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“Crude oil price and stock market


Prepared By
Mr. Dilip Kumar Gorai
Roll No. – 08FC075
Batch - 2008-10

Guide by

Prof.(Dr.) S. Dev

As a Partial Fulfillment of PGDFC of IMIS

Institute of Management & Information



1. ACKNOWLEDGMENT……………………………………………………………..1

2. ABSTRACT...……..………………………………………………………………...2

3. EXECUTIVE SUMMERY…………………………………………………………...3

4. INTRODUCTION…………………………………………………………………..4-

5. LITERATURE REVIEW……………………………………………………………...7

6. EVENT ANALYSIS (2006-2009)……………………………………………….…8-17

7. OBJECTIVE…….………………………………………………………………….17

8. LIMITATIONS OF STUDY……………………………………………………..17-18

9. METHODOLOGY...…………………………………………………………….18-

10. OBSERVATION & CONCLUSION ………………………………………...…19-



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.

We are also very thankful to Prof. S. Sahoo, who introduced us to many

insightful ideas on this topic and offered us great help with data collection.

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.


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.

In contrast, positive shocks to the global demand for industrial commodities

cause both higher crude oil prices and higher stock prices, which helps
explain the resilience of the Indian stock market to the recent surge in the
price of oil.

Executive Summery:

Today, BSE is the world’s number one exchange in terms of the

number of listed companies and the world’s 5th in transaction
Of the 23 stock exchanges in the India, Bombay Stock Exchange is
the largest, with over 6,000 stocks listed. The BSE accounts for
over two thirds of the total trading volume in the country.
Established in 1875, the exchange is also the oldest in Asia.
Among the twenty-two Stock Exchanges recognized by the
Government of India under the Securities Contracts (Regulation)
Act, 1956, it was the first one to be recognized and it is the only
one that had the privilege of getting permanent recognition ab-
initio. Moreover, The BSE SENSEX is not only scientifically
designed but also based on globally accepted construction and
review methodology. The index is widely reported in both
domestic and international markets through print as well as
electronic media.

The "Free-float Market Capitalization" methodology of BSE index

construction is regarded as an industry’s best practice globally. All
major index providers like MSCI, FTSE, STOXX, S&P and Dow
Jones use the Free-float methodology. Due to its 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, the
SENSEX has over the years become one of the most prominent
brands in the country.

So, in this project we emphasizes mainly on BSE-30 sensex and

major Fluctuations related to it from time period of 1st April 2006
to 31st march 2009 .in this study also we have put light on how
various factors such as rising crude oil prices, inflation, concerns
over a slowing down US economy and big role of Foreign

Institutional Investors (FIIs) and FDI determines market’s situation

and operate SENSEX.


Crude Oil Industry

Crude oil is one of the most necessitated worldwide required commodity.

Any slightest fluctuation in crude oil prices can have both direct and indirect
influence on the economy of the countries. The volatility of crude oil prices
drove many companies away and it’s impact the stock market also.

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.

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 -

• Production: The OPEC nations are the major producer of world's

crude oil. Therefore, every policy made by such countries related to
the crude oil prices have their influence on crude oil prices. Any
decision taken by OPEC nations for increasing or decreasing
production of crude oil impacts the price level of crude oil in
international commodity markets.
• Natural Causes: In prevent years, global community have witnessed
many events which in turns have volatility effects on the price level of
crude oil. Like hurricane katrina and other type of tropical cyclone
have hit the major portion of globe, which as a result driven the crude
oil prices to reach at its peak.
• Inventory: In throughout the world, oil producers and consumers get
stock their crude oil for their future requirements. This gives rise to
speculation on price expectations and sale chances in case any
unexpected thing cracks during supply and demand equations. Any
upward or downward movement in inventory level shoots up
volatility in price index of crude oil, which generates lot of changing
movement in sensex.
• Demand & supply: With a sharp rise in economic demand,
requirement of crude oil is increasing to manifold in context to the
limited supply.

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.

