Impact on select macro economic variables on the movement of bse sensex

A STUDY ON THE IMPACT OF SELECT MACRO-ECONOMIC VARIABLES ON THE MOVEMENT OF BSE SENSEX.
Acharya Institute of Graduate Studies 2 | P a g e
INTRODUCTION
The Indian stock market plays a pivotal role in the growth of Indian economy. Its every
movement puts an impact on the performance of the economy. The stock market is a place
at where investors, whether Indians or foreigners can invest or take the funds for capital
appreciation. Their decision to invest or withdraw the funds depends upon the numerous
factors. The various proponents opined that the macroeconomic variables are the one of
them. Macroeconomics is the analysis of the nation’s economy as a whole. It scrutinizes
the cyclical movements and trends exist in economy.
Indian capital market has undergone tremendous changes since 1991, when the government
has adopted liberalization and globalization polices. As a result, there is a growing
importance of the Stock market from aggregate economy point of view. Nowadays stock
market has become a key driver of modern market based economy and is one of the major
sources of raising resources for Indian corporate, thereby enabling financial development
and economic growth. In fact, Indian stock market is one the emerging market in the world.
Stock market is an important institution in a country and is of great concern to investors,
stakeholders and the government. Mobilization of resources in the economy has been a
puzzle for investors, stakeholders, analysts and regulators to solve. Effective and efficient
resource mobilization in an economy foster sustainable growth and development, therefore
funds must be effectively mobilized and allocated to enable the economy realize optimal
output. The stock market is an economy promotes efficiency in capital formation and
allocation. Numerous attempts by emerging stock markets to develop the financial sector
have been evident in the recent past, as they strive towards market efficiency. Stock market,
an efficient stock market, acts as a barometer to economic growth. Policy makers therefore
rely on market estimates of volatility as a barometer of the vulnerability of financial
markets. However, the existence of excessive volatility, or “noise,” in the stock market
undermines the usefulness of stock prices as a “signal” about the true intrinsic value of a
firm, a concept that is core to the paradigm of the informational efficiency of markets.

Financial markets play a crucial role in the foundation of a stable and efficient financial
system of an economy. Numerous domestic and international factors directly or indirectly
affect the performance of the stock market. Indian stock market has witnessed spectacular
change in the recent decades. The market has undergone huge reform in the past few years.
The economic instability in the global and national context has made its influence on the
market movement. The linkage of stock market with macroeconomic variables has always
been an area of interest among investors and policy makers. The Indian stock market is
prone to the macroeconomic uncertainty in the country. The stock markets and their
indicators in the form of indices, reflect the potential, the direction and health of the
economy. There is extensive group of macroeconomic variables that influences the stock
prices in the share market. If a country’s economy is performing well and expected to grow
at vigorous pace, the market is frequently expected to imitate the situation. The stock
market of emerging economics like India carries huge expectations of the investors.
The Sensex, also known as the sensitivity index, is the benchmark index of BSE Limited
and is the most widely tracked equity gauge in India. Sensex, otherwise known as the S&P
BSE Sensex index, is the benchmark index of the Bombay Stock Exchange (BSE). It is
composed of 30 of the largest and most actively-traded stocks on the BSE, providing an
accurate gauge of India's economy. Initially compiled in 1986, the Sensex is the oldest
stock index in India.
The relationship between macroeconomic variables and a developed stock market is well
documented in literature. The present study extends the existing literature in the Indian
context. This study takes into consideration three macro-economic variables namely,
Exchange Rate, Foreign Direct Investment(FDI), Repo rate and the Bombay Stock
Exchange(BSE)

CHAPTER II
RESEARCH DESIGN

INTRODUCTION
The research design refers to the overall strategy that you chose to integrate the different
components of the study in a coherent and logical way, thereby, ensuring you will
effectively address the research problem; it constitutes the blueprint for the collection,
measurement and analysis of data.
REVIEW OF LITERATURE
The literature provides past studies performed in international and national context to
examine the relationship between stock market and macroeconomic variable.
In the past decades, many industry researchers, financial analysts and practitioners have
attempted to predict the relationship between stock markets movement and macroeconomic
variables. They have conducted empirical studies to examine the effect of stock price on
macroeconomic variables or vice-versa or relationship between the two and the results of
all those studies have provided different conclusions according to the combination of
variables, methodologies and tests used. Here, I have discussed some previous research
works/papers and their empirical conclusions that are related to our sector analysis.
Anokhye and George (2008) examined the long-run and short-run effects of
macroeconomic variables namely, inward foreign direct investments, Treasury bill rate,
consumer price index, and exchange rate on the movement of stock prices in Ghana from
1991 to 2006 using Johansen's multivariate cointegration test and innovation accounting
techniques. And established that there is cointegration between macroeconomic variables
and stock prices in Ghana indicating long-run relationship. Further tests indicate that, in
the short-run, inflation and exchange rates matter for share price movements in Ghana,
however, interest rate and inflation prove very significant in the long-run.
Tarika ,Seema and Varsha (2010)examined for Taiwan the casual relationship between
index returns and certain crucial macroeconomic variable namely employment rate,
exchange rate, GDP, Inflation and money supply. The analysis was based on stock
portfolios rather than single stocks. In portfolio construction, four criteria are used: Market

capitalization, price/earnings ratio (P/E ratio), PBR and yield. Empirical findings revealed
that exchange rate and GDP seem to affect returns of all portfolios, while inflation rate,
exchange rate, and money supply were having negative relationship with returns for
portfolios of big and medium companies.
Tobias and Kennedy (2011) investigated the effect of Macro-economic factors on the
stock return volatility on the Nairobi Securities Exchange, Kenya. The study focused on
the effect of foreign exchange rate, interest rate and inflation rate fluctuation on stock return
volatility at the Nairobi Securities Exchange. It used monthly time series data for a ten
years period between January 2001 and December 2010. Empirical analysis employed was
Exponential Generalized Autoregressive Conditional Heteroscedasticity (EGARCH) and
Threshold Generalized Conditional Heteroscedasticity (TGARCH). And found that
Foreign exchange rate, Interest rate and Inflation rate, affect stock return volatility.
Karam and Ruhee (2011) examined the long-run relationship between the Indian capital
markets and key macroeconomic variables such as interest rates, inflation rate, exchange
ratesand gross domestic savings (GDS) of Indian economy. Using quarterly time series
data spanning the period from January 1995 to December 2008 has been used. The unit
root test, the co-integration test and error correction mechanism (ECM) have been applied
to derive the long run and short-term statistical dynamics.And found that there is co-
integration between macroeconomic variables and Indian stock indices which is indicative
of a long-run relationship,establishes that the capital markets indices are dependent on
macroeconomic variables even though the same may not be statistically significant in all
the cases.
Samveg Patel (2012) investigated the effect of macroeconomic determinants on the
performance of the Indian Stock Market using monthly data over the period January 1991
to December 2011 for eight macro-economic variables, namely, Interest Rate, Exchange
Rate, Index of Industrial Production, Money Supply, inflation, Oil price, Silver Price &
Gold Price and two stock market indies namely Sensex and S&P CNX Nifty, by applying
Augmented Dickey Fuller Unit root test, Johansen Co-integration test, Granger Causality
test and Vector Error Correction Model and the study found that Exchange rate exchange

rate contains some significant information to forecast stock market performance. The
Money supply, Inflation and IIP are other major significant factor and the commodity
prices too have an impact on the performance of stock market. And there exists a long run
equilibrium relation between stock market indices and all macroeconomic variables and it
provides evidence of causality running from exchange rate to stock market indices to IIP
and Oil Price.
Naik (2013) considered five macro-economic variables, including index of industrial
production, money supply, short term interest rate, inflation and Exchange rate. The study
revealed that three out of five macroeconomic variables had a significant long run
relationship with Sensex. In the long run, IIP and money supply were positively correlated
with stock performance represented by Sensex. The WPI represented as inflation was
negatively correlated with Sensex. Finally short term interest rates and exchange rate were
not significant predictors of Sensex.
Rakesh Kumar (2013)investigation based on the average monthly data (January, 2001 to
May, 2013) of 12 macroeconomic variables namely, Money Supply, Consumer Price
Index, Gold Prices, Crude Oil Prices, Foreign Exchange Reserves, Foreign Direct
Investment, Foreign Institutional Investment, Call Money Rate, Balance of Trade, Foreign
Exchange Rate, Repo Rate, Industrial Growth Rate, using the data reduction technique-
factor analysis to derive the factors which determine the performance of stock market in
India. The Principal Component Technique after using orthogonal rotation extracted three
factors labeled intuitively as Macro Environment, Industrial Performance and Policy Rates.
The study highlights that favorable macro environment in India is good for the stock market
and the stocks can trade with high Price Earning (PE) ratio and industrial performance play
significant role in influencing the stock market. Market rely more on optimistic
macroeconomic environment call for state’s prudent efforts to maintain macro stability.
Dr. Venkatraja.B (2014) examined the relationship between the Indian stock market
performance (BSE Sensex) and five macroeconomic variables, namely, index of industrial
production, wholesale price index, gold price, foreign institutional investment and real

effective exchange rate over the period April 2010- June 2014 using monthly data.
Multiple regression technique and Durbin-Watson test is applied and no evidence of auto
correlation between the independent variables is found and the data. The regression model
summary endorses a very strong combined influence of independent variables on the
Sensex. From the results, it appears that 82 per cent of variation in Sensex is explained by
the five selected macroeconomic factors. Wholesale price index, index of industrial
production, foreign institutional investment and real effective exchange rate have high
degree of positive influence on Sensex. It is also found that Sensex is inversely influenced
by changes in gold price. Further, of the five variables, the coefficients of all the variables
except index of industrial production are statistically significant. And it came to the
conclusion that inflation, inflow of foreign institutional investment, exchange rate and gold
price significantly impact the Indian stock market performance.
Pooja Singh (2014) investigated the relationship between macroeconomic variables
namely, Index of Industrial Production, Wholesale Price Index, Money supply, Interest
Rates, Trade Deficits, Foreign Institutional Investment, Exchange Rate, Crude oil Price
and Gold Price and used monthly data from January 2011 to December 2012 and the Indian
stock market. The multivariate stepwise regression and Granger’s causality test were used
to determine the relationship. The study found that. The gold prices have its negative
impact on the stock market and foreign investment as well as money supply exhibits
positive impact on the stock market. The exchange rate shows its adverse effect on the
stock market during the study period. Granger causality test signifies that there exists
unidirectional causal relationship from exchange rate to stock market. Thus, any movement
in the value of exchange rate has influence on stock market.
Gurloveleen and Bhatia (2015) investigated the impact of macroeconomic variables on
the functioning of Indian Stock Market using the monthly data of ten macroeconomic
variables, namely Broad Money, Call Money Rate, Crude Oil Price, Exchange Rate,
Foreign Exchange Reserve, Foreign Institutional Investors, Gross Fiscal Deficit, Index of
Industrial Production, Inflation Rate and Trade Balance and one stock market index i.e.

BSE 500. The Augmented Dickey Fuller (ADF) Test, Multiple Regression and Granger
Causality Tests were employed to find out the results. The two macroeconomic variables
Foreign Institutional Investors and Exchange Rate were found significant. It has been
observed that these variables have no relationship with closing prices of BSE 500
manufacturing firms. The study also revealed that the Indian Stock Market was a weak
form efficient because no relationship was found amongst the variables during the study
period.
Subramanian (2015) examined the relation between the BSE and macro-economic
variables namely, GDP, Inflation rate, Interest rate, Industrial production and Exchange
Rate using Regression and Pearson’s correlation analysis and by using LOG-LOG model
and observed that macro-economic variables are influencing the movement of stock market
index.
Kiran and Bhawna (2016) examined long and short run relations between selected
macroeconomic indicators and stock market returns by employing monthly data from July
2001 to July 2015 since major stock market reforms viz., ban of Badla system, introduction
of rolling settlement and introduction of stock derivatives, were all implemented in July
2001. With the help of cointegration and error correction model (ECM), the study reveals
the presence of long run relation between the BSE Sensex and select macro-economic
indicators viz., Exchange Rate, wholesale price index, T-bill rates and M3.
Ravindra Tripathi, Anurag,Priyanka (2016) made an attempt to explore the relationship
between the Indian stock market represented by BSE Sensex and key macro-economic
variables: Index of Industrial Production(IIP), Foreign Direct Investment(FDI), and
Wholesale price index(WPI) of the Indian economy using regression model. The findings
showed that IIP is the basic predictor of BSE Sensex. Whereas, FDI and WPI were not
found to be a significant predictor of BSE Sensex.

