was always present
somewhere in everybody’s mind, specially after a rate cut in US on
75bps to 3.50% and the down circuit of Indian stock market. Investors
had an expectation towards a boost to the market on part of the
Government. The investors having significant amount of losses were
48


more keen to see a rate cut.
Fact: In realty, there was no rate cut on behalf of the RBI in its
4th quarter credit policy review. CRR, Repo rate and Reverse Repo rate
were unchanged at 7.50%, 7.75% and 6% respectively. The initial
repercussion reflected as Nifty gone down Negative and the Nifty bank
index was around 300 points down.

Monday, March 31, 2008

Inflation spiralled to 6.68 per cent, much beyond the RBI's
comfort level of five per cent, prompting Finance Minister P
Chidambaram to stress that the government would take all measures,
monetary, fiscal and supply side, to combat it.

The heavy inflow of foreign currency into the country and the
sky-rocketing prices of international crude oil will pose a stiff
challenge before the Reserve Bank of India (RBI)

Government Policies:-

The recent developments in the forex, money and stock markets suggest that the
UPA Government and monetary authorities would have to recast their strategy and
reformulate the fiscal and monetary policies for ensuring balanced economic growth
with the gross domestic product (GDP) rising by 9-10 per cent.

The heady forex inflows so far in the current financial year resulting in an addition
of $ 62 billion in foreign exchange assets against $ 46.8 billion in the whole of
2006-07 has resulted in a steady appreciation of the rupee by 12.6 per cent vis-À-vis
the dollar since the end of October last year.

49


This increase in the external parity of the Indian currency is due more to technical
factors rather than improved competitive ability of the industrial and agricultural
sectors of the economy.

However, the impact of dearer rupee on select basic industries, which account for
40 per cent of total exports, has been such that Kamal Nath, Union Minister for
Commerce and Industry has, for the first time, expressed serious apprehension
about these industries being compelled to reduce exports sizably.

It has been indicated that exports of textiles declined by 22 per cent, handicrafts 66
per cent, leather 9 per cent and marine products 20 per cent in April-October 2007.
The shortfall under these heads have to be overcome with a step up in shipments of
other items which are in peak demand in overseas markets. But the industries
adversely affected by dearer rupee account for employment of millions of workers
and it is imperative that their competitive ability should not be impaired unduly till
such time new measures yield the desired results.

The increase in exports up to September was only 18 per cent against 27.1 per cent
in the corresponding period in 2006-07.

The spurt in exports by 35.65 per cent in October may prove to be a flash in the pan
as the ministry’s spokesman has observed that forex earnings in 12 months may be
only around $ 140-150 billion and the target of $ 160 billion may be difficult of
achievement.

As imports also will be increasing noticeably with larger outgo in respect of oil and
non-oil imports, the trade gap may widen uncomfortably in 2007-08 and the current
account deficit may be higher at $ 13-14 billion against $ 9.6 billion in 2006-07.
This gap may be bridged as on former occasions with heavy forex inflows on
capital account. Even though it may be argued that the future prospects are
promising and there may not be deficit on current account after 2008-09, the
monetary authorities have been obliged to intervene in the forex market and effect
sizable purchases of U.S. dollars. The substantial purchase has resulted in disturbing
increase in money supply and it has been necessary to hike the cash reserve ratio by
50


half a percentage point to 7 per cent effective from August 4 and also intensify
market stabilisation operations.

These measures have not been quite fruitful. While there has been a surge in the
growth of deposits, credit expansion has slowed down significantly due to
prevalence of higher lending rates and cost escalation in some directions.

While the industries turning out capital goods, communication equipment,
electronic and electrical components have been maximising their output, the
average rise in industrial output was 9.2 per cent in April-September against 11.1
per cent comparably.

The slower rise in industrial output cannot be allowed to persist even though it may
be claimed from the national angle that the growth in the GDP may be even 9.2 per
cent because of the better performance of the agricultural sector.

Sharath Pawar, Union Minister for Agriculture, has stated that there will not be any
further increase in wheat imports in the coming months apart from the commitment
Railway Minister Lalu Prasad has already presented a populist budget which
announced cuts in passenger fares and selective reduction in freight rates, while
painting a rosy picture on its earnings.

GOVERNMENT moves to impose curbs on PNs have in the past also resulted in
wild fluctuations in the market. With FIIs having such a major presence in the
Indian capital markets, the government has been cautious in dealing with these
instruments, for any moves perceived by the markets as imposing curbs on
international investors, could have a disastrous impact on the stock markets

With steady open market prices for rice and a noticeable downtrend in prices for
wheat and pulses, the monetary authorities have to worry only about the effects of
upward adjustments in respect of the petroleum sector if world prices for crude
fluctuate around $ 90 per barrel. As the UPA Government and the Reserve Bank of
India can now expect that there will be an abatement of new inflationary pressures,
it has become necessary to stimulate industrial growth in some directions. Towards
51


this end, the Governor of the Reserve Bank should take a decision about a reduction
in interest rates even by controlling an uncomfortable rise in money supply.
Selective credit expansion on a cheaper basis will have to be attempted if the
slowdown in industrial output is to be reversed.

The other side of the story is, if mid-term polls are inevitable, Government prefers
people over companies. Popular policies will slow down momentum which will
negatively impact investors sentiment towards India.