The Impact Analysis

The crude oil price impacts two key aspects of our economy

(1) The import bill

Since, we are a net importer of oil. The increasing import bill will widen
our Trade Balance, defined as Exports minus Imports, which has been
perpetually running at a deficit and possibly wipe out our current account
surplus, which is Trade Balance minus Net Invisibles, which has
turned from deficit into surplus over the last few years. Higher trade
balance will adversely impact the fiscal deficit, which in turn will
2. ...resulting
impact the interest rates
Hence, the stock market is impacted
in a higher

(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.


Although changes in the price of crude oil are often considered an

important factor for understanding fluctuations in stock prices,
there is no consensus about the relation between stock prices and
the price of oil among economists.

Kling (1985), for example, concluded that crude oil price

increases are associated with stock market declines.

Chen, Roll and Ross (1986), in contrast, suggested that oil price
changes have no effect on asset pricing.

Jones and Kaul (1996) reported a stable negative relationship

between oil price changes and aggregate stock returns.

Huang, Masulis, and Stoll (1996), however, found no negative

relationship between stock returns and changes in the price of oil
Wei (2003) concluded that the decline of U.S. stock prices in
1974 cannot be explained by the 1973/74 oil price increase.

EVENT ANALYSIS (2006-2009)

Year 2006 at a glance

In the secondary market, the uptrend continued in 2006-07 with BSE indices
closing above 14000(14,015) for the first time on January 3, 2007. After a
somewhat dull first half conditions on the bourses turned buoyant during the
later part of the year with large inflows from Foreign Institutional Investors
(FIIs) and larger participation of domestic investors. During 2006, on a
point-to-point basis, Sensex rose by 46.7%.

The pickup in the stock indices could be attributed to impressive growth in

the profitability of Indian corporate, overall higher growth in the economy,
and other global factors such as continuation of relatively soft interest rates
and fall in the international crude prices.

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 risesteadily 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 twoyear 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.

An overview of year 2006

During December 2005, the greatest demerger of Indian history between the
Ambanis paved the way for 9000. And the sensex entered the year 2006
with a 9000 + figure. On Feb. 10th 2006, we saw two roaring figures, both
sensex and sachin tendulkar crossing
10000 mark. But the reason behind roaring sensex was not sachin’s records
rather it was rallied by strong FII inflows and robust data. The government
forecasted a GDP growth of 8.1% in current year, with manufacturing and
the agriculture sectors estimated to grow
at 9.4% and 2.3% respectively. The 238-point rally was contrary to
expectations as it came despite negative news flow about a fresh tussle
between Ambani brothers over transfer of ownership of the four companies
demerged from erstwhile RIL.
Sensex’s surge to 11000 points on 21st march 2006 was prompted by PM
Manmohan Singh’s announcements on Capital Account Convertibility. On
Saturday, Prime Minister Manmohan Singh hinted at moving toward a free
float of the rupee and on Tuesday, the BSE responded by crossing the
11,000 mark in a lifetime intraday high. The new trading high was reached
29 days after Sensex entered the elite 10,000 club on February 6. Only
Nikkei, Hang Seng and Dow Jones could boast of being above 10,000 at that
time. Since full convertibility was expected to attract more foreign money
and also allow local companies to tap foreign debt markets more easily, it
was evident that the move will encourage investors and boost the confidence
of the markets.
RBI said it was constituting a panel to thrash out the contours for full
convertibility. Although the index later ended lower with investors wanting
to book gains, participants said it was evident the markets had sent out a
message - that the growth story of Asia’s third largest economy is intact and
that liquidity flows into the bourses would continue to remain firm.

After hitting a high of 11,017.25 points in mid-afternoon trade, Sensex lost

35.91 points to close at 10,905.20, fluctuating 153 points, with most of the
volatility coming in the last hour of trading. The rise in share prices was
partly attributed to a fall in oil price. The US April crude oil prices plunged
3.7% or $2.35, to settle at $60.42 a barrel, on the New York Mercantile
Exchange due to ample US inventories. After falling by 307 points on 12th
April 2006 on account of Heavy selling by FIIs in both cash and futures
markets and a move by stock exchanges to raise margins on