Mahmoud, Sara, Khaled(2016)investigated the relationship between the stock market
and macro economic factors in Egypt and Tunisia for the period from January 1998 to
January 2014 using Unit root test, Augmented Dickey Fuller test, vector auto regression,co-
integration test and Granger causality test.Results indicated that there is a casual
relationship in Egypt between market index and consumer price index, exchange rate
,money supply and interest rate and in Tunisia except for CPI ,which had no causal
relationship with the market index and also revealed that the four macroeconomic are co-
integrated with the stock market in both countries.
Venugopal and Sudha (2017) examined the relationship linking select macroeconomic
variables namely, call money rate, money supply (M3), exchange rate, gold &silver prices,
forex reserves, and consumer price index, and the stock prices of 30firms which form the
basis for the principal barometer of India’s economy, Bombay Stock Exchange’s Sensex
(BSE30). This study is conducted for the period Jan 2000- Aug 2017 month-wise and using
OLS method and Granger causality test. And found Call Money rate, Exchange rate and
Forex reserves showing significant impact on the Indian BSE 30 Index.

RESEARCH GAP
Majority of the studies were to examine the relationship between Indian stock market with
macro-economic variables such as interest rates, inflation rates, GDP, WPI & IIP in a
separate manner with limited time period. In addition with that many studies failed to
examine the relationship between stock market performance with exchange rates, FDI ,repo
rate in a grouped manner in a long period .So this research focus on the Impact of select
macro-economic variables on the movement of BSE Sensex.
STATEMENT OF THE PROBLEM
Investment is the backbone of the economy. It is mandatory for everyone to hold their
income in the form of investment. But the investment avenues in markets based on the risk
taking ability of the investors. In the share market, everyday Sensex movement is based on
the fluctuations of the macroeconomic environmental factors. It is necessary to understand
the share market Sensex movement before investment with the BSE SENSEX movements.
SCOPE OF THE STUDY
The study covers only three acro-economic variables namely Exchange rate, Repo rate and
FDI.This study is only conducted on BSE Sensex. Secondary data period covers from
2008-2017.
OBJECTIVES OF THE STUDY
1. To study the concept of macro-economic variables and the movement of BSE
Sensex.
2. To investigate the relationship between the stock market and various macro-
economic variables namely, Exchange rate, Foreign Direct Investment and Repo
rate.
3. To study the impact of macro-economic variables on the movement BSE SENSEX.

HYPOTHESES OF THE STUDY
1. Repo rate is not a significant predictor of BSE Sensex.
2. FDI is not a significant predictor of BSE Sensex.
3. Exchange rate is not a significant predictor of BSE Sensex.
4. There is no significant impact of macro-economic variables on BSE Sensex.
RESEARCH METHODOLOGY
The intended study is descriptive in nature. Since the data collected is from secondary
sources such as journals, RBI, BSE and Trading economics websites, which requires
statistical analysis to interpret the required information thus empirical study has been done
on this regard.
Period of study
The study covers the financial data from financial year 2008-2009 till 2016-2017.Financial
data includes Statement of Balance of Payment, Historical repo rates, Historical exchange
rates and historical BSE Sensex movement.
Data Collection
The data collected is from various secondary sources such as journals, RBI, BSE and
Trading economics and various other authentic websites.
Tools and Techniques
In order to analyze the collected data, various statistical tools has been used, such as;
 Mean
 Standard deviation
 Trend analysis
 Correlation and
 Regression analysis.

Reference period
As per Bangalore University guidelines the reference period for the study was limited to 2
months.
LIMITATIONS OF THE STUDY
There are four limitations that need to be acknowledged and addressed regarding the
present study.
And these limitations are as follows:
 Accuracy: The result & conclusion of this study might not be accurate due to
reliability of the secondary data & limitation on the variables selected & the time
span considered.
 Time period: A time span of only 10 years has been considered for examining the
relation between macroeconomic variables and Indian stock market.
 Limited variables: This study mainly focuses on selected three independent
variables which may not completely represent the macroeconomic variables.
CHAPTER SCHEME
Chapter 1: Introduction: - Introduction to the topic of study
Chapter 2: Research Design: - Review of Literature - Problem Statement - Scope of the
Study - Research Gap - Objectives of the Study - Hypothesis - Research Methodology –
Limitations of the study.
Chapter 3: Theoretical and Conceptual Background: - Introduction to Bombay stock
exchange and its Sensex, Repo rate, Exchange rate and various statistical tools.
Chapter 4: Data Analysis and Interpretation: - This chapter deals with the Analysis of
data extracted from the Statement of Balance of Payment, Historical repo rates, Historical
exchange rates and historical BSE Sensex movement using various statistical tools.

Chapter 5: Findings, Suggestions and Conclusion: - This chapter deals with findings from
the data analysis chapter and suggestions based on findings.
Bibliography

CHAPTER III
THEORETICAL AND CONCEPTUAL
FRAMEWORK

STOCK EXCHANGE
Stock exchange is an important constituent of capital market. It constitutes that part of the
capital market which is concerned with the purchase and sale of the industrial, government
and other securities. In simple words, a stock exchange is an open market place which
entertains the purchase and sale of second-hand securities.
It is a highly organized market for the purchase and sale of securities of public companies,
government and semi-government bodies. In this manner, the stock exchange helps an
investor to sell his holdings readily and conveniently. A stock exchange ultimately helps
the inventor, the trader, the investor, the industrialist and the banker. In this context, it is
described as the business of all businesses.
Definition of Stock Exchange:
According to Pyle, “Security exchanges are market places where securities that have been
listed thereon may be bought and sold for either investment or speculation.”
According to Garg, “A stock exchange is an association of persons engaged in the buying
and selling of stocks, bonds and shares for the public on commission and are guided by
certain rules and usages.”
According to Hartley Withers, “A stock exchange is something like a vast warehouse
where securities are taken away from shelves and sold across the counters at a fixed price
in a catalogue which is called the official list.”
The Securities Contracts (Regulation) Act, 1956 defines a stock exchange as, “an
association, organization or body of individuals, whether incorporated or not, established
for the purpose of assisting, regulating and controlling business in buying, selling and
dealing in securities.”

Characteristics of Stock Exchange:
1. It is an organized capital market.
2. It is an association or body of individuals whether incorporated or not.
3. It is an open market for the purchase and sale of all kinds of securities, viz., shares of
public companies, debentures or bonds of government and semi- government bodies.
4. It works under a code of set rules and regulations.
5. It helps the investor, the trader, the industrialist and the banker whether for investment
or speculation purposes.
Importance of Stock Exchange:
A stock exchange has been rightly described as the nerve Centre of modern commercial
world. Stock exchanges are, in fact, the theatres of business transactions and act as a gauge-
glass of the politics and finances of a nation.
It has been rightly said that the modern capitalistic economy cannot exist in the absence of
well-organized stock exchanges. It is because stock exchanges facilitate the necessary
mobilization of capital required by companies in the business sector. They have been aptly
described the, ‘shrines of values’, the ‘citadel of capital’ or ‘fortress of finance’.
In the modern times, a stock exchange has come to be recognized as the barometer of the
economic progress of a nation. Bismark once advised a young man of his country
(Germany) who was going to England to study its economic progress in these words: “If
you want to know how things in Britain are going on, do not study the House of Commons,
but watch the London Stock Exchange.”
Prof. Marshall has rightly observed, “Stock exchanges are not merely chief theatres of
business transactions, they are also barometers which indicate the general condition of the
atmosphere of business.” In brief, the business of a stock exchange may be described as
“the business of businesses.”

Someone has remarkably summed up its importance by describing it “as the market of the
world, the nerve center of politics and finance of a nation, the barometer of its prosperity
and adversity.”
Functions of Stock Exchange:
The important functions of stock exchange are discussed below:
(i) Ready Market for Securities: A stock exchange provides a ready market for the sale
and purchase of existing securities. This facilitates the steady marketability of shares and
debentures. It also provides price continuity to the investors regarding the securities they
hold or intend to purchase.
It is the place where persons with cash can convert it into securities and those with
securities can readily realize cash. The easy marketability of securities enhances their
liquidity and, hence, increases the value of securities.
(ii) Mobilization of Surplus Savings: It is another important function of a stock exchange.
It creates favorable climate suitable for investment of surplus funds into business sector. A
stock exchange, thus, encourages savings and channelizes the funds towards industrial
progress. In this manner, stock exchanges mobilize savings and channelize the flow of
capital into most profitable ventures.
(iii) Capital Formation: Stock exchanges play an active role in the capital formation of a
nation. Stock exchange fosters the habit of saving, investing and risk-taking among the
members of general public. The funds so mobilized are directed towards business sector
for meeting capital requirements. In this way, stock exchange helps in the process of capital
formation.
(iv) Evaluation of Securities: As per stock exchange rules, all transactions on the
exchange are required to be “recorded and made public”. Accordingly, the prices paid and
received become official quotations. This enables the holders of securities to know their
actual worth at any time. Besides, the market quotation helps the lender on the security of
shares to assess the value of the security.

(v) Safety of Funds: Stock exchanges work under set rules and regulations. This ensures
safety of investable funds. Thus the stock exchanges protect the interests of investors
through the strict enforcement of rules and regulations. Efforts are made to check over
trading, illegitimate speculation, manipulation, etc. In the absence of organized stock
exchanges the innocent investors may easily be deceived at the hands of clever brokers
dealing in securities.
(vi) Dependable Guide for the Investors: Stock exchange serves as a dependable guide
for the investors. Regular dealings in stock exchange sift the profitable investment from
the risky ones. With the slow magic of time, securities which offer or promise better return
come in the limelight while those which have no encouraging future decline in market
price. This becomes a dependable guide to the discerning investor.
(vii) Listing of Securities: Listing of securities is a very important function of stock
exchange. A stock exchange does not deal in the securities of all companies. Listing of
securities here means the inclusion of securities in the official list of a stock exchange for
the purpose of trading.
Listing is done only after a careful examination of the capital structure and the business
prospects of the companies. Besides enhancing the prestige of the companies, it puts the
investors in a better position to judge the propriety of different securities.
(viii) Supply of Useful Commercial Information: A stock exchange provides full
information regarding listed companies. Having listed the securities, a stock exchange
serves as a gauge-glass of the economic health of the concerned companies. It collects
necessary information regarding non-listed companies also. Such information is usually
provided in their respective Annual Official Year Books. This helps the prospective
investors to evaluate various investment ventures.
(ix) Facilities for Genuine Speculation: Stock exchanges facilitate genuine speculation.
The genuine traders speculate and secure sizeable gains through fluctuations in securities’
prices. In fact, speculation is an integral part of stock exchange functions. Genuine

speculation tends to smoother out wide fluctuation besides bringing near-equality in
demand and supply at different places.
(x) Regulation of Company Management: The stock exchanges indirectly regulate the
company management. This is achieved through listing of securities. A company has to
fulfill certain conditions before official listing of its securities. Besides, the company has
to maintain efficient conditions in its operations in order to prevent any decrease in market
quotations of its securities. Thus, stock exchanges regulate the workings of the company
management.
STOCK EXCHANGES IN INDIA
Most of the trading in the Indian stock market takes place on its two stock exchanges: the
Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE). The BSE has
been in existence since 1875. The NSE, on the other hand, was founded in 1992 and started
trading in 1994. However, both exchanges follow the same trading mechanism, trading
hours, settlement process, etc. At the last count, the BSE had about 4,700 listed firms,
whereas the rival NSE had about 1,200. Out of all the listed firms on the BSE, only about
500 firms constitute more than 90% of its market capitalization; the rest of the crowd
consists of highly illiquid shares.
Almost all the significant firms of India are listed on both the exchanges. NSE enjoys a
dominant share in spot trading, with about 70% of the market share, as of 2009, and almost
a complete monopoly in derivatives trading, with about a 98% share in this market, also as
of 2009. Both exchanges compete for the order flow that leads to reduced costs, market
efficiency and innovation. The presence of arbitrageurs keeps the prices on the two stock
exchanges within a very tight range.
Trading at both the exchanges takes place through an open electronic limit order book, in
which order matching is done by the trading computer. There are no market makers or
specialists and the entire process is order-driven, which means that market orders placed
by investors are automatically matched with the best limit orders. As a result, buyers and
sellers remain anonymous. The advantage of an order driven market is that it brings more

