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CAPITAL MARKET AND ECONOMIC GROWTH:1
It is needless to say that the securities markets, finance, economic growth There have a number of studies, starting from World Bank and IMF to various scholars, which have established robust relationship not only one way, but also the both ways, between the development in the securities market and the economic growth. As market gets disciplined / developed/ efficient, it avoids the allocation of scarce savings to low yielding enterprises and forces the enterprises to focus on their performance which is being continuously evaluated through share prices in the market and which faces the threat of takeover. Thus securities market converts a given stock of investible resources to a larger flow of goods and services. The securities market fosters economic growth to the extent that it:(a) Augments the quantities of real savings and capital formation from any given level of national income. (b) Increases net capital inflow from abroad. (c) Raises the productivity of investment by improving allocation of investible funds. (d) Reduces the cost of capital. The securities market facilitates the internationalization of an economy by linking it with the rest of the world. This linkage assists through the inflow of capital in the form of portfolio investment. Moreover, a strong domestic stock market performance forms the basis for well performing domestic corporate to raise capital in the international market. This implies that the domestic economy is opened up to international competitive pressures, which help to raise efficiency. In as much as the securities market enlarges the financial sector, promoting additional and more sophisticated financing, it increases opportunities for specialization, division of labour and reductions in costs in financial activities. The securities market and its institutions help the user in many ways to reduce the cost of capital. They provide a convenient market place to which investors and issuers of securities go and thereby avoid the need to search a suitable counterpart. The market provides standardized products and 2
thereby cuts the information costs associated with individual instruments. The market institutions specialize and operate on large scale which cuts costs through the use of tested procedures and routines.
CAPITAL MARKET:Progress on developing India’s capital market, which is becoming more competitive, deep and developed as on international markets standards. Business in the country’s oldest stock exchange, namely the Bombay Stock Exchange (BSE) dating back to 1875, which is also one of the oldest stock exchanges in the world, continued to thrive. The National Stock Exchange (NSE), which emerged in the mid-1990s and catalyzed improvements in trading systems to provide the necessary depth and choice to investors, made sustained progress. With the BSE and NSE emerging as the two apex institutions of the country’s capital market, restructuring of other stock exchanges went apace. Overseen by Securities and Exchange Board of India (SEBI), an independent statutory regulatory authority, the country’s capital market dealt in scrips of a large number of listed companies with a wide geographical outreach, providing a world class trading and settlement system, a wide range of product availability with a fast growing derivatives market, and well laid down corporate governance and investor protection measures. As a part of the on-going financial and regulatory reforms of the primary and secondary market segments of the capital market, a number of initiatives were taken in 2007-08 and the current year so far. These measures are designed to attain the stability in current turmoil and to keep the pace of economic growth and keep the confidence of investors (both domestic and foreign) in the country’s capital market. The stock market scaled new peaks year after year since 2003, with the BSE and NSE indices crossing the 20,000 and 5,000 marks, respectively, in January 2008 but after it came under the direct impact global slowdown and stock index have shown the steep downfall to 8000 and 2700 respectively and failure of US investment banks also contributed to downfall.
The informational efficiency of major stock markets has been extensively examined through the study of causal relations between stock price indices and macroeconomic aggregates. The findings of these studies are important since informational inefficiency in stock market implies on the one hand, that market participants are able to develop profitable trading rules and thereby can consistently earn more than average market returns, and on the other hand, that the stock market is not likely to play an effective role in channeling financial resources to the most productive sectors of the economy.
FUNCTIONS OF CAPITAL MARKET:
The securities market allows people to do more with their savings than they would otherwise. It also allows people to do more with their ideas and talents than would otherwise be possible. The people’s savings are matched with the best ideas and talents in the economy. Stated formally, the securities market provides a linkage between the savings and the preferred investment across the entities, time and space. It mobilizes savings and channelises them through securities into preferred enterprises. The securities market enables all individuals, irrespective of their means, to share the increased wealth provided by competitive enterprises. The securities market allows individuals who cannot carry an activity in its entirety within their resources to invest whatever is individually possible and preferred in that activity carried on by an enterprise. Conversely, individuals who cannot begin an enterprise they like can attract enough investment form others to make a start and continue to progress and prosper. In either case, individuals who contribute to the investment share the fruits. The securities market also provides a market place for purchase and sale of securities and thereby ensures transferability of securities, which is the basis for the joint stock enterprise system. The liquidity available to investors does not inconvenience the enterprises that originally issued the securities to raise funds. The existence of the securities market makes it possible to satisfy simultaneously the needs of the enterprises for capital and of investors for liquidity.