share transactions by about 250 basis points, the 131-year-old BSE on

Thursday, April 20, 2006 crossed yet another milestone when it breached
the 12,000-point mark, backed by strong corporate earnings, higher liquidity
and robust economic growth. The index was being driven by the strong flow
of liquidity. Earlier, it was based on the expectations that (corporate) results
would be great...and by the first few companies were more than matching
those expectations
Although, Sensex was beaten to the 12,000 mark by various global indices,
the time it took to breach this milestone has been one of the fastest. Traders
point to the fact that foreign investors, buoyed by a booming economy, have
chosen India as one of their top investment destinations.
Now, everything was going fine….perhaps it was the lull before the storm.
Suddenly the Dalal Street experienced its worst single day crash on
Thursday, 18th may 2006 as an ambiguous Government circular on taxing
investment gains prompted foreign funds to book profits, knocking the
bottom off the jittery stock market. Opening amidst weak global markets
and reports of rising US interest rates, the BSE-30 Sensex went on to close
826.38. However the Dealers said the fall was accentuated by large-scale
selling of client positions by broking firms due to margin calls or the lack of
margins. The May crash saw the Sensex shedding its market capitalization
by as much as 14% in just one month.
Benchmark stock indices vaulted to new highs on Monday, oct 30th 2006
driven by a heady cocktail of strong corporate earnings, a rapidly growing
economy and relatively stable crude oil prices. The Sensex ended at its
highest closing level of 13024.26, a gain of 117.45 points or 0.9%.
Marauding bulls defied the weak trend globally, which was sparked off by
weak US GDP growth figure, pointing to a slowdown.
Back home, the mood was upbeat even as some expect that the RBI may
raise interest rates by 25 basis points in its mid-term credit policy on
Tuesday. Market watchers said sentiment could be affected only if the hike
is more than 25 basis points, which is unlikely. Higher interest rates drive up
borrowing costs for corporate as well as the retail consumer, who could then
cut back on their investments and spending, in turn causing a slack in
domestic demand.
The benchmark 30-share sensex briefly crossed the psychological 14,000-
mark on Tuesday, December 5, 2006. While foreign institutional investors
have been aggressive buying stocks over the past few months, the response
of domestic mutual funds has been guarded. In the last two months alone,
FIIs bought net stocks worth Rs 17,001 crore while local mutual funds have
pumped in a net Rs 638.07 crore.

Year 2007 at a glance

In the secondary market segment, the market activity expanded further
during 2007-08 with BSE and NSE indices scaling new peaks of 21,000 and
6,300, respectively, in January 2008. Although the indices showed some
intermittent fluctuations, reflecting change in the market sentiments, the
indices maintained their north-bound trend during the year. This could be
attributed to the larger inflows from Foreign Institutional Investors (FIIs)
and wider participation of domestic investors, particularly the institutional
investors. During 2007, on a point-to-point basis, Sensex and Nifty Indices
rose by 47.1 and 54.8 per cent, respectively. The buoyant conditions in the
Indian bourses were aided by, among other things, India posting a relatively
higher GDP growth amongst the emerging economies, continued uptrend in
the profitability of Indian corporate, persistence of difference in domestic
and international levels of interest rates, impressive returns on equities and a
strong Indian rupee on the back of larger capital inflows.
The BSE Sensex (top 30 stocks) too echoed a similar trend to NSE nifty.
The sell-off in Indian bourses in August 2007 could partly be attributed to
the concerns on the possible fallout of the sub-prime crisis in the West.
While the climb of BSE Sensex during 2007-
08 so far was the fastest ever, the journey of BSE Sensex from 18,000 to
19,000 mark was achieved in just four trading sessions
during October 2007. It further crossed the 20,000 mark in December 2007
and 21,000 in an intra-day trading in January 2008. However, BSE and NSE
indices declined subsequently reflecting concerns on global developments.
BSE Sensex yielded a
Compounded return of 36.5 per cent per year between 2003 and 2007. In
terms of simple average, BSE Sensex has given an annual return of more
than 40 per cent during the last three years.

An overview of year 2007

After touching 14K mark on December 5th 2006, sensex entered into 2007
with a promising figure of 14000+, though the year started on a rather
tentative note with a marked slowdown being observed in the FII inflows
into the country. The inflows received from FIIs in January and February
2007 was 48 per cent less than what was received during the same period in
2006. The return provided by the BSE Sensex for 2007 turned into negative
territory following the 389-point tumble on Friday, February 23rd; the year-
to-date return generated by the Sensex was negative 0.97 per cent.