transparency, by displaying all buy and sell orders in the trading system. However, in the
absence of market makers, there is no guarantee that orders will be executed.
All orders in the trading system need to be placed through brokers, many of which provide
online trading facility to retail customers. Institutional investors can also take advantage of
the direct market access (DMA) option, in which they use trading terminals provided by
brokers for placing orders directly into the stock market trading system.
Settlement Cycle and Trading Hours
Equity spot markets follow a T+2 rolling settlement. This means that any trade taking place
on Monday gets settled by Wednesday. All trading on stock exchanges takes place between
9:55 am and 3:30 pm, Indian Standard Time (+ 5.5 hours GMT), Monday through Friday.
Delivery of shares must be made in dematerialized form, and each exchange has its own
clearing house, which assumes all settlement risk, by serving as a central counterparty.
Market Indexes
The two prominent Indian market indexes are Sensex and Nifty. Sensex is the oldest market
index for equities; it includes shares of 30 firms listed on the BSE, which represent about
45% of the index's free-float market capitalization. It was created in 1986 and provides
time series data from April 1979, onward.
Another index is the S&P CNX Nifty; it includes 50 shares listed on the NSE, which
represent about 62% of its free-float market capitalization. It was created in 1996 and
provides time series data from July 1990, onward.
Market Regulation
The overall responsibility of development, regulation and supervision of the stock market
rests with the Securities & Exchange Board of India (SEBI), which was formed in 1992 as
an independent authority. Since then, SEBI has consistently tried to lay down market rules
in line with the best market practices. It enjoys vast powers of imposing penalties on market
participants, in case of a breach.

BOMBAY STOCK EXCHANGE
Bombay Stock Exchange was founded by Premchand Roy Chand. He was one of the most
influential businessmen in 19th-century Bombay. A man who made a fortune in the
stockbroking business and came to be known as the Cotton King, the Bullion King or just
the Big Bull. He was also the founder of the Native Share and Stock Brokers Association,
an institution that is now known as the BSE.
While BSE Ltd is now synonymous with Dalal Street, it was not always so. The first venue
of the earliest stock broker meetings in the 1850s was in rather natural environs - under
banyan trees - in front of the Town Hall, where Horniman Circle is now situated. A decade
later, the brokers moved their venue to another set of foliage, this time under banyan trees
at the junction of Meadows Street and what is now called Mahatma Gandhi Road. As the
number of brokers increased, they had to shift from place to place, but they always
overflowed to the streets. At last, in 1874, the brokers found a permanent place, and one
that they could, quite literally, call their own. The new place was, aptly, called Dalal Street
(Brokers' Street).
The Bombay Stock Exchange is the oldest stock exchange in Asia. Its history dates back
to 1855, when 22 stockbrokers would gather under banyan trees in front of Mumbai's Town
Hall. The location of these meetings changed many times to accommodate an increasing
number of brokers. The group eventually moved to Dalal Street in 1874 and became an
official organization known as "The Native Share & Stock Brokers Association" in 1875.
On August 31, 1957, the BSE became the first stock exchange to be recognized by
the Indian Government under the Securities Contracts Regulation Act. In 1980, the
exchange moved to the Phiroze Jeejeebhoy Towers at Dalal Street, Fort area. In 1986, it
developed the S&P BSE SENSEX index, giving the BSE a means to measure the overall
performance of the exchange. In 2000, the BSE used this index to open its derivatives
market, trading S&P BSE SENSEX futures contracts. The development of S&P BSE
SENSEX options along with equity derivatives followed in 2001 and 2002, expanding the
BSE's trading platform.

Historically an open outcry floor trading exchange, the Bombay Stock Exchange switched
to an electronic trading system developed by CMC Ltd. in 1995. It took the exchange only
50 days to make this transition. This automated, screen-based trading platform called BSE
On-Line Trading (BOLT) had a capacity of 8 million orders per day. The BSE has also
introduced a centralized exchange-based internet trading system, BSEWEBx.co.in to
enable investors anywhere in the world to trade on the BSE platform. Now BSE has raised
capital by issuing shares and as on 3rd May 2017 the BSE share which is traded in NSE
only closed with Rs.999
The BSE is also a Partner Exchange of the United Nations Sustainable Stock Exchange
initiative, joining in September 2012.
BSE established India INX on 30 December 2016. India INX is the first international
exchange of India.
Established in 1875,
BSE (formerly
known as Bombay
Stock Exchange
Ltd.), is Asia's first
& the Fastest Stock
Exchange in world
with the speed of 6
micro seconds and
one of India's
leading exchange
groups. Over the past 141 years, BSE has facilitated the growth of the Indian corporate
sector by providing it an efficient capital-raising platform. Popularly known as BSE, the
bourse was established as "The Native Share & Stock Brokers' Association" in 1875. Today
BSE provides an efficient and transparent market for trading in equity, currencies, debt
instruments, derivatives, mutual funds. It also has a platform for trading in equities of
small-and-medium enterprises (SME). India INX, India's 1st international exchange,

located at GIFT CITY IFSC in Ahmedabad is a fully owned subsidiary of BSE. BSE is
also the 1st listed stock exchange of India.
BSE provides a host of other services to capital market participants including risk
management, clearing, settlement, market data services and education. It has a global reach
with customers around the world and a nation-wide presence. BSE systems and processes
are designed to safeguard market integrity, drive the growth of the Indian capital market
and stimulate innovation and competition across all market segments. BSE is the first
exchange in India and second in the world to obtain an ISO 9001:2000 certifications. 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 On-Line
Trading System (BOLT). It operates one of the most respected capital market educational
institutes in the country (the BSE Institute Ltd.). BSE also provides depository services
through its Central Depository Services Ltd. (CDSL) arm.
BSE's popular equity index - the S&P BSE SENSEX - is India's most widely tracked stock
market benchmark index. It is traded internationally on the EUREX as well as leading
exchanges of the BRCS nations (Brazil, Russia, China and South Africa).
Vision
"Emerge as the premier Indian stock exchange with best-in-class global practice in
technology, products innovation and customer service."
Heritage
BSE Ltd, the first ever stock exchange in Asia established in 1875 and the first in the
country to be granted permanent recognition under the Securities Contract Regulation Act,
1956, has had an interesting rise to prominence over the past 140 years.
While BSE Ltd is now synonymous with Dalal Street, it was not always so. The first venue
of the earliest stock broker meetings in the 1850s was in rather natural environs - under
banyan trees - in front of the Town Hall, where Horniman Circle is now situated. A decade
later, the brokers moved their venue to another set of foliage, this time under banyan trees

at the junction of Meadows Street and what is now called Mahatma Gandhi Road. As the
number of brokers increased, they had to shift from place to place, but they always
overflowed to the streets. At last, in 1874, the brokers found a permanent place, and one
that they could, quite literally, call their own. The new place was, aptly, called Dalal Street
(Brokers' Street).
The journey of BSE Ltd. is as eventful and interesting as the history of India's securities
market. In fact, as India's biggest bourse in terms of listed companies and market
capitalization, almost every leading corporate in India has sourced BSE Ltd. services in
raising capital and is listed with BSE Ltd.
Even in terms of an orderly growth, much before the actual legislations were enacted, BSE
Ltd. had formulated a comprehensive set of Rules and Regulations for the securities
market. It had also laid down best practices which were adopted subsequently by 23 stock
exchanges which were set up after India gained its independence.
BSE Ltd as an institutional brand, has been and is synonymous with the capital market in
India. Its S&P BSE SENSEX is the benchmark equity index that reflects the health of the
Indian economy.
Brand Identity
Bombay Stock Exchange has now adopted only its initials as the new name (BSE),
positioning itself better position as a national multi-asset financial infrastructure institution.
BSE’s strategic shift in approach, attitude and business focus is reflected in its new tag line
- Experience the New.

With renewed zeal and focus on new business opportunities, product and service
innovation, upgrades in technology, increased investor and member focus, BSE is always
pushing the envelope on all fronts. The ambition is to continually improve and adopt new
and better ways of conducting our business.
As the first stock exchange in Asia and the pioneer of securities transaction business, BSE
prides itself on being at the forefront of bringing innovations to the Indian capital markets
while creating diverse investment opportunities for the investor community in India
throughout its long history.
BSE continues to undertake several initiatives to build on its strong brand, legacy and
market position to create value for its stakeholders and the financial system.
Achievements
At par with international standards, BSE Ltd. has been a pioneer in several areas over the
decades and has many firsts and key achievements to its credit. BSE is the first exchange
in India to:
 Launch a special platform for trading in SME securities.
 Introduce Equity Derivatives.
 Launch a Free Float Index - S&P BSE SENSEX.
 Launch Exchange Enabled Internet Trading Platform.
 Obtain ISO certification for a stock exchange.
 Exclusive facility for financial training – BSE Institute Ltd.
 Launch its website in Hindi and regional languages.
 Host the popular opening-bell ceremony in Indian capital markets.
 Launch mobile-based trading in India in Sept 2010.
 Become securities market infrastructure member of SWIFT in India and provide
corporate actions to custodians in ISO 15022 format.
 Launched S&P BSE SENSEX Realized S&P BSE Volatility (REALVOL) Index
in Nov 2010.

Besides the above, BSE has taken large strides in product and service innovation for the
benefit of its members and investors, notable one’s being
 Launch of a reporting platform for corporate bonds.
 Launch of the S&P BSE IPO index and S&P BSE PSU website.
 Revamp of its website with wide range of new investor-friendly features.
 Launch of trading in S&P BSE SENSEX futures on EUREX and leading exchanges
of the BRICS nation bloc.
 Launched Smart Order Routing for members and investors.
 Introduced SACT (SMS alert & Complaint Tracking system).
 Launched co-location facility at BSE premises in November 2010.
 Reduction in membership fees to Rs. 10 lakhs for new memberships to promote
financial access and inclusion.
 Launch of web-based mutual fund trading platform for investors.
AWARDS AND RECOGNITIONS
As a pioneering financial institution in the Indian capital market, BSE has won several
awards and recognitions that acknowledge the work done and progress made.
 ‘IT Genius Awards 2017’ in the category ‘Data Centre Excellence’ for setup of the
India INX Data Centre by CORE (Centre of Recognition & Excellence).
 Digital Innovation Award 2017 for the Social Media Analytics Project by Net
magic.
 Business World Digital Leadership and CIO Award.
 The IDC Digital Transformation Awards 2017.
 The Best Exchange of the year award for equity and currency derivatives in Tefla's
Commodity Economic Outlook Award 2017.
 Best Brand award 2017 by Economic Times.
 CIO POWER LIST 2017.