The liquidity the market confers and the yield promised or anticipated on security encourages people to make additional savings out of current income. In the absence of the securities market, the additional savings would have been consumed otherwise. Thus the provision of securities market results in net savings. The securities market enables a person to allocate his savings among a number of investments. This helps him to diversify risks among many enterprises, which increases the likelihood of long term overall gains.
ROAD AHEAD FOR CAPITAL MARKET:
The securities market promotes economic growth. More efficient is the securities market, the greater is the promotion effect on economic growth. It is, therefore, necessary to ensure that our securities market is efficient, transparent and safe. In this direction, SEBI has been working since its inception and would continue to work to continuously improve market design to bring in further efficiency and transparency to market and make available newer and newer products to meet the varying needs of market participants, while protecting investors in securities. The aim is to make Indian securities market a model for other jurisdictions to follow and make SEBI the most dynamic and respected regulator globally. Some of the initiatives on which SEBI is working are: A.) Introducing exchange traded interest rate derivatives B.) Promoting an index to comprehensively reflect the level of corporate governance C.) Setting up a central listing authority to dynamise listing requirements D.) Facilitating demutualization of stock exchanges E.) Building a cadre of securities market professionals through training and certification F.) Constructing a central registry of securities market participants and professionals G.) Rationalizing margin trading, securities lending and short selling H.) Promoting secondary market for corporate debt securities
I.) Implementing market wide straight through processing from trade initiation to settlement J.) Operationalising T+1 rolling settlement K.) Reviewing all regulations of SEBI and code of conduct for intermediaries L.) Providing a legal framework for central counter party M.) Consolidation of exchanges and other market participants N.) Benchmarking Indian securities market with best in the World These measures would definitely improve efficiency of the market leading to higher economic growth.
The economy of India is the fourth largest in the world as measured by purchasing power parity (PPP). Consistent growth with strong macroeconomic fundamentals has characterized developments in the Indian economy in 2008-09 so far. However, there are some genuine concerns on the inflation front earlier which was controlled later. Growth of 8.5 per cent in 2007-08 and the estimates for the current year 2008-09 is around 7.5 per cent but global estimates for imdian economy is around 5.5 per cent . While the upand-down pattern in agriculture continued with growth estimated at 6.0 per cent and 2.7 per cent in the two recent years, and services maintained its vigorous growth performance, there were distinct signs of sustained improvements on the industrial front. Entrenchment of the higher growth trends, particularly in manufacturing, has boosted sentiments, both within the country and abroad. The overall macroeconomic fundamentals are satisfactory, even in the global meltdown and period of fall industrial growth the economy is generating the 7.5 percent growth shows the strength of the fundamentals. The economy is diverse and encompasses agriculture, handicrafts, textile, manufacturing, and a multitude of services. Although two-thirds of the Indian workforce still earn their livelihood directly or indirectly through agriculture, services are a growing sector and are playing an increasingly important role of India's economy. The advent of the digital age, and the large number of young and educated populace fluent in English, is gradually 6
transforming India as an important 'back office' destination for global companies for the outsourcing of their customer services and technical support. India is a major exporter of highly-skilled workers in software and financial services, and software engineering.
1. OVERALL ECONOMY: Advance estimates of GDP for the year 2008-09 shows that GDP is slated to grow by 8.5 per cent. This growth will be primarily led by the industry, manufacturing and services sectors. The Industrial growth is expected to remain at about 10 per cent for the current fiscal, manufacturing sector and the services sector are likely to achieve 11.3% and 11.18% growth respectively. However, the agriculture sector will expand by a merge 2.7 per cent as per the most of forecasted figures.