FIIs have pressed substantial sales over those days in contrast to an

intermittent surge in inflow in February 2007. As a result, the sensex which
closed at 14091 on January 31st, closed at 12938 on February 28th. As per
provisional data FIIs were net sellers to the tune of Rs 613 crore on Friday 2
March, the day when Sensex had lost 273 points. Their net outflow was
worth Rs 3080.80 crore in four trading sessions from 26 February to 1
March 2007. Market continued to reel under selling pressure on 5th march
2007 taking cue from weak global markets and heavy FII sales as a result of
fall over 400 points, all the indices were in red.
On April 24th, The Sensex again crossed the 14K mark and was trading at
14,150.18 having gained 221.85 points or 1.59%. The midcap and smallcap
indices were rather moving slow indicating that the actual movers are the
large cap stocks but at the month end it finally closed at 13872. Further we
can see May and June having month end figures at 14544 and 14651
respectively. The benchmark BSE 30-Share Sensitive Index (Sensex)
breached the 15,000-mark, to reach a record high of 15007.22, for the first
time intra-day on Friday, July 06 2007 before closing at 14964.12. Despite
weak global cues, Indian stocks were in great demand, especially auto,
pharma, IT and metals stocks. On Friday, this lifted the Bombay Stock
Exchange's benchmark 30-share Sensex past the magical 15,000-mark.
The Sensex took 146 sessions to cover the 1,000 point distance from 14,000
till 15,000. This is the highest since the index took 371 trading sessions to
move up from 6,000 to 7,000.
The sensex experienced its second bigger ever fall on 2nd august 2007. The
fall came in after the Fed Reserve cut its discount interest rate at an
emergency meeting and JPMorgan Chase agreed to buy Bear Stearns for
USD 2 a share. Sensex closed down 951.03 points or 6.03% at 14809.49,
When FIIs were pumping money in stock market and were Net Buyers of
Equity worth Crores; the Sensex was moving Up , Up and Up on weekly
basis. Many thought that FIIs were playing blind in Indian stock market. But
when FIIs have turned Net Sellers of Equity and have started booking profit
backed by massive sell off of shares in global markets; Sensex has to go
down. As expected; the Sensex plunged by 600 Points in early trading on
16th August and most of the shares were down by 4 to 5 per cent. But very
soon the sensex surpassed the gloomy days and Stock markets on
Wednesday, September 19th, 2007 gave thumbs up to the decision of the
U.S. Fed Reserve to reduce the rates by 50 basis points, as the benchmark
30-share BSE Sensex moved up sharply by 653.63 points or 4.17 per cent at
16322.75. By staying well above the 16000- mark, it outperformed most

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

by a huge one-day gain as on October 23 when the BSE barometer rose

878.85 points after market regulator SEBI allowed sub-accounts of Foreign
Institutional Investors (FIIS) to trade It took the index a little over 20 years
to reach the first 10,000 mark, but just a little over 20 months to double that
score and the sensex made history with touching the 20000 mark on October
29 2007. Significantly, it was the local institutions that were in the driver’s
seat. As per BSE data, foreign funds have net sold over Rs 1,100 crore
worth of shares over the last three trading sessions while local funds have
net bought over Rs 2,300 crore worth of shares. Sceptics point to the fact
that there were only a handful of stocks that was driving the market higher.
On 13th November, BSE Sensex registered its biggest ever gain in a single
of 893.58 points to settle at the third-highest level ever on buying by
investors in bank counters and blue chip companies such as Reliance
Industries. The market gain was because of global cues. Besides, the
political development also gelled well with the sentiment.
The rally was driven by short covering, strong buying by domestic investors.
However, there was not much involvement of foreign investors.
But in December 2007, sensex again experienced a black Monday on 17th
December. The market succumbed to profit booking, that came in due to
weak global cues as well as profit booking by FIIs in the holiday season.
The Sensex ended losing 769 points from the previous close, at 19,261.