 Best Corporate film encompassing Vision, History, Value and Spirit of Excellence
award, Best Corporate film on Employer Branding award and Most Influential HR
Leaders in India award at World HRD Congress 2017.
 'Best Exchange of the year' award at 4th India Bullion & Jewellery awards 2017.
 Red Hat Innovation Awards 2016 by Red Hat Solutions.
 Skoch Achiever Award 2016 for SME Enablement.
 Best IT Implementation Award 2016 in the “Most Complex Project Category” by
PCQuest.
 InfoSec Maestros Awards 2016 .
 Lions CSR Precious Awards 2016.
 Golden Peacock Award 2015.
 CIO Power List 2015.
 SKOCH Renaissance Award 2014 for Contribution to Economy.
 SKOCH Renaissance Award 2014 for Corporate Social Responsibility.
 Netmagic Innovative Champion Award – IT Consolidation growth & Scalability
2014.
 India Innovative Awards- Big Data Innovation 2014.
 ET Now – CISCO Technology Awards 2014.
 Unicom –India Top 50 companies with best software 2014.
 HR was awarded with Asia's Best Employer Brand Awards at Singapore in two
categories in August 2014.
 Asia's Best Employer Brand Award.
 CHRO of the Year Award.
 Lokmat HR Leadership Award at Mumbai in June-2014.
 50 most talented global HR leaders in Asia at the World HRD congress at Mumbai
in February-2014.
 FIICI-Frames Best Animation Film-International Category for the Investor
Education television commercial.
 India Innovation Award for Big Data Implementation.

 ICICI Lombard & ET Now Risk Manager Award in BFSI Category.
 SKOCH Order of Merit for E-Boss for qualifying among India’s Best 2013.
 Indian Merchant Chamber Award in the Large Enterprise Category for use of
Information Technology.
 Best Managed Financial Derivatives Exchange in the Asia Pacific by the The Asian
Banker.
 The Golden Peacock Global CSR Award for its initiatives in Corporate Social
Responsibility.
 BSE has won NASSCOM - CNBC-TV18’s IT User Awards, 2010 in Financial
Services category.
 BSE has won Skoch Virtual Corporation 2010 Award in the BSE StAR MF
category.
 Responsibility Award (CSR), by the World Council of Corporate Governance.
 Annual Reports and Accounts of BSE have been awarded the ICAI awards for
excellence in financial reporting for four consecutive years from 2006 onwards.
 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.
CSR (Corporate Social Responsibility)
Corporate Social Responsibility (CSR) in BSE is aligned with its tradition of creating
wealth in the community with a three pronged focus on Education, Health and the
Environment. Besides funding charitable causes for the elderly and the physically
challenged, BSE has been supporting the rehabilitation and restoration efforts in
earthquake-hit communities of Gujarat. BSE has been awarded the Golden Peacock Global
- CSR Award for its initiatives in Corporate Social Responsibility (CSR) by the World
Council of Corporate Governance.

BSE AND SUSTAINABILITY
Sustainability in a general sense can be seen as meeting the needs of the present without
compromising the ability of future generations to meet their own needs. Environmentalists
have long warned that our current patterns of economic growth and resource consumption,
so severely threaten the earth's carrying capacity that ecological collapse is likely, if not
inevitable. BSE being a responsible stock exchange is taking various initiatives in the
domain of sustainability and corporate social responsibility. BSE has launched theme
based indices like S&P BSE Carbonex and S&P BSE Greenex. BSE is also participating
in the sustainable stock exchanges initiative. BSE has signed Memorandum of
Understanding with Ministry of Corporate Affairs to launch corporate social responsibility
index.
 Sustainable Stock Exchanges (SSE)
 BSE - Corporate Social Responsibility Index.
 BSE - Carbon Disclosure Project (CDP) initiative
Sustainable Stock Exchanges (SSE):
The United Nations had been playing a catalyzing role through a series of Global Dialogues
- held in New York (2009), Xiamen (2010) and Rio de Janeiro (2012) - the initiative had
become a platform for exploring how exchanges can work with investors, regulators and
companies to enhance corporate sustainability and promote responsible investment.
The Exchange's pro-active work had been noticed by UNCTAD. UNCTAD has
approached BSE to get on board of SSE by signing the commitment letter to promote long
term sustainable investment and improved environmental, social and corporate governance
disclosure BSE is the first stock exchange from Asia to join Sustainable stock exchange
Initiative.
"We are hopeful that this initiative would help us in further introducing a culture of
sustainable business practices amongst BSE's listed companies" BSE's MD & CEO Ashish
Kumar Chauhan”

BSE - Corporate Social Responsibility Index.
BSE and Indian Institute of Corporate Affairs (IICA - Established by Ministry of Corporate
Affairs), have signed a Memorandum of Understanding (MoU) on September 23, 2013 to
work collaboratively in the domains of business sustainability, Corporate Social
responsibility (CSR), investor education and other allied areas.
BSE - IICA are going to launch Corporate Social Responsibility Index. An Advisory
Committee (AC) consisting officials from IICA and BSE is formed to guide the CSR Index
construction, design and roll-out processes. This Advisory Committee will be having a
consultative approach and shall interact with various stakeholders.
"CSR and sustainability are two extremely important topics for 2013, especially with the
passing of The Companies Act 2013. They also represent the aspirations of youth as well
as society. This conclave being very timely and the discussions being detailed, I'm sure the
participants will be able to gather a lot of executable knowledge about how to go about in
setting up the CSR framework in their organizations when they go back." said Mr. Ashish
K. Chauhan, MD & CEO, BSE Ltd. on the occasion of "CSR & Sustainability Conclave
2013" organized by Dun & Bradstreet.
Corporate Social Responsibility (CSR) in BSE is aligned with its tradition of creating
wealth in the community with a three pronged focus on Education, Health and the
Environment. Besides funding charitable causes for the elderly and the physically
challenged, BSE has been supporting the rehabilitation and restoration efforts in
earthquake-hit communities of Gujarat. BSE has been awarded the Golden Peacock Global
- CSR Award for its initiatives in Corporate Social Responsibility (CSR) by the World
Council of Corporate Governance.

BSE - Carbon Disclosure Project (CDP) initiative:
BSE signed Memorandum of Understanding with CDP India to jointly carry out activities
for creating awareness about filing sustainability data / Environment, Social and
Governance (ESG) data with CDP.
CDP is a nonprofit organization which works with other CDP entities worldwide to provide
a transformative global system for thousands of companies and cities to measure, disclose,
manage and share environmental information. CDP India is actively in touch with Top 200
(BSE-200 constituents) companies to encourage them to report non-financial data. The data
received from CDP will be used for the calculations of S&P BSE Carbonex. "BSE with
more than 5,200 listed companies is one of the largest Exchanges in the World and the first
Exchange from Asia to join United Nations Sustainable Stock Exchanges (SSE) initiative.
BSE's objective is for Indian Companies to look beyond shareholder value and make
sustainability a core driver of their strategy. S&P BSE Carbonex Index, using CDP data,
calculated by Asia index Private Limited is a key step in this direction. S&P BSE
CARBONEX uses risk-tilted version of established S&P BSE-100 index. Weights of the
constituents are adjusted to reflect their climate risk relative to industry peers. In addition,
the BSE has also entered into an MOU with Indian Institute of Corporate Affairs
established by the Ministry of Corporate Affairs, Government of India for creating
benchmarks indices in the area of Corporate Social Responsibility." Ashish Kumar
Chauhan MD & CEO BSE Ltd.CDP India 200 climate change report2013 Report - "Energy
efficiency driving the climate change response in Indian high performing companies"

BSE SENSEX
Sensex, otherwise known as the S&P BSE Sensex index, is the benchmark index of the
Bombay Stock Exchange (BSE). It is composed of 30 of the largest and most actively-
traded stocks on the BSE, providing an accurate gauge of India's economy. Initially
compiled in 1986, the Sensex is the oldest stock index in India.
Analysts and investors use the Sensex to observe the overall growth, development of
particular industries, and booms and busts of the Indian economy. Some of the highest
priced shares listed on the Sensex, as of July 2016, include those of ACC (cement and
cement products), HDFC Bank (banking), Housing Development Finance Corporation
(finance and housing), Infosys Technologies (computer software), Larsen & Toubro
(engineering), Mahindra & Mahindra (automobiles), Maruti Suzuki India (automobiles)
and Tata Consultancy Services (computer software).
The Sensex experienced enormous growth in the first decade of the 21st century, rising
from a close of 3,377.28 in 2002 to one of 20,286.99 in 2007. This is reflective of India's
GDP growth since the turn of the century, one that ranks as one of the fastest in the world.
According to IMF estimates, India's GDP grew at an average annual rate of 8.01% between
2002 and 2007. Its GDP faltered to a growth rate of 3.89% in 2008, in stride with the global
financial meltdown of that year, but was back on a strong track with a growth rate of
10.26% in 2010. GDP growth in 2016 is expected to be over 7%, significantly higher than
the projected growth rates of 2-2.5% in the U.S. and 1-2% in Japan and Europe. This
economic miracle owes much thanks to the rise of the Indian middle class, which stood at
less than 1% of the global middle class in 2000 but is expected to account for 10% by 2020.
The middle class is an important driver of consumption demand.

Sensex movement of last 10 years
Free-Float Capitalization Method
The index is calculated based on a free-float capitalization method when weighting the
effect of a company on the index. This is a variation of the market cap method, but instead
of using a company's outstanding shares, it uses its float, shares that are readily available
for trading. The free-float method, therefore, does not include restricted stocks, such as
those held by company insiders, which can't be readily sold.
To find the free-float capitalization of a company, first find its market cap (number of
outstanding shares x share price) then multiply its free-float factor. The free-float factor is
determined by the percentage of floated shares to outstanding. For example, if a company
has a float of 10 million shares and outstanding shares of 12 million, the percent of float to
outstanding is 83%. A company with an 83% free float falls in the 80-85% free-float factor,

or 0.85, which is then multiplied by its market cap (e.g., $120 million (12 million shares x
$10/share) x 0.85 = $102 million free-float capitalization).
The base year of SENSEX is 1978-79 and the base value is 100. The index is widely
reported in both domestic and international markets through print as well as electronic
media. The SENSEX is not only scientifically designed but also based on globally accepted
construction and review methodology. By including the prestigious companies & due to is
wide acceptance amongst the Indian investors; SENSEX is regarded to be the pulse of the
Indian stock market. As the oldest index in the country it provides the time series data over
a fairly long period of time (From 1979 onwards). Also it is a value weighted stock average,
using the free float market capitalization methodology, of 30 largest and most actively
traded stocks of Indian stock markets from varied sectors being the most quoted Index. So,
BSE-SENSEX has been selected for this study as the representative of Indian stock
markets.
If the SENSEX goes up, it means that the prices of the stocks of most of the companies
under the BSE SENSEX (30 companies) have gone up. If the Sensex goes down, this tells
you that the stock price of most of the major stocks on the BSE have gone down.