Advance estimates of GDP for the year 2008-09 shows that GDP is slated to grow by 8.5 per cent. This growth will be primarily led by the industry, manufacturing and services sectors. The Industrial growth is expected to remain at about 10 per cent for the current fiscal with the manufacturing sector and the services sector likely to achieve 11.3 per cent and 11.18 per cent growth. However, the agriculture sector will expand by a merge 2.7 per cent in 2008-09 Table 1: Real GDP Growth (%) Sector First Half (April-September) 2007-08 2008-09 4.5 2.9 9.1 5.0 10.6 9.9 9.3 7.8 Year
Agriculture Industry Services Overall
2. INDUSTRIAL GROWTH:
The General Index stands at 267.2, which is 2.4% higher as compared to the level in the month of November 2007. The cumulative growth for the period April-November 200809 stands at 3.9% over the corresponding period of the pervious year. 7 The Indices of
Industrial Production for the Mining, Manufacturing and Electricity sectors for the month of November 2008 stand at 175.0, 285.7, and 217.5 respectively, with the corresponding growth rates of 0.5%, 2.4% and 3.1% as compared to November 2007. The cumulative growth during April-November, 2008-09 over the corresponding period of 2007-08 in the three sectors have been 3.4%, 4.0% and 2.9% respectively, which moved the overall growth in the General Index to 3.9%.In terms of industries, as many as ten (10) out of the seventeen (17) industry groups (as per 2-digit NIC-1987) have shown positive growth during the month of November 2008 as compared to the corresponding month of the previous year. The industry group ‘Rubber, Plastic, Petroleum and Coal Products’ have shown the highest growth of 30.7%, followed by 14.5% in ‘Beverages, Tobacco and Related Products’ and 8.7% in ‘Wood and Wood Products; Furniture and Fixtures’. On the other hand, the industry group ‘Other Manufacturing Industries’ have shown a negative growth of 16.9% followed by 13.1% in ‘Leather and Leather & Fur Products‘and 11.4% in ‘Wool, Silk and Man-made Fibre Textiles ’.As per Use-based classification, the Sectoral growth rates in November 2008 over November 2007 are 2.3% in Basic goods, (-)2.3% in Capital goods and 2.6% in Intermediate goods. The Consumer durables and Consumer non-durables have recorded growth of (-)4.2% and 7.3% respectively, with the overall growth in Consumer goods being 4.4%.Alongwith the Quick Estimates of IIP for November 2008, the indices for October 2008 have undergone the first revision and those for August 2008 have undergone the second (final) revision in the light of the updated data received from the source agencies. (It may be noted that revised indices (first revision) in respect of September 2008 have already been released in December 2008 and these indices shall undergo final (second) revision in February 2009).Statements giving Quick Estimates of the Index of Industrial Production at Sectoral, 2-digit level of National Industrial Classification (NIC)-1987 and by Use-based classification for the month of November 2008, along with the growth rates over the corresponding month of previous year, including the cumulative indices and growth rates, are enclosed.
INDEX OF INDUSTRIAL PRODUCTION (Growth at 2-digit level)
Industry code 20-21
Index Nov'2007 Nov'2008 166.6
Food Products Beverages, Tobacco and
(Base: 1993-94=100) Cumulative Index Percentage growth Apr-Nov Nov'2008 Apr-Nov 2007-2008 2008-2009 2008-2009 172.9 149.6 149.0 3.8 -0.4
22 23 24
Related Products Cotton Textiles Wool, Silk and man-made fibre textiles Jute and other vegetable fibre Textiles (except
23.8 55.2 22.6
508.3 153.9 286.0
581.9 153.8 253.3
488.4 163.0 276.1
575.6 161.3 268.4
14.5 -0.1 -11.4
17.9 -1.0 -2.8
cotton) Textile Products (including Wearing Apparel) Wood and Wood Products; Furniture and Fixtures Paper & Paper Products and Printing, Publishing &
Allied Industries Leather and Leather & Fur Products Basic Chemicals & Chemical Products (except products of
Petroleum & Coal) Rubber, Plastic, Petroleum
31 32 33
and Coal Products Non-Metallic Mineral Products Basic Metal and Alloy Industries Metal Products and Parts, except Machinery and
57.3 44.0 74.5
241.3 304.9 307.1
315.4 311.9 324.2
243.1 320.1 304.7
246.2 320.8 323.4
30.7 2.3 5.6
1.3 0.2 6.1
