Professional Documents
Culture Documents
PROJECT REPORT
On
Prepared By
Mr. Dilip Kumar Gorai
Roll No. – 08FC075
Batch - 2008-10
Guide by
Prof.(Dr.) S. Dev
IMIS
TABLE OF CONTENTS
1. ACKNOWLEDGMENT……………………………………………………………..1
2. ABSTRACT...……..………………………………………………………………...2
3. EXECUTIVE SUMMERY…………………………………………………………...3
4. INTRODUCTION…………………………………………………………………..4-
7
5. LITERATURE REVIEW……………………………………………………………...7
7. OBJECTIVE…….………………………………………………………………….17
8. LIMITATIONS OF STUDY……………………………………………………..17-18
9. METHODOLOGY...…………………………………………………………….18-
19
Acknowledgment
We would like to express our sincere thanks to prof. (Dr.) S. Dev. For
providing us a good project and his valuable advice and encouragement
while we were working on this project.
And we could learn many things while doing this project that how the
market (sensex) fluctuate with the movement of other variables like crude
oil price, inflation, FII, and FDI.
Last but not least I would like to thank my group members for their equal
distribution and good group coordination while working on this project.
4
Abstract:
While there is a strong presumption in the financial press that oil prices
drive the stock market, the empirical evidence on the impact of oil price
shocks on stock prices has been mixed. This study shows that the response
of aggregate Indian stock market returns or movement may differ greatly
depending on whether the increase in the price of crude oil is driven by
demand or supply shocks in the crude oil market. The conventional wisdom
that higher oil prices necessarily cause lower stock prices is shown to apply
only to oil-market specific demand shocks such as increases in the
precautionary demand for crude oil that reflect concerns about future oil
supply shortfalls.
Executive Summery:
Introduction
Crude oil prices act like any other product cost with more variation taken
place during shortage and excess supply. Studies have conducted to analyze
the impact of rise in crude oil price to the economic growth in the OPEC
(Organization of Petroleum Exporting Countries) countries.
Any massive increase or decrease in crude oil has its impact on the
condition of stock markets in throughout the world. The stock exchanges of
every country keep a close eye on any up and downward movement of the
crude oil price.
India fulfills its major crude oil requirements by importing it from oil
producing nations. India meets more than 80% of its requirement by
importing process. Therefore, any upward and downward motion of prices
are closely tracked in the domestic marketplace. Many times it has been
recorded that prices of essential products like crude also acts as a prime
driver in becoming reason of up and down movement of price.
Any fluctuation in crude oil affects the other industrial segments also.
Higher crude oil price implies to the higher price of energy, which in turns
negatively affects other trading practices that are directly or indirectly
depends on it. Crude Oil has been traded in throughout the world and there
prices are behaving like any other commodity as swinging more during
shortage and excessiveness.
In the short term, price of crude oil is influenced by many factors like socio
and political events, status of financial markets, whereas from medium to
long run it is influenced by the fundamentals of demand and supply which
thus results into self price correction mechanism.
7
There are innumerable factors which influence the price movement of crude
oil in throughout the world. Like methods and technology using for increase
the oil production, storing up of crude oil, changes introduced in tax policy,
social and political issues, demand & supply etc.
The crude oil prices have been buffeted by many factors, which are
summarized as below -
Price of
Crude oil
The high demand economies of crude oil are putting undue pressure on
the available fixed resources. The major gap created between demand
and supply of crude oil is forcing the price curve of crude oil to rise in
upward direction.
(2) Inflation
Since petroleum products are key constituents of Wholesale and Consumer
Price Inflation Index. Higher import bill directly and indirectly impacts the
rupee, while inflation impacts interest rates, and hence even the rupee. These
factors obviously affect our GDP growth rates.
All these factors individually and collectively could have a negative
impact on the stock market.
LITERATURE REVIEW
Chen, Roll and Ross (1986), in contrast, suggested that oil price
changes have no effect on asset pricing.
BSE Sensex (top 30stocks) which was 9,398 at end-December 2005 and
10,399 at end- May 2006, after dropping to 8,929 on June 14, 2006,
recovered soon thereafter to rise steadily to 13787 by end-December 2006.
According to the number of transactions, NSE continued to occupy the third
position among the world’s biggest exchanges in 2006, as in the previous
three years. BSE occupied the sixth position in 2006, slipping one position
from 2005. In terms of listed companies, the BSE ranks first in the world.