MACRO ECONOMIC VARIABLES
Macro-economic variables are the indicators or signposts signaling the current trends in
the economy. They are factors that greatly influence the economic growth. Macroeconomic
indicators are economic statistics which are released periodically by government agencies
and private organizations. These indicators provide insight into the economic performance
of a particular country. Some of the macro economic variables include, Gross Domestic
Product, Inflation rate, Interest Rate, Employment & Unemployment Rate, Foreign Direct
Investment, Foreign portfolio Investment, Foreign Institutional Investment, Gold Prices,
Silver Prices, Crude oil price, Index of Industrial Production, Exchange Rate, Call money
rate, Money supply(M3), Consumer Price Index, Trade Deficit etc.
This study considers five macro-economic variables namely, Exchange rate, Foreign Direct
Investment and Repo rate.
EXCHANGE RATE
An exchange rate is the price of a nation’s currency in terms of another currency. Thus, an
exchange rate has two components, the domestic currency and a foreign currency, and can
be quoted either directly or indirectly. In a direct quotation, the price of a unit of foreign
currency is expressed in terms of the domestic currency. In an indirect quotation, the price
of a unit of domestic currency is expressed in terms of the foreign currency. Exchange rates
are quoted in values against the US dollar. However, exchange rates can also be quoted
against another nations currency, which are known as a cross currency, or cross rate.
A global currency is one that is accepted for trade throughout the world. Some of the
world's currencies are accepted for most international transactions. The most popular are
the U.S. dollar, the euro, and the yen. Another name for global currency is reserve currency.
The first U.S. dollar, as it is known today, was printed in 1914 upon the creation of the
Federal Reserve Bank. Less than six decades later, the dollar officially became the world’s
reserve currency. However, its ascendancy to the throne began not long after the ink was
dry on that first printing.The Federal Reserve Bank was created by the Federal Reserve Act

of 1913 in response to the unreliability and instability of a currency system based on bank
notes issued by individual banks. At that time, the U.S. economy had overtaken Britain’s
as the world’s largest, but Britain was still the center of world commerce, with much of it
transacted in British pounds. Also at that time, most of the developed countries pegged
their currencies to gold to create stability in currency exchanges. However, when World
War I broke out in 1914, many countries abandoned the gold standard to be able to pay
their military expenses with paper money, which devalued their currencies.
Three years into the war, Britain, which had steadfastly held to the gold standard to
maintain its position as the world’s leading currency, found itself having to borrow money
for the first time. The United States became the lender of choice for many countries that
were willing to buy dollar-denominated U.S. bonds. In 1919, Britain was finally forced to
abandon the gold standard, which decimated the bank accounts of international merchants
who traded in pounds. By then, the dollar had replaced the pound as the world’s leading
reserve.
As it did in World War I, the United States entered World War II well after the fighting
had started. Before it entered the war, the United States served as the Allies’ main
proprietor of weapons, supplies and other goods. Collecting much of its payment in gold,
by the end of the war, the United States owned the vast majority of the world’s gold. This
precluded a return to the gold standard by all of the countries that had depleted their gold
reserves.
In 1944, delegates from 44 Allied countries met in Bretton Wood, New Hampshire, to
come up with a system to manage foreign exchange that would not put any country at a
disadvantage. It was decided that the world’s currencies couldn’t be linked to gold, but
they could be linked to the U.S. dollar, which was linked to gold. The arrangement, which
came to be known as the Bretton Woods Agreement, established that the central banks
would maintain fixed exchange rates between their currencies and the dollar. In turn, the
United States would redeem U.S. dollars for gold on demand. Countries had some degree
over the currencies in situations where their currency values became too weak or too strong
relative to the dollar. They could buy or sell their currency to regulate the money supply.

As a result of the Bretton Woods Agreement, the U.S dollar was officially crowned the
world’s reserve currency, backed by the world’s largest gold reserves. Instead of gold
reserves, other countries accumulated reserves of U.S. dollars. Needing a place to store
their dollars, countries began buying U.S. Treasury securities, which they considered to be
a safe store of money.
The demand for Treasury securities coupled with the deficit spending needed to finance
the Vietnam War and the Great Society domestic programs caused the United States to
flood the market with paper money. With growing concerns over the stability of the dollar,
the countries began to convert dollar reserves into gold. The demand for gold was such that
President Richard Nixon was forced to intervene and delink the dollar from gold, which
led to the floating exchange rates that exist today.
Through periods of stagflation, high inflation and deflation, the U.S. dollar remains the
world’s reserve currency based largely on the size and strength of the U.S. economy and
the dominance of the U.S. financial markets. Despite large deficit spending, trillions of
dollars in foreign debt and the unbridled printing of U.S. dollars, U.S. Treasury securities
remain the safest store of money because of the trust and confidence that the world has in
the ability of the United States to pay its debts. Because of that, the dollar is still the most
redeemable currency for facilitating world commerce.

Exchange rate movement of last 10 years

FOREIGN DIRECT INVESTMENT (FDI)
Foreign direct investment (FDI) is an investment made by a company or individual in one
country in business interests in another country. Generally, FDI takes places when an
investor establishes foreign business operations or acquires foreign business assets,
including establishing ownership or controlling interest in a foreign company. Foreign
direct investments are distinguished from portfolio investments in which an investor
merely purchases equities of foreign-based companies. Foreign direct investment
frequently involves more than just a capital investment. It may include provisions of
management or technology as well. The key feature of foreign direct investment is that it
is an investment made that establishes either effective control of, or at least substantial
influence over, the decision-making of a foreign business.
Foreign direct investments can be made in a variety of ways, including the opening of a
subsidiary or associate company in a foreign country, acquiring a controlling interest in an
existing foreign company, or by means of a merger or joint venture with a foreign company.
The threshold for a foreign direct investment that establishes a controlling interest, per
guidelines established by the Organization of Economic Co-operation and Development
(OECD), is a minimum 10% ownership stake in a foreign-based company. However, that
definition is flexible, as there are instances where effective controlling interest in a firm
can be established with less than 10% of the company's voting shares.
Foreign direct investments are commonly categorized as being horizontal, vertical or
conglomerate in nature. A horizontal direct investment refers to the investor establishing
the same type of business operation in a foreign country as it operates in its home country,
for example, a cell phone provider based in the United States opening up stores in China.
A vertical investment is one in which different but related business activities from the
investor's main business are established or acquired in a foreign country, such as when a
manufacturing company acquires an interest in a foreign company that supplies parts or
raw materials required for the manufacturing company to make its products.

A conglomerate type of foreign direct investment is one where a company or individual
makes a foreign investment in a business that is unrelated to its existing business in its
home country. Since this type of investment involves entering an industry the investor has
no previous experience in, it often takes the form of a joint venture with a foreign company
already operating in the industry.
in India is the major monetary source for economic development in India. Foreign
companies invest directly in fast growing private Indian businesses to take benefits of
cheaper wages and changing business environment of India. Economic liberalization
started in India in wake of the 1991 economic crisis and since then FDI has steadily
increased in India. It was Manmohan Singh and P. V. NarasimhaRao who brought FDI in
India, which subsequently generated more than one crore jobs.
There are two routes by which India gets FDI.
Automatic route: By this route FDI is allowed without prior approval by Government or
Reserve Bank of India.
Government route: Prior approval by government is needed via this route. The application
needs to be made through Foreign Investment Facilitation Portal, which will facilitate
single window clearance of FDI application under Approval Route. The application will
be forwarded to the respective ministries which will act on the application as per the
standard operating procedure. Foreign Investment Promotion Board (FIPB) which was the
responsible agency to oversee this route was abolished on May 24, 2017.
Apart from being a critical driver of economic growth, foreign direct investment (FDI) is
a major source of non-debt financial resource for the economic development of India.
Foreign companies invest in India to take advantage of relatively lower wages, special
investment privileges such as tax exemptions, etc. For a country where foreign investments
are being made, it also means achieving technical know-how and generating employment.
The Indian government’s favorable policy regime and robust business environment have
ensured that foreign capital keeps flowing into the country. The government has taken

many initiatives in recent years such as relaxing FDI norms across sectors such as defense,
PSU oil refineries, telecom, power exchanges, and stock exchanges, among others.
Since 1991, the regulatory environment for foreign investment has consistently been eased to
make it investor-friendly, catapulting India into the position of one of the fastest-growing
economies of the world. It has been ranked (9th in terms of FDI inflows for 2016
by UNCTAD) among the top attractive destinations for inbound investments in the world. The
Government of India (GoI) with intent to attract and promote Foreign Direct Investment has
put in place a policy framework on Foreign Direct Investment (FDI) which is transparent,
predictable and easily comprehensible.
Foreign investment into an Indian entity on a strategic basis is subject to FDI policy. The GoI
through Department of Industrial Policy & Promotion (DIPP) formulates a consolidated FDI
Policy on a yearly basis which is a defined framework for FDI. Currently, the FDI policy of 28
August 2017 is in effect.

ELIGIBLE INVESTOR
Foreign investors can invest directly in India, either on their own or through joint ventures
in virtually all the sectors except a very small list of activities where foreign investment is
prohibited.
FDI in majority of the sectors is under automatic route,i.e allowed without any requirement
of seeking regulatory approval prior to such investment . Eligible investors can invest in
most of the sectors of the Indian economy on an automatic basis.
 A Non-residential individual (NRI) /Entity can invest subject to FDI policy (except
in prohibited sectors) .NRI resident in and citizens of Bhutan and Nepal are
permitted to invest on repatriation basis .

 Company, trust or partnership firm incorporated outside India and owned and
controlled by NRIs.
 Foreign Institutional Investors (FII) and Foreign Portfolio Investors.
 Registered FIIs /FPIs /NRIs as per schedules 2,2A and 3 respectively of foreign
exchange management (Transfer or issue of Security by a person Resident Outside
India) Regulations ,2000 can invest or trade through a registered broker pf Indian
companies on recognized stock exchanges.
 SEBI registered Foreign Venture Capital Investor (FVCI) in any activity mentioned
in Schedule 6 of Notification No.20/2000.
FDI INVESTMENT ROUTES
Foreign Direct Investment (FDI) can be made through two routes that are:
1. Automatic Route: Indian companies engaged in various industries can issue shares to foreign
investors up to 100% of their paid up capital in Indian companies
2. Government Approval Route: Certain activities that are not covered under the automatic
route require prior Government approval for FDIs.
 Category 1- Sectors in which FDI is permitted up to 100% under automatic route
 Category 2- Sectors in which FDI is permitted up to 100% under Government Route
 Category 3- Sectors in which FDI is permitted beyond certain limit with Government
 Category 4- Sectors wherein FDI is permitted up to certain limit under both
Government and Automatic routes subject to applicable laws/ regulations security and
other conditionality’s.
Category 1- Sectors in which FDI is permitted upto 100% under automatic route
Subject to applicable laws/regulations, security and other conditionalities, FDI is
permitted upto 100% under the automatic route in the following:
 Agriculture & Animal Husbandry;
 Plantation sector including tea, coffee, rubber, cardamom, Palm oil tree, olive oil tree
plantations;

 Mining and Exploration of metal and non-metal ores;  Coal & Lignite;  Exploration of
Petroleum & Natural Gas;
 Broadcasting carriage services;
 Up-linking of Non-‘News & Current Affairs’ TV Channels/Down-linking of TV
Channels;
 Airports;
 Non-Scheduled Air Transport Services, Helicopter services/seaplane services, Ground
handling services and other related services;
 Construction Development;
 Cash & Carry Wholesale Trading;
 Market place E-commerce activities ;
 Railway infrastructure;
 Asset Reconstruction Companies;
 Credit Information Companies;
 White Label ATM operations;  Other financial services; and
 Pharmaceuticals -Greenfield sector.
Category 2- Sectors in which FDI is permitted upto 100% under Government Route
Subject to applicable laws/regulations, security and other conditionalities. FDI is permitted
upto 100% under Government route in the following sectors:
 Mining and minerals separation of titanium bearing minerals& ores;
 Publishing/ printing of scientific and technical magazines/specialty journals/ periodicals;
 Publication of facsimile edition of foreign newspapers;
 Satellites-establishment and operations; and
 Trading including through e-commerce in respect of food products manufactured and/ or
produced in India.

Category 3- Sectors in which FDI is permitted beyond certain limit with government
approval
Sector/ Activity % of equity Entry route
1.Telecom services 100% Government route beyond
49%
2.Single brand product retain
trading
100% Government route beyond
49%
3.Defence Sector 100% Government route beyond
49% where it is likely to
result in access to modern
technology or other reasons
to be recorded.
4.Pharmaceutical sector-
Bromfield
74%
5.Air transport services
a. Scheduled Air
Transport service /
Domestic Scheduled
Passenger Airline.
49%
Category 4 – Sectors wherein FDI is permitted upto certain limit under both
government and Automatic routes subject to applicable laws /regulations security and
other conditionalities are listed below:
Sector / Activity Percentage
of equity
Entry route
1.Insurance 49% Automatic route
2.Petroleum refining by the the public sector
undertakings.
49% Automatic route

3.Infrastructure companies in securities market 49% Automatic route
4.Power Exchanges 49% Automatic route
5.Pension Sector 49% Automatic route
6.Up-linking of news & current affairs TV Channels 49% Government
route
7.Terrestrial Broadcasting FM (FM Radio) 49% Government
route
8.Print media publishing of newspaper and
periodicals dealing with news and current affairs and
publication of Indian editions of foreign magazines
dealing with news and current affairs.
26% Government
route
9.Multi Brand Retail Trading 51% Government
route
10.Banking- Public Sector
20% Government
route
11.Banking: Private sector 74% Government
route beyond
49%
ww12.Private security Agencies 74% Government
route beyond
49%

Market size
According to Department of Industrial Policy and Promotion (DIPP), the total FDI
investments in India during April-December 2017 stood at US$ 35.94 billion, indicating
that government's effort to improve ease of doing business and relaxation in FDI norms is
yielding results.
Data for April-December 2017 indicates that the telecommunications sector attracted the
highest FDI equity inflow of US$ 6.14 billion, followed by computer software and
hardware – US$ 5.16 billion and services – US$ 4.62 billion. Most recently, the total FDI
equity inflows for the month of December 2017 touched US$ 4.82 billion.