Machinery and Equipment other than Transport 35-36 equipment Transport Equipment and 37 38 1 2-3 4 Parts Other Manufacturing Industries Mining & Quarrying Manufacturing Electricity General Index 39.8 25.6 104.7 793.6 101.7 1000.0 389.7 430.1 174.2 278.9 210.9 261.0 355.1 357.3 175.0 285.7 217.5 267.2 369.4 342.4 162.3 276.7 216.4 258.6 394.3 335.3 167.8 287.9 222.6 268.7 -8.9 -16.9 0.5 2.4 3.1 2.4 6.7 -2.1 3.4 4.0 2.9 3.9 95.7 387.8 409.2 379.5 409.6 5.5 7.9
INDEX OF INDUSTRIAL PRODUCTION : USE-BASED
Month 2007-2008 Apr May Jun Jul Aug Sep
Basic goods (355.65) 2008-2009 212.8 223.6 215.8 216.7 217.6 214.0
2007-2008 221.3 230.4 220.5 228.2 226.0 223.8
Capital goods (92.57) 2008-2009 278.4 334.7 358.3 317.4 368.6 389.1
(Base : 1993-94=100) Intermediate goods (265.14) 2007-2008 2008-2009 313.0 249.2 256.9 349.0 264.2 269.1 386.3 260.1 267.5 374.3 264.1 271.9 372.0 273.3 258.3 461.3 264.8 258.0
Oct Nov* Dec Jan Feb Mar Average Apr-Nov
227.2 220.8 230.0 235.2 226.4 246.3
350.8 392.1 420.5 340.0 356.8 543.4
260.5 255.7 271.7 266.6 259.4 279.3
Growth over the corresponding period of previous year Nov Apr-Nov 5.2 8.4 2.3 3.5 24.2 20.9 -2.3 7.5 5.5 9.8 2.6 0.1
* Indices for Nov 2008 are Quick Estimates. NOTE : Indices for the months of Aug'2008 and Oct'2008 incorporate updated production data.
INDEX OF INDUSTRIAL PRODUCTION : USE-BASED
Month Apr May Jun Jul Aug Sep Oct Nov* Dec Jan Feb Mar Average
Consumer goods (286.64) 2007-2008 2008-2009 290.9 288.8 266.9 274.5 266.8 273.4 280.6 273.5 320.8 335.2 327.6 324.0
Consumer durables (53.65) 2007-2008 2008-2009 315.6 341.8 310.3 380.3 293.2 357.9 290.8 351.5 283.9 379.7 293.2 388.9 274.5 431.9 285.6 368.4 353.7 383.4 389.6 408.4
(Base : 1993-94=100) Consumer non-durables (232.99) 2007-2008 2008-2009 352.9 279.2 307.0 391.0 267.7 291.7 374.4 246.0 274.5 400.5 256.8 265.6 394.5 240.8 258.4 445.7 246.8 258.1 418.7 245.8 241.3 353.1 251.7 270.0 313.2 324.1 313.3 304.6
Growth over the corresponding period of previous year Nov Apr-Nov -2.9 5.3 4.4 6 -5.5 -1.9 -4.2 4.3 -2 8.1 7.3 6.4
* Indices for Nov 2008 are Quick Estimates.
3. TELECOMMUNICATIONS: The telecommunication sector is growing at a phenomenal rate. Soon, in a month’s time, This rise in the total phone subscription to 400 million is on the back of additions seen in the mobile phones growing at the rate of 4-5% every month.15.41 million wireless subscribers added in the January 2009 Teledensity already achieved 34.5 mark this month. Net addition of wireless and fixed line subscribers in the January 2009 was 15.26 million, which is almost 1.5 times greater as compared to the addition of 10.66 million in the corresponding period of last year. Table-3.1 - Growth of the telecommunication network (in million) April-January Fixed (including fixed) 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 17.8 21.6 26.8 33.0 39.1 41.5 line Cellular WLL phones (including mobile) 0.9 1.2 1.9 3.6 6.4 13.0 12 WLL 18.7 22.8 28.7 36.6 45.6 54.5 mobile Total phones
2003-04 2004-05 2005-06 2006-07
42.6 45.9 49.7 40.4
33.6 52.2 90.0 156.3
76.2 98.1 139.8 196.7 400
2007-08 37.70 362.30 Source: Telecom Regulatory Authority of India
Wholesale price index (WPI), fell by more than half from its intra-year peak of 12.91 per cent on August 2, 2008 to 5.60 per cent by January 10, 2009. While prices of primary articles and manufactured products increased, fuel prices declined (Table 2). In terms of relative contribution to decelerating headline inflation between August 2, 2008 and January 10, 2009, petroleum and basic metals (combined weight of 13.2 per cent in WPI) together accounted for 79.4 per cent, followed by ‘oilseeds, edible oils & oil cakes’ (16.4 per cent). Clearly, the fall in commodity prices reflecting global trends has been the key driver of the sharp fall in WPI inflation although effective management of domestic demand too has contributed to this moderation. Table 2: Annual Inflation Rate (%) Wholesale Price Index (WPI) WPI - All Commodities WPI - Primary Articles WPI - Fuel Group WPI - Manufactured Products WPI - Excluding Fuel WPI - Excluding Food and Fuel Consumer Price Index (CPI) January 12, 2008January 10, 2009 (y-o-y) 4.36 4.49 3.69 4.57 4.55 5.21 December (y-o-y) 5.60 11.64 -1.32 5.90 7.53 6.52 2007December (y-o-y) 10.45 11.14 11.14 10.79
(y-o-y) 1. CPI for Industrial Workers* 5.51 2. CPI for Agricultural Labourers 5.90 3. CPI for Rural Labourers 5.63 4. CPI for Urban Non-Manual Employees*5.06 * Pertains to November.