Sensex during year 2008

After scaling new heights of 20000+, sensex entered year 2008 with rosy
pictures. The trade pundits, brokers and even investors predicted new
heights for the year. And they felt their predictions coming true when sensex
touched the 21000 mark on 8th January 2008. It’s interesting if one sees in
terms of flows; the journey from 20,000 to 21,000 is dominated by domestic
institutional investors; FIIs were negative sellers, they sold in the cash
market to the tune of USD 45 billion. So if one has to take out some pointers
from this journey from 20,000 to 21,000, it is the longest journey which we
have seen in the last 5,000 marks, the midcaps and smallcaps have been
outperformers and in terms of flows, it has been domestic institutional
investors which have been really putting the money.
But the rosy picture soon turned gloomy. The skyrocketing sensex suddenly
started heading south and Sensex saw the biggest absolute fall in history,
shedding 2062 points intra-day. It closed at 17,605.35, down 1408.35 points
or 7.4 per cent. It fell to a low of
16,951.50. The fall was triggered as a result of weakness in global markets,
but the impact of the global rout was the biggest in India. The market

tumbled on account of a broad based sell-off that emerged in global equity

markets. Fears over the solvency of major Western banks rattled stocks in
Asia and Europe.
After the worst January in the last 20 years for Indian equities, February
turned out to be a flat month with the BSE sensex down 0.4%. India finished
the month as the second worst emerging market. The underperformance can
partly be attributed to the fact that Indian markets outperformed global
markets in the last two months of 2007and hence we were seeing the lagged
impact of that outperformance. In the shorter term, developments in the US
economy and US markets continued to dominate investor sentiments
globally and we saw volatility move up sharply across most markets.
The Bombay Stock Exchange (BSE) Sensex fell 4.44 percent on Monday,
31st march the last day of the financial quarter, to end the quarter of March
down 22.9 percent, its biggest quarterly fall since the June 1992 quarter, as
reports of rising inflation and global economic slowdown dampened market
sentiments. Financial stocks led the Sensex slide along with IT. According
to market analysts, IT stocks fell on worries about the health of the US
economy. Indian IT firms depend on the US clients for amajor share of their

Reasoning for the slowdown (FY 08-09)

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.

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
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
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.

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

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
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,

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.

(3) Even if we were to control for reverse causality, existing models

postulate that the effect of an exogenous increase in the price of oil is the
same, regardless of which underlying shock in the oil market is responsible
for driving up the price of crude oil. Recent work by Kilian (2008c) has
shown that the effects of demand and supply shocks in the crude oil market
on indian stock market. macroeconomic aggregates are qualitatively and
quantitatively different, depending on whether the oil price increase is
driven by oil production shortfalls, by a booming world economy, or by
shifts in precautionary demand for crude oil that reflect increased concerns
about future oil supply shortfalls. It is quite natural to expect similar
differences in the effect of these shocks on stock returns. Since major oil
price shocks historically have been driven by varying combinations of these
demand and supply shocks, their effect on stock returns is bound to be
different from
one episode to the next.
Moreover, to the extent that exogenous demand shocks
in the crude oil market have direct effects on the indian economy in addition
to their indirect effects through the real price of oil, and to the extent that
they affect other industrial commodity prices, it is not possible to think of an
innovation to the real price of oil while holding everything else constant.


In order to does the research on movement of stock market (Sensex) with

the movement of crude oil price, FII, FDI, Inflation. We have study the last
three year 1st April 2006 to 31st March 2009.

Data Description

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.

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
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.


Let the null hypotheses is

Ho=µ= All the independent variable doesn’t have any impact on stock
market (Sensex).
And Alternative hypothesis is
H1=µ= All the independent variable have impact on stock market (Sensex).




A M r-0



M pr- ay 6
a 0 Ju -06
Juy -06 n
n 6 Ju -0 6

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

Fen-07 c 7

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

O p- 08
c Au l-0
N t- 0 8 g 8
D o v- 8 Se - 0
e 0 p- 8

Comparative analysis between FII and SENSEX

O 08
J ac-0 8 c
Fen-08 No t- 08
M b- 09 De v-0
a c 8
A r- 09 Ja -0 8
pr 9 n-
-0 Fe 0
9 b 9
M -09
Ap - 09

From the above graph we can see that as the crude oil price increases the




FII crude oil price



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

a All requested variables entered.

b Dependent Variable: SENSEX

Variables entered /removed

In the table 1, we can see that the dependent variable is Sensex and
independent variables and Sensex price, crude oil and FII.
Note:- Sensex price- Sensex price (closing).