During April-December 2017, India received the maximum FDI equity inflows from
Mauritius (US$ 13.35 billion), followed by Singapore (US$ 9.21 billion), Netherlands
(US$ 2.38 billion), USA (US$ 1.74 billion), and Japan (US$ 1.26 billion).
Indian impact investments may grow 25 per cent annually to US$ 40 billion from US$ 4
billion by 2025, as per Mr. Anil Sinha, Global Impact Investing Network's (GIIN’s) advisor
for South Asia.
Government Initiatives
In September 2017, the Government of India asked the states to focus on strengthening
single window clearance system for fast-tracking approval processes, in order to increase
Japanese investments in India.
The Ministry of Commerce and Industry, Government of India has eased the approval
mechanism for foreign direct investment (FDI) proposals by doing away with the approval
of Department of Revenue and mandating clearance of all proposals requiring approval
within 10 weeks after the receipt of application.
India and Japan have joined hands for infrastructure development in India's north-eastern
states and are also setting up an India-Japan Coordination Forum for Development of North
East to undertake strategic infrastructure projects in the northeast.
The Government of India is in talks with stakeholders to further ease foreign direct
investment (FDI) in defense under the automatic route to 51 per cent from the current 49
per cent, in order to give a boost to the Make in India initiative and to generate employment.
In January 2018, 100 per cent FDI was allowed in single brand retail through automatic
route along with relaxations in rules in other areas.
The Central Board of Direct Taxes (CBDT) has exempted employee stock options
(ESOPs), foreign direct investment (FDI) and court-approved transactions from the long
term capital gains (LTCG) tax, under the Finance Act 2017.

The Government of India is likely to allow 100 per cent foreign direct investment (FDI) in
cash and ATM management companies, since they are not required to comply with the
Private Securities Agencies Regulations Act (PSARA).
The World Bank has stated that private investments in India is expected to grow by 8.8 per
cent in FY 2018-19 to overtake private consumption growth of 7.4 per cent, and thereby
drive the growth in India's gross domestic product (GDP) in FY 2018-19.
The Union Cabinet has approved number of amendments to Foreign Direct Investment
(FDI) Policy. The purpose of amendments is to simplify and liberalize. FDI policy in India
to provide ease of doing business in country. The liberalized policy will lead to larger FDI
inflows contributing to growth of investment, employment and income.
Key Amendments
 100% FDI for Single Brand Retail Trading (SBRT) under automatic route.
 100% FDI under automatic route in Construction Development.
 Foreign airlines allowed investing up to 49% in Air India under government
approval route.
 FIIs/FPIs allowed investing in Power Exchanges through primary market.
 Definition of ‘medical devices’ amended in FDI Policy.

FDI movement of last 10 years

REPO RATE (INTEREST RATE)
Interest rate is the price demanded by the lender from the borrower for the use of
borrowed money.
In other words, interest is a fee paid by the borrower to the lender on borrowed cash as
a compensation for forgoing the opportunity of earning income from other investments
that could have been made with the loaned cash.
Thus, from the lender’s perspective, interest can be thought of as an "opportunity cost’
or "rent of money" and interest rate as the rate at which interest (or ‘opportunity cost’)
accumulates over a period of time. The longer the period for which money is borrowed,
the larger is the interest (or the opportunity cost).
The amount lent is called the principal. Interest rate is typically expressed as
percentage of the principal and in annualized terms.
From a borrower’s perspective, interest rate is the cost of capital. In other words, it is
the cost that a borrower has to incur to have access to funds.
Factors affecting the level of Interest Rate
Interest rates are typically determined by the supply of and demand for money in the
economy. If at any given interest rate, the demand for funds is higher than supply of
funds, interest rates tend to rise and vice versa.
Theoretically speaking, this continues to happen as interest rates move freely until
equilibrium is reached in terms of a match between demand for and supply of funds. In
practice, however, interest rates do not move freely.
The monetary authorities in the country (that is the central bank of the country) tend to
influence interest rates by increasing or reducing the liquidity in the system.

Broadly the following factors affect the interest rates in an economy:
Monetary Policy: The central bank of a country controls money supply in the economy
through its monetary policy. In India, the RBI’s monetary policy primarily aims at price
stability and economic growth. If the RBI loosens the monetary policy (i.e., expands
money supply or liquidity in the economy), interest rates tend to get reduced and
economic growth gets spurred; at the same time, it leads to higher inflation. On the other
hand, if the RBI tightens the monetary policy, interest rates rise leading to lower
economic growth; but at the same time, inflation gets curbed. So, the RBI often has to
do a balancing act. The key policy rate the RBI uses to inject/remove liquidity from the
monetary system is the repo rates. Changes in repo rates influence other interest rates
too.
Growth in the economy – If the economic growth of an economy picks up momentum,
then the demand for money tends to go up, putting upward pressure on interest rates.
Inflation: Inflation is a rise in the general price level of goods and services in an
economy over a period of time. When the price level rises, each unit of currency can
buy fewer goods and services than before, implying a reduction in the purchasing power
of the currency. So, people with surplus funds demand higher interest rates, as they want
to protect the returns of their investment against the adverse impact of higher inflation.
As a result, with rising inflation, interest rates tend to rise. The opposite happens when
inflation declines.
Global liquidity: If global liquidity is high, then there is a strong chance that the
domestic liquidity of any country will also be high, which would put a downward
pressure on interest rates.
Uncertainty: If the future of economic growth is unpredictable, the lenders tend to cut
down on their lending or demand higher interest rates from individuals or companies
borrowing from them as compensation for the higher default risks that arise at the time
of uncertainties or do both. Thus, interest rates generally tend to rise at times of
uncertainty. Of course, if the borrower is the Government of India, then the lenders have

little to worry, as the government of a country can hardly default on its loan taken in
domestic currency.
Impact of interest rates
There are individuals, companies, banks and even governments, who have to borrow
funds for various investment and consumption purposes. At the same time, there are
entities that have surplus funds. They use their surplus funds to purchase bonds or
Money Market instruments. Alternatively, they can deposit their surplus funds with
borrowers in the form of fixed deposits/ wholesale deposits.
Changes in the rate of interest can have significant impact on the way individuals or
other entities behave as investors and savers. These changes in investment and saving
behavior subsequently impact the economic activity in a country. For example, if interest
rates rise, some individuals may stop taking home loans, while others may take
smaller loans than what they would have taken otherwise, because of the rising cost of
servicing the loan. This will negatively impact home prices as demand for homes will
come down. Also, if interest rates rise, a company planning an expansion will have to
pay higher amounts on the borrowed funds than otherwise. Thus the profitability of the
company would be affected. So, when interest rates rise, companies tend to borrow less
and invest less. As the demand for investment and consumption in the economy declines
with rising interest, the economic growth slows down. On the other hand, a decline in
interest rates spurs investment spending and consumption spending activities and the
economy tends to grow faster.
Interest rate policy has been considered very crucial for central banks for ensuring smooth
functioning of the transmission mechanism of monetary policy. From a stringent
administered regime to a virtually complete liberalization, the evolution of interest rate
policy in India has been a gradual process. Since 1964, RBI had been fixing all the deposit
rates of commercial banks and since 1969 their lending rates. Moreover, the ceiling on call
rates had been fixed by Indian Bank Association since 1973.Over the years, an elaborate
system of fixing either the maximum or minimum or differential interest rates had evolved

in India. The ruling level and structure of interest rates in India was an administered one.
Though the interest rates in our country were to a large extent administered, they were
revised from time to time in the context of emerging needs and trends.
RBI sets the interest rates largely by three ways.
1. Signaling: By revising key policy rates, it tell banks that it wants interest rates
to come down in the system.
2. Revising repo rates: The repo rate is the rate at which RBI lends to banks. If
this is lowered the cost of funds automatically comes down and since banks are
supposed to fix their benchmark lending rate aligned with their cost of funds, the
benchmark rates will come down.
3. Increasing liquidity: By buying back government bonds or selling them, RBI
ends up either infusing liquidity or draining liquidity from money markets. By
making money more available or dearer, RBI influences interest rates.
RBI takes into account the macroeconomic conditions and indicators within and outside
India to decide on the benchmark rates of the Bank. Inflation forecast and monsoon are two
important factors. The others could be exchange rates, industrial production etc.
Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case
of India) lends money to commercial banks in the event of any shortfall of funds. Repo rate
is used by monetary authorities to control inflation.
In other words, commercial banks borrow money from Reserve Bank of India by selling
securities or bonds with an agreement to repurchase the securities on a certain date at a
predetermined price. The rate of interest charged by the central bank on the cash borrowed
by commercial banks is called the “Repo Rate”. For example: if the Repo Rate is 10% and
the loan amount borrowed by a commercial bank from RBI is Rs. 10,000, the interest paid
to the RBI will be Rs. 1,000.
Repo Rate also decides the liquidity rate in the banking system. If RBI wants to increase
the liquidity rate, it will reduce the Repo Rate and encourage the banks to sell their
securities. However, if the central bank wants to control liquidity, it will increase the

interest rate, discouraging banks to borrow easily. An increased Repo Rate means that the
central bank will earn a higher interest rate from the commercial banks while an increased
Reverse Repo Rate means that the commercial banks earn high interest from the central
bank.
Interest rate movement of last 10 years
When repo rate increases
 Banks lend from RBI at a higher rates of interest.
 They lend it to borrowers at a high rate of interest.
 As lending interest rate increases, borrowing of money decreases.
 Increase in the deposit interest rate to attract depositors.

When repo rate decreases
 Increase in money supply in economy.
 Increase in demand of goods.
 Increase in GDP growth.
Effects of Repo rate on Inflation
When the repo rate is raised, banks are compelled to pay higher interest to the RBI which
in turn prompts them to raise the interest rates on loans they offer to customers. The
customers then are dissuaded in taking credit from banks, leading to a shortage of money
in the economy and less liquidity. So, while on the one hand, inflation is under controlled
as there is less money to spend, growth suffers as companies avoid taking loans at high
rates, leading to a shortfall in production and expansion. For instance, if the availability of
funds is scarce, and banks are not able to borrow at repo rate, they may have to increase
the deposits rates upwards to attract depositors. Hence, any rate hike in repo rate increases
the probability of higher deposit rates, which is good news for depositors.
Impact on Sectors
Sectors such as automobiles, consumer durables and realty are the most vulnerable in the
scenario where policy rate hikes push the interest rates. Rising rates would not only reduce
the demand for these companies’ products, they will also affect their earnings in terms of
rising interest costs. Rising rates would also impact companies with higher leverage.
Besides, there is a possibility that more money gets allocated to debt than equities given
the risk-return tradeoffs.

STATISTICAL TOOLS
Analysis of data is a process of inspecting, cleaning, transforming and modelling data with
the goal of discovering useful information, suggesting conclusions and supporting decision
making.
Types of data analysis
1. Univariate Data Analysis
2. Bivariate Data Analysis
3. Multi variate Data Analysis.
Univariate data analysis: It refers to the data analysis which is carried out with description
of a single variable and its attributes of the applicable unit of analysis. The best way of
presenting univariate data is to create a frequency distribution of the individual cases,
which involves presenting the number of attributes of variable studied each case observe
in the sample.
Bivariate Data Analysis: Bivariate data is the data that has two variables. The quantities
from these two variables are often represented using a scatter plot. This is done so that the
relationship between the variables are easily seen. In the analysis of bivariate data, one
typically either compares summary statistics of each of the variable quantities or uses
regression analysis to find more direct relationship between the data.
Multivariate Data Analysis: Multivariate Analysis is based on the statistical principle of
multivariate statistics which involves observation and analysis of more than one statistical
outcome variable at a time. Uses for multivariate analysis include:
1. Design for capability.
2. Inverse design, where any variable can be treated as an independent
variable.
3. Analysis of alternatives.
4. Analysis of concepts with respect to changing scenarios.