On the other hand, inflation based on various consumer price indices (CPIs) is still in double digits due to the firm trend in prices of food articles and the higher weight of food articles in measures of consumer price inflation (Table 2). As the decline in input prices percolates over time to the prices of manufactured and other products, consumer price inflation too is expected to soften in the months ahead. For its overall assessment of inflation outlook for policy purposes, the Reserve Bank continues to monitor the full Array of price indicators.
Growth in key monetary aggregates – reserve money and money supply (M3) – in 200809 so far has reflected the changing liquidity positions arising from domestic and global financial conditions and the monetary policy response to the evolving macroeconomic developments. Reserve money variations during 2008-09 have largely reflected increase in currency in circulation and reduction in the cash reserve ratio (CRR) of banks. Reduction in the CRR has three inter-related effects on reserve money. First, it reduces reserve money as bankers’ required cash deposits with the Reserve Bank fall. Second, the money multiplier rises. Third, with the increase in the money multiplier, M3expands with a lag. While the initial expansionary effect is strong, the full effect is felt in 4-6 months. Reflecting these changes, while the year-on-year increase in reserve money as on January 2, 2009 was lower, it was significantly higher when adjusted for the first round effect of CRR reduction. The annual M3 growth as on January 2, 2009 though lower compared with last year, was higher than the trajectory projected in the Annual Policy Statement (Table 4).
Table 4: Annual Variations in Monetary Aggregates (%) Item Annual Variations (y-o-y) January 4, 2008 January 2, 2009 Reserve Money 28.8 7.4 Reserve Money 18.1 19.4 (adjusted for CRR changes) Currency in Circulation 15.6 16.6 Money Supply (M3) 22.6 19.6 M3 (Policy Projection)* 17.0-17.5 16.5-17.0 Money Multiplier 4.66 5.20 * Policy projections are for the financial year as indicated in the Annual Policy Statements of the respective financial years. Since September 2008, monetary conditions have been evolving following changes in monetary policy in response to global developments and also due to slackening of domestic demand conditions. As the Reserve Bank had to provide dollar liquidity, its net foreign exchange assets (NFEA) contracted. The Reserve Bank sought to compensate the fall in NFEA by expanding its net domestic assets (NDA) through: (i) buy-back of securities held under the market stabilisation scheme (MSS); (ii) purchase of oil bonds; (iii) enlargement of the refinance window; and (iv) repo operations under the liquidity adjustment facility (LAF). Thus, a notable feature of monetary operations during the third quarter of 2008-09 was the substitution of foreign assets by domestic assets to keep the overall liquidity conditions comfortable. Liquidity conditions have indeed improved since mid-November 2008 as reflected in daily absorption under the LAF reverse repo and moderation in market interest rates.
7. FISCAL TRENDS:
As a proportion of the budget estimates (BE), both tax and non-tax revenue receipts of the Central Government for the period April-November 2008 were lower than those in the corresponding period of the previous year. On the other hand, both revenue expenditure and total expenditure, as a proportion to the BE, were higher than a year ago. Consequently, the revenue deficit and the gross fiscal deficit (GFD) were significantly
higher during April-November 2008 as compared with the corresponding period of the previous year (Table 3). Table 3: Fiscal Position of the Central Government Item April-November Percentage to Budget Estimates Growth (%) 2007-08 2008-09 2007-08 2008-09 1. Revenue Receipts 56.5 52.2 24.2 14.7 2. Gross Tax Revenue 55.5 52.0 25.2 17.5 3. Tax Revenue (Net) 54.6 50.0 24.5 15.1 4. Non-Tax Revenue 65.7 64.1 22.7 13.2 5. Total Expenditure 60.5 65.8 22.2 20.1 (58.7) (11.7) (31.5) 6. Revenue Expenditure 61.8 69.3 12.7 32.4 7. Capital Expenditure 54.5 40.7 116.3 -43.4 (37.8) (1.2) (21.0) 8. Revenue Deficit 97.9 256.2 -17.2 102.0 9. Fiscal Deficit 63.8 132.4 -11.0 83.3 (63.0) (-12.2) (85.7) Note : Figures in parentheses are net of transactions relating to transfer of the Reserve Bank’s stake in State Bank of India to the Government.