Some of the volatile dates and events Caused by Government
policies and budgets on Indian Stock Market are:

Feb 26, 2008,Tuesday

Market choppy; Railway Budget 2008-09 lifts market higher in late
afernoon trade
Market started with moderate gains as stocks specific buying was
seen across all sectors. Market surged higher only in the late trade
backed by positive global cues and a favourable railway budget
announcement. Reduced rail fares, lower freight charges, technology
and rail infrastructure upgradation were the major highlights of the
budget. Realty, power, capital goods stocks were the major gainers as
all sectoral indices ended in green.

Friday, February 29, 2008

Budget'08 tabled; Short term capital gain increased to 15% as
market ends weak
Market opened lower this morning and slipped sharply in the
afternoon trade as the Finance presented the Union Budget 2008. Short
term capital gain tax has been increased from 10% to 15%. Market had
52


a negative reaction to this announcement and made day's low at this
point in time. However, market rose smartly and managed to recover
some losses. Realty, IT, capital goods, power stocks were major losers
while auto stocks were among the gainers.
Fundamental Analysis is the cornerstone of Investing. In fact, some
would say that you aren't really investing if you aren't performing
fundamental analysis.
During fundamental analysis we look at a stock from three aspects
1.Company
At the company level, fundamental analysis may involve
examination of financial data, management, business concept and
competition.
2.Industry
At the industry level, there might be an examination of supply
and demand forces for the products offered.
3.Economy
Fundamental analysis might focus on economic data to assess the
present and future growth of the economy.
To forecast future stock prices, fundamental analysis combines
economic, industry, and company analysis to derive a stock's current
fair value and forecast future value. If fair value is not equal to the
current stock price, fundamental analysts believe that the stock is either
over or under valued and the market price will ultimately gravitate
towards fair value. Fundamentalists do not heed the advice of the
random walkers and believe that markets are weak-form efficient.

For instance, information regarding changes in the economy, which is
reflected in macro level data, changes in policies, including industrial
53


policy, political situation and the social situation, influence of overall
price behavior of the market. Industry-specific factors, such as
industrial policies of the domestic as well as foreign governments,
demand and supply factors, as also incentives and barriers for the
movement of products of a specific industry or group of industries in
international markets, seasonal factors that influence a particular
industry or group of industries, entry and exit policies, labour relations
etc., influence the prices of all securities of companies in an industry.
Company-specific factors such as quality and credibility of promoters,
competence and professionalism of management, policies with regard
to financing, investment and dividend decisions influence the security
prices of the company and thus the market volatility.

But one positive thing though, if one looks at the index performance
over the past three months, it has been getting better progressively. If
one looks at Asia Ex- Japan index, May’s returns have been minus
1.7%, in June it came down to minus 1% and in July it was just 10 basis
points negative return. So although all have been negative, what we see
is a betterment of the returns over a three-month period.

54


Other Factors:-

Most of the investors and analysts are unable to cope with this unbelievable rise in
Indian stocks especially capital goods and power stocks. Foreign investors and big
financial institutions invested heavily in these stocks when markets were crashed in
August but many retail investors missed to capitalize this rally. FIIs discounted all
the negative news and poured money into Indian stocks after Fed rate cut in
September. But will this euphoria last forever?

1. Political Instability: This is the single most major reason for stock market crash.
Investors especially FIIs never like political instability and they will book profits
and go to another country. Even though political turmoil will have no significant
impact on the growth of companies, stock markets always negatively respond to
political instability.
2. RBI decision: Don’t expect positive news from RBI. Don’t be fooled by inflation
data which is released on every Friday. You will know real inflation in the routine
life. No government will allow raising inflation by cutting interest rate cut just
before elections. RBI will definitely raise CRR and is major negative news for
markets.
3. Negative news: When markets rose too high within a short span, single negative
news will create havoc in stock markets. Markets discounted negative news like
Crude rise, rupee appreciation, inflation concerns in U.S after fed rate cut and slow
down in economic growth etc.
4. Economic growth: There is a slow down in economic growth if you see the data
but markets already discounted 2008-09 earnings especially for high growth sectors
like power and capital goods.
5. Profit booking: Shrewd investor always book profits just before every crash
whether it is in 2000 or 2006. Greedy investors always lose money in every crash.
Decide yourself whether you are greedy or not?

55


FINDINGS AND SUGGESTIONS

• Investors should trade carefully during volatility

• Investors should invest in Blue Chip Companies during volatile Market

Conditions

• Investors should not be very greedy and Book the partial profits even if it is

small during the volatile

• Investors should always trade discounting the market news

• Investors should always be aware of the news which affects market

sentiment

• Investors should avoid heavy exposure during long week ends

• Investors should always have an eye on global and other asian markets.

• Investors should always be informed about global and asian economy

• Investors and Traders should always enter market with stop loss option

• Always have a watch on various support and resistance levels

• Investors should entry and exit the market at the proper time

56


CONCLUSION

The expectations and foresight of investors as well as speculators determine the
magnitude of price fluctuations to a larger extent. If market participants anticipate
changes in either fundamental factors or any other factors correctly, and if the
change or anticipated change comes about gradually, the prices move in a smooth
fashion from one point of equilibrium to another. On the contrary, when the
anticipations prove to be either too optimistic or pessimistic, or the changes in these
factors or anticipations about them, undergo a sudden change, the prices move
erratically, rather than move in a smooth fashion resulting in greater Volatility.

57


BIBLIOGRAPHY:

Textbooks:

 Financial Management,
By Prasanna Chandra

 Security analysis and portfolio Management
By Prasanna Chandra

Websites

www.nseindia.com
www.moneycontrol.com
www.yahoofinance.com
www.bseindia.com
www.google.com
www.wikipedia.com

Reference Journals:

 The ICFAI journals of applied finance.
 Banking finance
 Vikalpa

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