5. Identification of critical design drivers and correlations across hierarchical
levels.
DESCRIPTIVE METHODS OF DATA ANALYSIS
Descriptive method is a set of brief descriptive coefficients that summarizes a given data
set, which can either be representation of the entire population or a sample. The measures
used to describe the data set are measures of central tendency and measures of variability
or dispersion.
Measures of central tendency are numbers that describe what is average or typical within
a distribution of data. There are three main measures of central tendency: mean, median,
and mode. While they are all measures of central tendency, each is calculated differently
and measures something different from the others.
Mean: Mean is the most common measure of central tendency. It is simply the sum of the
numbers divided by the number of numbers in a set of data. This is also known as average.
Its defined as the value obtained by dividing the total values of all items in their series by
their number. Its represented by:
μ = (Σ Xi) / N
The symbol ‘μ’ represents the population mean. The symbol ‘Σ Xi’ represents the sum of
all scores present in the population (say, in this case) X1 X2 X3 and so on. The symbol
‘N’ represents the total number of individuals or cases in the population.
Median: Median is defined as the value of that item which divides the series into two equal
halves, one half contains all values less than (or equal to) it and the other half containing
all values greater than (or equal to) it. It is also defined as the “central value of variable”.
It should note that the value of items should be arranged in order of their magnitude or size
to find out the median.
The median is the value of the variable which divides the group into two equal parts, one
part comprising all values greater and the other all values lesser than the median. Median
is the positional average.

Mode: The mode is a statistical term that refers to the most frequently occurring number
found in a set of numbers. The mode is found by collecting and organizing data in order to
count the frequency of each result. The result with the highest number of occurrences is
the mode of the set. It is the value x at which its probability mass function takes its
maximum value. In other words, it is the value that is most likely to be sampled. A mode
of a continuous probability distribution is often considered to be any value x at which
its probability density function has a locally maximum value, so any peak is a mode.
Standard deviation: The standard deviation, often represented with the Greek letter
sigma, is the measure of a spread of data around the mean. A high standard deviation
signifies that data is spread more widely from the mean, where a low standard deviation
signals that more data align with the mean. In a portfolio of data analysis methods, the
standard deviation is useful for quickly determining dispersion of data points.
standard deviation, is a measure of the spread (variability) of the scores in the sample on a
given variable and is represented by:
s = sqrt [ Σ (xi – x_bar )2
/ (n – 1)]
The term ‘Σ (xi – x_bar )2
’ represents the sum of the squared deviations of the scores from
the mean.
Variance: Variance is a measurement of the spread between numbers in a data set. The
variance measures how far each number in the set is from the mean. Variance is calculated
by taking the differences between each number in the set and the mean, squaring the
differences (to make them positive) and dividing the sum of the squares by the number of
values in the set.
X: individual data point

u: mean of data points
N: total no: of data points
Correlation : Correlation is a statistical measure that indicates the extent to which two or
more variables fluctuate together. A positive correlation indicates the extent to which those
variables increase or decrease in parallel; a negative correlation indicates the extent to
which one variable increases as the other decreases.
A correlation coefficient is a statistical measure of the degree to which changes to the value
of one variable predict change to the value of another. When the fluctuation of one variable
reliably predicts a similar fluctuation in another variable, there’s often a tendency to think
that means that the change in one causes the change in the other. However, correlation does
not imply causation. There may be, for example, an unknown factor that influences both
variables similarly.
The degree of association is measured by a correlation coefficient, denoted by r. It is
sometimes called Pearson's correlation coefficient after its originator and is a measure of
linear association. If a curved line is needed to express the relationship, other and more
complicated measures of the correlation must be used.
The correlation coefficient is measured on a scale that varies from + 1 through 0 to - 1.
Complete correlation between two variables is expressed by either + 1 or -1. When one

variable increases as the other increases the correlation is positive; when one decreases as
the other increases it is negative. Complete absence of correlation is represented by 0
The calculation of the correlation coefficient is as follows, with x representing the values
of the independent variable and y representing the values of the dependent variable. The
formula to be used is:
which can be shown to be equal to:
Regression: Correlation describes the strength of an association between two variables,
and is completely symmetrical, the correlation between A and B is the same as the
correlation between B and A. However, if the two variables are related it means that when
one changes by a certain amount the other changes on an average by a certain amount. For
instance, in the children described earlier greater height is associated, on average, with
greater anatomical dead Space. If y represents the dependent variable and x the independent
variable, this relationship is described as the regression of y on x.
The relationship can be represented by a simple equation called the regression equation. In
this context "regression" (the term is a historical anomaly) simply means that the average
value of y is a "function" of x, that is, it changes with x.

The regression equation representing how much y changes with any given change of x can
be used to construct a regression line on a scatter diagram, and in the simplest case this is
assumed to be a straight line. The direction in which the line slopes depends on whether
the correlation is positive or negative. When the two sets of observations increase or
decrease together (positive) the line slopes upwards from left to right; when one set
decreases as the other increases the line slopes downwards from left to right. As the line
must be straight, it will probably pass through few, if any, of the dots. Given that the
association is well described by a straight line we have to define two features of the line if
we are to place it correctly on the diagram. The first of these is its distance above the
baseline; the second is its slope. They are expressed in the following regression equation:
With this equation we can find a series of values of Y fit the variable, that correspond
to each of a series of values of x, the independent variable. The parameters α and β have to
be estimated from the data. The parameter signifies the distance above the baseline at which
the regression line cuts the vertical (y) axis; that is, when y = 0. The parameter β
(the regression coefficient) signifies the amount by which change in x must be multiplied
to give the corresponding average change in y, or the amount y changes for a unit increase
in x. In this way it represents the degree to which the line slopes upwards or downwards.
The regression equation is often more useful than the correlation coefficient. It enables us
to predict y from x and gives us a better summary of the relationship between the two
variables. If, for a particular value of x, x i, the regression equation predicts a value of y fit
, the prediction error is . It can easily be shown that any straight line passing through
the mean values x and y will give a total prediction error of zero because the
positive and negative terms exactly cancel. To remove the negative signs we square the
differences and the regression equation chosen to minimize the sum of squares of the
prediction errors, We denote the sample estimates of Alpha and Beta by a
and b. It can be shown that the one straight line that minimizes , the least squares estimate,
is given by

and
it can be shown that
which is of use because we have calculated all the components of equation (11.2) in the
calculation of the correlation coefficient.
ANOVA
Analysis of variance (ANOVA) tests the hypothesis that the means of two or more
populations are equal. ANOVAs assess the importance of one or more factors by
comparing the response variable means at the different factor levels. The null hypothesis
states that all population means (factor level means) are equal while the alternative
hypothesis states that at least one is different.
Types of ANOVA
There are two types of analysis of variance: one-way (or unidirectional) and two-way. One-
way or two-way refers to the number of independent variables in your Analysis of Variance
test. A one-way ANOVA evaluates the impact of a sole factor on a sole response variable.
It determines whether all the samples are the same. The one-way ANOVA is used to
determine whether there are any statistically significant differences between the means of
three or more independent (unrelated) groups.

A two-way ANOVA is an extension of the one-way ANOVA. With a one-way, you have
one independent variable affecting a dependent variable. With a two-way ANOVA, there
are two independents. For example, a two-way ANOVA allows a company to compare
worker productivity based on two independent variables, say salary and skill set. It is
utilized to observe the interaction between the two factors. It tests the effect of two factors
at the same time.
HYPOTHESIS
A hypothesis, in a scientific context, is a testable statement about the relationship between
two or more variables or a proposed explanation for some observed phenomenon. In a
scientific experiment or study, the hypothesis is a brief summation of the researcher's
prediction of the study's findings, which may be supported or not by the outcome.
Hypothesis testing is the core of the scientific method.
The researcher's prediction is usually referred to as the alternative hypothesis, and any
other outcome as the null hypothesis -- basically, the opposite outcome to what is predicted.
(However, the terms are reversed if the researchers are predicting no difference or change,
hypothesizing, for example, that the incidence of one variable will not increase or decrease
in tandem with the other.) The null hypothesis satisfies the requirement for falsifiability:
the capacity for a proposition to be proven false, which some schools of thought consider
essential to the scientific method. According to others, however, testability is adequate, on
the grounds that if there is sufficient support for a hypothesis it is not necessary to be able
to conceive of a contrary outcome. A simple hypothesis might predict a causal
relationship between two variables, meaning that one has an effect on the other. The
independent variable is manipulated and the dependent variable is measured to see how it
is affected as the independent variable changes. A complex hypothesis is similar to a simple
one but includes two or more independent variables or two or more dependent variables.

CHAPTER IV
DATA ANAYSIS
AND
INTERPRETATION

DESCRIPTIVE ANALYSIS
Table 4.1
Mean and Standard deviation of BSE Sensex, Repo rate, FDI and Exchange rate
Source: Formulated in MS Excel
Table 4.1 presents a summary of descriptive statistics of all the variables. Sample mean,
standard deviation, maximum, minimum have been reported. These variables are Bombay
stock exchange and exchange rate, FDI and repo rate. The mean of stock price (SENSEX)
is 21146, while its maximum price is 33473 for data series and the standard deviation is
5997 which is considered to be very high. It reflects significant variability in stock prices
(SENSEX).
Exchange rate mean is 56 and standard deviation is 8.08. So, there is not so significant
variability in dollar price form its mean. The maximum and minimum values of dollar price
are 67 and 40 respectively. FDI mean is 7289 and its standard deviation is 3541 which
imply that there is a high moderate variability and the maximum and minimum FDI is
14685 and 577 respectively.
Repo rate mean is 7 and its standard deviation is 1.146 which imply that there is no
significant variability in the repo rate. The maximum and minimum repo rate is 8.8 and 4.8
respectively.
MEAN STANDARD
DEVIATION
MAXIMUM MINIMUM
BSE SENSEX 21146 5997 33473 9341
REPO RATE 7 1.146188 8.8 4.8
FDI 7289 3541.396 14685 577
EXCHANGE
RATE
56 8.683417 67 40

CORRELATION AND REGRESSION ANALYSIS
BSE SENSEX AND REPO RATE
Hypothesis: Repo rate is not a significant predictor of BSE Sensex.
Table 4.2
BSE Sensex and Repo rate -Regression
Regression Statistics
Multiple R 0.003999616
R Square 0.000015996
Adjusted R Square -0.026299372
Standard Error 6075.345234
Observations 40
Table 4.2 explains that, there is a zero correlation between BSE Sensex and Repo rate. R
square value is 0.000015 which is too far from 0.75 (the value considered to measure the
strength relationship between two variables) So we can infer that there is no relation
between repo rate and movement of BSE Sensex. So it is understood that the repo rate and
Sensex are not directly related.

Table 4.3
Analysis of variance between BSE Sensex and Repo rate
ANOVA
Df SS MS F
Significance
F
Regression 1 22437.21737 22437.21737 0.000607893 0.980458785
Residual 38 1402573149 36909819.71
Total 39 1402595586
From the ANOVA table, it is understood that the null hypothesis is accepted, that
means the model is not fit because the Significance value is 0.984, as it is greater than the
benchmark value 0.05.
Table 4.4
BSE Sensex and Repo rate- Regression Equation
Coefficients Standard Error t Stat P-value
Intercept 21000.23351 5975.911375 3.514147414 0.001157722
REPO RATE 20.9264958 848.7562295 0.024655484 0.980458785
Regression equation:
BSE Sensex = 21000+20.926x
Where, x =Repo rate
Here as the P-value is 0.09804 which is greater than 0.05, so the null hypothesis is accepted.
That is there is no significant relationship between repo rate and BSE Sensex. Repo rate is
predicted the BSE Sensex with the value of 20.92.