In terms of volatility of weekly returns, uncertainties as depicted by Indian
indices were higher than those in outside India such as S&P 500 of United
States of America and Kospi of South Korea. The Indian indices recorded
higher volatility on weekly returns during the two-year period. January 2005
to December 2006 as compared to January 2004 to December 2005
The market valuation of Indian stocks at the end of December 2006, with the
Sensex trading at a P/E multiple of 22.76 and S&P CNX Nifty at 21.26, was
higher than those in most emerging markets of Asia, e.g. South Korea,
Thailand, Malaysia and Taiwan; and was the second highest among
emerging markets. The better valuation could be on account of the good
fundamentals and expected future growth in earnings of Indian corporate
Liquidity, which serves as a fuel for the price discovery process, is one of
the main criteria sought by the investor while investing in the stock market.
Market forces of demand and supply determine the price of any security at
any point of time. Impact cost quantifies the impact of a small change in
such forces on prices. Higher the liquidity, lower the impact cost.
11
Asian peers and it was the biggest single day gain. This trend shows that
global cues had an influential effect on our market.
On the auspicious occasion of Ganesh chaturathi, India experienced a flow
of good news. The festive spirit did not end with the immersion of Ganapati.
On Wednesday, it boiled over to the streets of Mumbai and its financial
district, the Sensex touched the magical 17,000 number. It took Dalal Street
just 5 days to travel 1,000 points. Suddenly, tech stocks, which were the
whipping boys till Tuesday, became hot favourites. Why? Hopes
that the rupee will soften as a result of RBI's latest announcements to allow
more outflow sparked a rally in tech stocks, pushing the Sensex to a new
high of 17,073.87 during the day. At the end of the day, RBI's measures may
not be enough to rein in the rupee. But there were no takers for this. The
bellwether index finally settled at 16,921.39. On October 9th, 2007, Sensex
hits a record high of 18,280 on the back of eye-popping
rallies in Reliance & Reliance. At the height of the dotcom mania in 1999-
00, the easiest way to maximize returns was to buy into any stock with the
suffix ‘Software’ or ‘Technologies’. Eight years on, the same seems to hold
true for any stock with the prefix ‘Reliance’, given their baffling run-up over
the past one month. Eye-popping rallies in Reliance Industries, Reliance
Energy and Reliance Communications lifted the 30-share Sensex to a record
high of 18,327.42 intra-days.
On October 15th 2007, amidst heavy buying by investors, the bull roared to
breach the 19000 mark in just 4 sessions Sensex was up by 639.63 points or
3.47 per cent at 19058.67. This rise came on the back of some strong sectors
for which the macro picture is quite bright — power, capital goods,
infrastructure and telecom.
Foreign Institutional Investors were pumping in huge money in the equity
market and this too was pushing up the index. Since September, they nearly
pumped in more than Rs. 30,000 crore in the cash market. After the U.S.
Federal Reserve cut interest rates by 50 basis points, a re-rating of the
emerging markets had been seen wherein liquidity flows were quite robust.
Then suddenly happened the second biggest crash the sensex ever
experienced when the sensex crashed by 1743 points on 17th October 2007
within minutes of opening, prompting suspension of trade for hour fallout of
regulator Sebi's move to curb Foreign Institutional Investors. In a knee-jerk
reaction to the cap proposed by the market
regulator for the Participatory Notes, an overseas derivative instrument
(ODI), used by foreign institutional investors (FIIs), the stock market
crashed by 1743 points in intra-day, but recovered substantially later to close
with a loss of 336.04 points or 1.76 per cent at 18715.82. but it was followed
16
The first month of the financial year 08-09 proved to be a good one for
investors with the month ending on a positive note. The BSE sensex showed
a gain of 10.5% to close at 17287 points. A combination of firming global
markets and technical factors like short covering were the main reasons for
the up move in the markets. Though inflation touched a high of 7.57%
against 6.68% in march 2008 as a result RBI hiked CRR by 50 bps to take
the figure to 8%, still emergence of retail investors was also seen; a fact
reinforced by the strong movement in the mid-cap and small- cap index that
rose 16% and 18% respectively.
So April was the last month to close positive. Then after nobody saw a
stable sensex even. Sometimes it surged by 600+ points, but very next day it
plunged by some 800 odd points and this story is still continuing. Every
prediction, every forecasting has failed. The
sensex is dancing on the music of lifetime high inflation rates, historic crude
prices, tightening RBI policies, weak industrial production data, political
uncertainties and obviously the sentiments of domestic as well as FIIs. The
only relief came in the form of weakening Indian rupees which enlightened
the IT sector and most recently the UPA gaining vote of confidence.