For 2008-09, the Central Government had budgeted gross market borrowing of Rs.1,78,575 crore and net market borrowing of Rs.99,000 crore. Subsequently, the Government presented two supplementary demands, as a result of which the market borrowing programme of the Central Government was raised to Rs.2,52,154 crore (gross) and Rs.1,75,374 crore (net). Against this enhanced borrowing programme, market borrowing of the Central Government was Rs.2,22,154 crore (gross) and Rs.1,51,697 crore (net) during 2008-09 so far (up to January 23, 2009). The weighted average yield and weighted average maturity of central government dated securities issued during 2008-09 (up to January 23, 2009) were at 8.03 per cent and 14.59 years respectively as compared with 8.10 per cent and 14.38 years in 2007-08. The State Governments have borrowed a net amount of Rs.46,327 crore up to January 23, 2009. The evolving scenario raises some concerns on the extent of stress on the fisc in the current year emanating from several factors. First, the Centre is expected to suffer revenue losses from lower direct tax collection on account of the economic slowdown. 16
Second, the Centre is likely to lose further revenues worth about 0.6 per cent of GDP due to cuts in excise and customs duties. Third, there has been a disproportionate growth in expenditure of the Central Government during April-November 2008, particularly in respect of revenue expenditure arising out of increase in subsidies, disbursements as well as implementation of the recommendations of the Sixth Pay Commission and the farm debt waiver scheme. The net cash outgo indicated in supplementary demands for grants would be of the order of 2.8 per cent of GDP (Rs.1,50,310 crore). Thus, additional expenditure coupled with foregone revenue would raise the fiscal deficit from the budget estimate of 2.5 per cent to at least 5.9 per cent of GDP. In addition, special bonds for Rs.44,000 crore and Rs.14,000 crore, amounting to 1.1 per cent of GDP, have been issued to oil marketing companies and fertiliser companies respectively during 2008-09 (up to January 23, 2009). In its latestReview of the Economy (January 2009), the Economic Advisory Council to the Prime Minister has placed the consolidated fiscal deficit of the Central Government, including full issuances of oil and fertiliser bonds, at 8.0 per cent of GDP for 2008-09. The consolidated budgeted revenue surplus of the States in 2008-09 may not, in fact, materialise. Consequently, the consolidated fiscal deficit of the States is expected to rise to 2.6 per cent of GDP. While some of the increase in the revenue and fiscal deficits is on account of post-budget expenditure commitments such as payment of arrears resulting from the Sixth Pay Commission Award, a substantial increase is also due to the economic downturn arising from the impact of the global financial crisis. Although the fiscal stimulus packages have meant deviation from the roadmap laid out by the Fiscal Responsibility and Budget Management (FRBM) Act, reversing the consolidation process of the last several years, they were warranted under the prevailing circumstances. It is critically important, however, that the Centre and States re-anchor to a revised FRBM mandate once the immediacy of the crisis is behind us
India’s current account deficit (CAD) of the balance of payments (BoP) widened in the first half of 2008-09 in comparison with the corresponding period of the previous year due to a large trade deficit, reflecting high oil prices even as private transfers and 17
software export earnings were sustained. As net capital flows declined sharply, the overall balance of payments position turned marginally negative during the first half of 2008-09 as against a large surplus in the corresponding period of the previous year (Table 12). Import growth had moderated during October-November 2008 reflecting the fall in international oil prices and slowing domestic demand. During the same period, export growth turned negative reflecting slowing global demand. Going forward, it is expected that imports may slow down faster than exports.