Figure 4.1
Correlation between BSE Sensex and Repo rate
So it can be inferred that there is no linear dependency with repo rate and BSE Sensex as
there is a straight line in the diagram but they can own other kind of relationship.
0
5000
10000
15000
20000
25000
30000
35000
40000
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0
BSE SENSEX AND REPO

BSE SENSEX & FDI
Hypothesis: FDI is not a significant predictor of BSE Sensex.
Table 4.5
BSE Sensex and FDI -Regression
R Square 0.401064563
Adjusted R Square 0.385303104
Observations 40
The correlation value 0.633 shows that there is a moderate positive relationship between
FDI and BSE Sensex. R square is the regression co-efficient, here the value is 0.4010, it
shows that the relation between FDI and Sensex is not strong, its moderate. So when there
is an increase in FDI there will be a slight movement in the Sensex.
Table 4.6
Analysis of Variance between BSE Sensex and FDI
ANOVA
df SS MS F
Significance
F
Regression 1 5.63E+08 5.63E+08 25.4459 0.000011556
Residual 38 8.4E+08 22106953
Total 39 1.4E+09
From the Anova table, it is understood that the null hypothesis is rejected, that means the
model is fit because the significance P-value is 0.0000115 which is lesser than
0.05(benchmark value).

Table 4.7
BSE Sensex and FDI –Regression Equation
Coefficients
Standard
Error t Stat P-value
Intercept 13329.10605 1718.658 7.755531 2.39E-09
FDI 1.072424062 0.212597 5.044393 0.0000115
BSE Sensex= 13329+1.0724x.
Where x=FDI
Here the P-value is 0.0000115, which is lesser than 0.05, so the hypothesis that FDI is not
a significant predictor of BSE Sensex is rejected. The analysis shows that FDI is a predictor
of BSE Sensex.

Figure 4.2
Correlation between BSE Sensex and FDI
There is a moderate uphill (positive) correlation between FDI & BSE Sensex. So if FDI
increases there will be a moderate Sensex movement.
0
5000
10000
15000
20000
25000
30000
35000
40000
0 2000 4000 6000 8000 10000 12000 14000 16000
BSE SENSEX AND FDI

BSE SENSEX & EXCHANGE RATE
Hypothesis: Exchange rate is not a significant predictor of BSE Sensex.
Table 4.8
BSE Sensex and Exchange rate-Regression
R Square 0.646047999
Observations 40
The correlation value is 0.8037, which shows that there is a strong relationship between
the exchange rates and BSE Sensex. R square is the regression co-efficient, here the value
is 0.64 which is lesser than 0.75(Benchmark value), so it is understand that even though
there is a positive relationship between exchange rate and BSE Sensex but their strength of
relationship is moderate.
Table 4.9
Analysis of Variance between BSE Sensex and Exchange rate
ANOVA
df SS MS F Significance F
Regression 1 906144072 906144072 69.35918966 0.000042484
Residual 38 496451514.3 13064513.53
Total 39 1402595586

model is fit because the Significance P value is 0.0000424 which is lesser than
0.05(benchmark value)
Table 4.10
BSE Sensex and Exchange rate –Regression Equation
Intercept -9708.895739 3748.641397 -2.58998 0.013535
Exchange rate 555.1056947 66.65361022 8.328216 0.00004248
BSE Sensex = -9708.89+555.10x
Where x = Exchange rate
As the P-value is 0.00004 which is below 0.05, it is understood that Exchange rate is a
significant predictor of BSE Sensex.

Figure 4.3
Correlation between BSE Sensex and Exchange rate
There is a strong uphill(positive) correlation between Exchange Rate & BSE Sensex.
0
5000
10000
15000
20000
25000
30000
35000
40000
0 10 20 30 40 50 60 70 80
BSE SENSEX AND EXCHANGE RATE

MULTIPLE REGRESSION ANALYSIS
Hypothesis: There is no significant impact of macro-economic variables on the
movement of BSE Sensex.
Table: 4.11
Macro-economic variables and BSE Sensex-Regression
R Square 0.670298054
Observations 40
From the above table, as the correlation value is 0.81 its understood that there is a positive
relationship between the macroeconomic variables namely FDI, Exchange rate, Repo rate
and the BSE Sensex, that is means macro-economic variables effects the movement of BSE
Sensex. R-square is the regression co efficient is 0.67 which shows that strength of the
relationship between macro-economic variables and BSE Sensex is a moderate.

Table 4.12
Analysis of Variance between macro-economic variables and BSE Sensex
model is fit because the significance value is 0.00008586 which is lesser than
0.05(benchmark value). So it can be inferred that there is a relationship between macro-
economic variables and BSE Sensex so the null hypothesis is rejected.
Table: 4.13
Macro-economic variables and BSE Sensex-Regression Equation
Intercept -4235.820568 5301.820965 -0.79894 0.429566716
Exchange rate 475.4501012 89.14704236 5.333324 0.000054
FDI 0.313712611 0.220096068 1.425344 0.16267103
REPO RATE -479.4937486 506.6161106 -0.94646 0.350222091
BSE Sensex = -4326+475.45* X1 +0.313* X2+(-479) * X3
Where ,X1 =Exchange rate
X2=FDI
X3=Repo rate
ANOVA
df SS MS F
Significance
F
Regression 3 9.4E+08 3.13E+08 24.39651 0.00008586
Residual 36 4.62E+08 12845514
Total 39 1.4E+09

From the above table, BSE Sensex is highly influenced by exchange rate with the value of
(475.45). So it is understood that macro-economic variables can predict the movement of
BSE Sensex.
TREND ANALYSIS
Trend analysis is a technical analysis of the movement of a stock based on past
performance. A trend analysis is a method of analysis that allows traders to predict
what will happen with a stock in the future. Trend analysis is based on historical data
about the stock's performance given the overall trends of the market and particular
indicators within the market.
Trend analysis takes into account historical data points for a stock and, controlling for
other factors like the general changes in the sector, market conditions, competition for
similar stocks, it allows traders to forecast short, intermediate, and long term possibilities
for the stock.

BSE SENSEX & FDI
Figure 4.4
Movement of BSE Sensex and FDI
From the above graph it can be inferred that FDI and Sensex move in the same direction.
With the increase in the FDI the Sensex point is also increased. So they have a positive
relation.
0
2000
4000
6000
8000
10000
12000
14000
16000
0
5000
10000
15000
20000
25000
30000
35000
40000
2008
Q1
Q3 2009
q1
Q3 2010
Q1
Q3 2011
Q1
Q3 2012
Q1
Q3 2013
Q1
Q3 2014
Q1
Q3 2015
Q1
Q3 2016
Q1
Q3 2017
Q1
Q3
BSE SENSEX FDI

BSE SENSEX AND EXCHANGE RATE
Figure 4.5
Movement of BSE Sensex and Exchange rate
From the above graph its inferred that the fluctuations in the exchange rate also bring a
moderate Sensex movement. The inflows and outflows of foreign funds in the stock market
affect the demand and supply of the dollar. When the market is trending upward, the
increasing inflow of foreign funds will cause the Rupee to appreciate against the dollar.
Conversely, when the market is falling, the increase in demand for dollar byoutflow of foreign
portfolio will cause the Rupee to depreciate which effect the movement of Sensex.
0
10
20
30
40
50
60
70
80
0
5000
10000
15000
20000
25000
30000
35000
40000
2008
Q1
Q3 2009
q1
Q3 2010
Q1
Q3 2011
Q1
Q3 2012
Q1
Q3 2013
Q1
Q3 2014
Q1
Q3 2015
Q1
Q3 2016
Q1
Q3 2017
Q1
Q3
BSE SENSEX Exchange rate

BSE SENSEX AND REPO RATE
Figure 4.6
Movement of BSE Sensex and Repo rate
Even though there is zero correlation between repo rate and Sensex. Indirectly it has
impact on the movement of Sensex. Every time when the repo rate changes are announced,
the broad based market has a tendency to react sharply to the news.The most important
thing to note here is that while market may react to news sharply on the date of repo rate
change announcements real impact comes only over a period of time. From the above graph
it can be inferred that high repo rate bring a downfall in BSE Sensex and a low repo rate
brings a upward movement of BSE Sensex.
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
10.0
0
5000
10000
15000
20000
25000
30000
35000
40000
BSE SENSEX REPO RATE

CHAPTER V
FINDINGS, SUGGESTIONS AND
CONCLUSIONS

FINDINGS
 From the correlation, it is found that Sensex and the repo rate have zero correlation.
It means the movements in the Sensex in the past 10 years not be linked with the
movements of repo rate directly. Whenever the RBI increases repo rate, it does not
affect BSE Sensex but it has a direct effect in the form of borrowings from RBI
 Repo rates don’t have direct effect on stock market, where as the potential changes
in profits or losses of a company due to change in interest will be reflected in the
stock market.
 The data of the past 10 years shows that both the Sensex and the FDI share a strong
positive correlation with a value of 0.63. It means ,63% of the movements in Sensex
in the past 10 years can be linked with the movements of FDI. With the increase in
the FDI there is also an increase in the BSE Sensex. Which shows that FDI impacts
the movement of BSE Sensex.
 Exchange rate and BSE Sensex is showing a positive relation. Exchange rate is
having a profound effect on BSE Sensex movements. From the study it is found
that both the Sensex and the rupee have gone from strength to strength. The data of
the past 10 years shows that both the Sensex and the rupee movements share a
strong positive correlation, when the market goes up, the rupee appreciates, and
vice versa. There is a correlation of 0.80 between the two. It means ,80% of the
movements in the Sensex in the past 10 years can be linked with the movements in
the rupee and vice versa.
 Even though FDI and Exchange range are showing a positive correlation with BSE
Sensex, their strength is poor. Which means that they are not only the predictor of
BSE Sensex. There are other factors too effects the movement of BSE Sensex. That
means it is not a single parameter which determines the movement of BSE Sensex.

SUGGESTIONS
 With the greater financialisations of the economy and an increased number of
market participants, the Sensex will go on to represent the overall economy a lot
better than previously, with greater correlation with the exchange rate. So
government should take initiatives for better strategies to attract investors.
 Exchange rate fluctuations have an impact with the BSE Sensex. So government
should frame a policy to improve the value of Indian currency in the foreign
exchange market.
 The flow of FDI accelerated the Indian economy and also gave opportunities to
Indian industry for technological up-gradation, gaining access to global managerial
skills and practices, optimizing utilization of human and natural resources and
global competitive advantage with greater efficiency. So the government should
come up with the policies which increases that FDI in return it enhances BSE
Sensex.
 Repo rate have a indirect relationship with BSE Sensex. So banks may be offered
the loan to the Industry with subsidized interest rate even though there is a rise in
repo rate.

CONCLUSION
Stock market is the barometer of the Indian economy. It plays the vital role in the financial
system of of any economy. Numerous domestic and international factors directly or
indirectly affects the performance of stock markets. In this paper, the study performed
necessary analyses to answer the research question of whether some of the identified
macroeconomic factors can influence the Indian stock market. The macroeconomic
variables are represented by the Foreign Direct Investment, Exchange Rate and Repo rate.
Indian stock market is represented by BSE SENSEX. The quarterly data of last 10 years
(2008-2017) are considered in this study. The paper employed Correlation analysis,
Regression Analysis and Trend analysis for investigating their relationship. The results are
interesting and useful in understanding the Indian stock market pricing mechanism as well
as its return generating process.
On the basis of overall analysis, it’s found that two out of three variables have a direct
impact on the movement of Sensex. Where FDI and Exchange rate shows a positive
correlation even though their strength is poor with the BSE Sensex. Whereas repo rate
shows a zero correlation which is not true in reality. Repo rate and BSE Sensex shows a
indirect linkage.
So from the study its evident that not only a single macro-economic variable can be the
predictor of BSE Sensex. The movement of BSE Sensex is dependent on may other factors,
that is the other leading macro-economic variable too like GDP, Inflation, Index of
Industrial production, Whole sale price Index, Gold price, Crude oil price etc. This
concludes that in long term the Indian stock market is driven by both the domestic macro
factors and Global factors. Even though in the beginning the performance of BSE was weak
now its performing very well due to the liberalized initiatives taken by our government.

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