18
Presently it is revolving around the figures of 14000 and no one knows what
next? The 30-share BSE Sensex fell 117.89 points or 0.67% at 17,373.01 on
Tuesday, 6 May 2008. The key benchmark indices ended lower as investors
resorted to profit booking due to lack of positive triggers in the market. On
30th May an imminent hike in domestic retail fuel prices due to soaring
crude oil prices weighed on the market last week. Foreign institutional
investors sold close to Rs 2204 crore in the first three trading sessions of the
week which accentuated the downfall. However better than expected Q4
gross domestic product figures provided some relief to the bourses on
Friday. IT stocks gained on slipping rupee. BSE Sensex rose in two out of
five trading sessions.
In May, Indian inflation stood at 8.2%. The market declined sharply as a
hike in fuel prices by about 10% announced by the Union government on
Wednesday, 4 June 2008, triggered possibility of a surge in inflation to
double digit level. The BSE Sensex declined 843.39 points or 5.14% to
15,572.18 in the week ended 6 June 2008. The S&P CNX Nifty fell 242.3
points or 4.97% to 4627.80 in the week.
On 6 June 2008, local benchmark indices underperformed their global peers,
hit by rumours that the Reserve Bank of India (RBI) may hike cash reserve
ratio (CRR) or interest rate later in the day to tame runaway inflation. The
30-share BSE Sensex declined 197.54 points or 1.25% to settle at 15,572.18.
On 9th June 2008, Bombay’s Sensex index closed 506.08 points down at
15,066.10,
having earlier fallen 4.4% and slipped below 15,000 for the first time since
March. Oil prices surged to record levels, fanning fears that they will keep
climbing and hurt world growth.
Central banks across the globe warned that interest rates may have to rise as
they look to keep inflation under control, despite the fact that economic
growth is slowing in key nations such as the US and UK. On the week
ending 27th June 2008 Sensex declined 769.07 points or 5.28% to
13,802.22.
The S&P CNX Nifty lost 210.90 points or 4.85% to 4136.65 in the week.
Equities extended losses for the fifth straight day on 24 June 2008 with the
barometer index BSE Sensex falling below the psychologically important
14,000 mark for the first time in 10 months since late August 2007. On 25
June 2008, equities staged a solid rebound after touching fresh calendar
2008 lows in early trade. The initial jolt was caused by the Reserve Bank of
India's move to hike the key lending rate. A setback to stocks in Asia and
US, sharp spurt in crude oil prices and political uncertainty due to Indo- US
nuclear deal rattled bourses on 27 June 2008.
19
On July 15th 2008, Indian shares fell 4.9 per cent to their lowest close in 15
months, joining a world equities rout as investors dumped financials on
concerns about the fallout from worsening global credit turmoil. Although
Indian banks have no direct exposure to the US subprime mortgage sector,
the global financial sector turmoil impacts sentiment in the local market and
raises worries of more withdrawals by foreign funds. An 800+ point surge
was experienced in the market on the day following UPA gaining vote of
confidence but the very next day market couldn’t maintain the momentum
and since then its in a doldrums’ position.
Presently, we can saw market plunging after the RBI announced further
hikes in Repo rate as well as CRR both increased to 9%. Also, the serial
blasts at Ahmadabad and Bangalore adding to the worries and enhancing the
negative sentiments. And above all we can't see any positive trigger that can
dilute the flow of negative news.
• To Study the relation between crude oil price and movement of Indian
stock market.
• To study the major Episodes of volatility in Indian stock market and
analyzing the factors or variables like FII ,FDI, INFLATION etc and
their impact on sensex
LIMITATIONS OF STUDY
Existing studies of the relationship between crude oil prices and market
returns suffer from three limitations.
(1) We can’t conclude that the crude oil price is the only variable which
impacts the stock market. There are many variables like inflation , FII
FDI, political issues , government monetary polices etc which are
also
Influence the stock market.
(2) Many previous empirical and theoretical models of the link between
oil prices and stock prices have been constructed under the premise
that one can think of varying the price of crude oil, while holding all
other variables in the model constant .