Table-2 –Model summary

Model Summary(b)

Adjusted R Std. Error of

Model R R Square Square the Estimate
1 .882(a) .779 .757 1518.23119
a Predictors: (Constant), SENPRICE, CRUDEOIL, FII
b Dependent Variable: SENSEX

From the model summary table, we can know the following things about our
research model.

i) Here R=.882 =88.2% , which show that correlation coefficient

which is positive correlation it means in this model all the
independent variables have positive correlation collectively .
ii) R² = co-efficient of determination = explained variable/total
R² signified the strength of the model and strength of the relationship
between dependent variable and independent variables.

Here, R² = .779 =77.9%, it shows that the independent variables (crude

oil price, FII, index closing) are explained the model or dependent
variable 77.9%, means all the independent variable have impact on the
dependent variable up to 77.9% .

And rest of 22.1% is not explained by our dependent variables. Hence

22.1% and the other factor which influence the stock market.

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.

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
Total 322693712
a Predictors: (Constant), SENPRICE, CRUDEOIL, FII
b Dependent Variable: SENSEX

If we look to the ANOVA table means analysis of variance the ANOVA

table signifies the statistical validity of the model.

In this table F value(calculated value) = 36.332.

The degree of freedom for variables = (n-1)=(4-1)=3
The degree of freedom for observation (sample)=n-1 =35-1=34
Now if we refer the F table with degree of freedom=3 and degree of
freedom of observation = 34 with pre-determinant level of significant
=0.01% =99% level of confident.
T.V=4.31 & C.V=36.332

Hence, C.V> T.V

Since, C.V>T.V

Null hypothesis =Ho=µ is rejected

Accept the alternative hypothesis =H1


Hence, all the independent variables have impact on the stock market

Table-4(coefficient table)

Unstandardized Standardized
Coefficients Coefficients

Model B Std. Error Beta t Sig.

1 (Constant
1822.162 1345.230 1.355 .185
48.690 12.171 .394 4.001 .000
FII .027 .041 .069 .659 .515
.609 .112 .619 5.429 .000
a Dependent Variable: SENSEX

Dependent Variable: SENSEX



Std. Dev = .95

Mean = 0.00
0 N = 35.00
-2.50 -1.50 -.50 .50 1.50
-2.00 -1.00 0.00 1.00 2.00

Regression Standardized Residual

If we refer to the co-efficient table from this table we can know which
and the most important variable which have impact on the dependent
variable and which are the variable who have no impact on the dependent

variables by referring T-Table, T table value explains the statistical

validity or significant of the variables value.

Model= a+bı(crude oil)+b2(FII)+b3(index)+ε.

where,b1, b2,b3 ……..and the regression co-efficient between DV and
So, model is
Sensex=1822.162+48.69(crude oil)+.029(FII)+.609(INDEX)

Now, if we move to T column T value for 99% of pre-determinant level

of confident
T.V= T-value=2.423
Now we have to take these T.V will have higher impact on the D.V.
Hence, Sensex= f(crude oil, index).
Hence, crude oil price and BSE – index closing. Are statistically
Here, index closing price explain Maximum Variation in the D.V Sensex
= 61.9% and followed by crude oil price= 39.4%


SENSEX Pearson
1 .659(**) .350(*) .812(**)
Sig. (2-tailed) . .000 .034 .000
N 37 37 37 35
.659(**) 1 -.062 .402(*)
Sig. (2-tailed) .000 . .716 .017
N 37 37 37 35
FII Pearson
.350(*) -.062 1 .509(**)
Sig. (2-tailed) .034 .716 . .002
N 37 37 37 35
.812(**) .402(*) .509(**) 1
Sig. (2-tailed) .000 .017 .002 .
N 35 35 35 35
** Correlation is significant at the 0.01 level (2-tailed).
* Correlation is significant at the 0.05 level (2-tailed).

(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

respectively at the 0.01 level of significant. This shows the positive

correlation among the variables.

Hence, we can conclude that here is positive relation between the

movement of crude oil price on the stock market.
So crude oil price impact the sensex.