In other words, oil prices are treated as strictly exogenous
with respect to the global economy. This premise is not credible (see,
20
e.g., Barsky and Kilian 2002, 2004; Hamilton 2003). There are good
theoretical reasons and there is strong empirical evidence that global
macroeconomic fluctuations have influenced the price of crude oil since
the 1970s (see Kilian 2008a,c). For example, it is widely accepted that a
global business cycle expansion (as in recent years) tends to
raise the price of crude oil. The fact that the same economic shocks that
drive macroeconomic aggregates (and thus stock returns) may also drive
the price of crude oil makes it difficult to separate cause and effect in
studying the relationship between oil prices and stock returns.
RESEARCH METHODOLOGY
Data Description
21
To study the market movement we have collected the secondary data from
various sources. in the present study we have taken the last three year (2006-
2009) BSE-30 (sensex) monthly wise closing data from the BSE. And the
monthly wise crude oil closing data from the BSE and the monthly wise
crude oil price from the energy information administration year (2006-2009)
and we have taken the monthly wise FII movement from RBI. And the past
event the stock market information has been taken from various news
bulletins, magazines, journal, and websites.
Method
In this study we have taken the BSE-30 (Sensex) as dependent variable and
crude oil price, FII, and as well as past Sensex closing price as independent
variable.
To find out the relation between dependent variable and independent
variable, we have run the regression model with the help of SPSS software
and also we find the correlation between dependent variable and
independent variable, coefficient of variation and T-test by using these
statistical tools we will prove whether all the independent variable impact
the dependent variable or not.
HYPOTHESIS TESTING
•
Ap
10,000.00
15,000.00
20,000.00
25,000.00
5,000.00
0.00
A M r-0
10,000.00
15,000.00
20,000.00
25,000.00
5,000.00
0.00
M pr- ay 6
a 0 Ju -06
Juy -06 n
n 6 Ju -0 6
Observations
J -0
sensex decline.
Au l-0
A ul-0 6
ug 6 g 6
S - Se - 0
e 0 p 6
O p- 06 O -06
c ct
N t- 0 6 No -06
D o v- 6
e 0 De v-0
Jac-0 6 c 6
Ja -0 6
Fen-06 n-
Fe 0 7
M b- 07 b
a M -07
A r- 07 ar
M pr- 7 Ap -07
a 0 M r-0
Juy-07 ay 7
n 7 Ju -07
J -0 n
A ul-0 7
u Ju -0 7
S g- 7 Au l-0
e 0 g 7
O p- 07
c Se - 0
p 7
N t- 0 7 O - 07
D o v- 7 ct
e 0 No -07
J ac-0 7 De v-0
MONTHS
Fen-07 c 7
months
M b- 08 Ja -0 7
a n-
Fe 0
A r- 08 b 8
M pr- 8 M -08
a 0 ar
Juy-08 Ap -08
n 8 M r- 0
J -0 ay 8
comparative analyse
A ul-0 8
u Ju -08
S g- 8 n
e 0 Ju -0 8
COMPARATIVE ANALYSIS
O p- 08
c Au l-0
N t- 0 8 g 8
D o v- 8 Se - 0
e 0 p- 8
0.00
From the above graph we can see that as the crude oil price increases the
5000.00
0
-5000.00
10000.00
15000.00
20000.00
25000.00
20
40
60
80
-20000.00
-15000.00
-10000.00
100
120
140
160
22
FII
SENSEX
CRUDE OIL
SENSEX
23
After run the regression model the taking consideration dependent variable
and independent variable we have found the following observation if we
refer the table-1
Variables Entered/Removed(b)
Variables Variables
Model Entered Removed Method
1
SENPRICE,
CRUDEOIL, . Enter
FII(a)
From the model summary table, we can know the following things about our
research model.
iii) here the adjusted R square = 75.7% which means the 75.7%
explained by the independent variable with perfect, where no error
means the real strength of the model.
Table-3(ANOVA)
ANOVA(b)
Sum of
Model Squares df Mean Square F Sig.
1 Regressio 251237908
3 83745969.424 36.332 .000(a)
n .273
Residual 71455804.
31 2305025.938
075
Total 322693712
34
.347
a Predictors: (Constant), SENPRICE, CRUDEOIL, FII
b Dependent Variable: SENSEX
Hence, all the independent variables have impact on the stock market
Table-4(coefficient table)
Coefficients(a)
Unstandardized Standardized
Coefficients Coefficients
Histogram
Dependent Variable: SENSEX
12
10
4
Frequency
(1) In the correlation table correlation between sensex D.V with I.V
crude oil price, FII, and index closing are .659, .350 and .812
27
References
1. www.bse.com
2. www.rbi.org.in
3 http://tonto.eia.doe.gov/dnav/pet/hist/wtotworldw.htm