Table 12: India’s Balance of Payments (US $ billion) April-September 2007-08 2008-09 Exports 72.6 96.7 Imports 115.9 165.9 Trade Balance - 43.2 - 69.2 Invisibles, net 32.3 46.8 Current Account Balance - 11.0 - 22.3 Capital Account* 51.4 19.8 Change in Reserves# (-) 40.4 (+) 2.5 # On a BoP basis (excluding valuation): (-) indicates increase; (+) indicates decrease. * Including errors and omissions. The reversal of capital flows has raised concerns about management of the BoP, particularly with reference to outstanding external debt with residual maturity of less than one year. These concerns are somewhat misplaced as the following analysis will show. India’s external debt with residual maturity of less than one year as at end-March 2008 was estimated at around US $ 85 billion (as per revised data), which would mature during the financial year 2008-09. Sovereign debt and commercial borrowings are most likely to be rolled over during 2008-09. Indeed, the BoP data for the first half of the year (April-September 2008) indicate net positive accretions beyond roll-over under both these heads. Current trends indicate that under NRI deposits, not only will the maturing debt be rolled over but there will be net accretions as a result of the upward adjustment in interest rate ceilings on such deposits. Here again, available data up to December 2008 show net accretions. That leaves trade credit of the order of US $ 43.2 billion to be repaid 18
during 2008-09. Of this, as much as US $ 28.1 billion has already been disbursed during April-November 2008 leaving a balance of US $ 15.1 billion. There are reports that large inflows are in the pipeline on account of commitments of buyers’ credit by the importers and oil companies. Even conservatively projecting that only a small portion of this balance would be rolled over, India’s external payment situation remains stable. The overall approach to the management of India’s foreign exchange reserves takes into account the changing composition of the balance of payments and endeavours to reflect the ‘liquidity risks’ associated with different types of flows and other requirements. As capital inflows during 2007-08 were far in excess of the normal absorptive capacity of the economy, there was substantial accretion to foreign exchange reserves by US $ 110.5 billion. The foreign exchange reserves declined by US $ 23.4 billion from US $ 309.7 billion as at end-March 2008 to US $ 286.3 billion by end-September 2008 largely reflecting valuation effects. Excluding valuation effects, the decline was US $ 2.5 billion. Between October 2008 and January 16, 2009 foreign exchange reserves declined by US $ 34.1 billion to US $ 252.2 billion, including valuation effects. India’s current level of foreign exchange reserves remains comfortable.
Net capital flows during 2008-09 were lower than those in the corresponding period of 2007-08, mainly on account of outflows by foreign institutional investors ($7.3 billion) during 2008-09 (up to October 10, 2008) in contrast to net FII inflows ($ 18.9 billion) during the corresponding period of 2007-08. On the other hand, net FDI flows into India were placed higher at $16.7 billion during April-August 2008 against $8.5 billion during April-August 2007. The funds raised through issuances of ADRs/GDRs abroad were at $1.1 billion during April-August 2008 ($2.8 billion in April-August 2007). NRI deposits recorded a net inflow of $273 million during April-August 2008 mainly due to inflows under the rupee deposit accounts as against a net outflow ($168 million) during AprilAugust 2007, said the report.
With net capital flows being higher than the current account deficit, the overall balance of payments recorded a surplus of $2.2 billion during the first quarter of 2008-09 ($11.2 billion in the first quarter of 2007-08).
10. CREDIT CONDITION
The year-on-year (y-o-y) growth in non-food bank credit at 23.9 per cent as on January 2, 2009 was higher than that of 22.0 per cent as on January 4, 2008 (Table 5). Increase in total flow of resources from the banking sector to the commercial sector (i.e., non-food bank credit together with investments in shares/bonds/debentures and commercial papers issued by public sector/private sector companies) was also higher at 23.4 per cent as compared with 21.7 per cent a year ago. Despite the expansion in bank credit, there was a perception of lack of credit availability. This could be attributed to reduced flow of funds from non-bank sources, notably the capital market and external commercial borrowings. During 2008-09 so far, the total flow of resources to the commercial sector from banks and other sources was marginally lower than in the previous year reflecting contraction of funds from other sources (Table 6).
Table 5: Annual Variations in Banking Indicators (%) Item January 4, 2008 January 2, 2009 (y-o-y) Aggregate Deposits Bank Credit Non-food Bank Credit Total flow of Resources from Banks to the Commercial Sector SLR Investments Incremental Credit-Deposit Ratio 25.1 21.4 22.0 21.7 25.8 63.1 (y-o-y) 21.2 24.0 23.9 23.4 19.2 81.4
Table 6: Flow of Financial Resources to the Commercial Sector (Rs. crore) Item 2007-08 2008-09 (Up to January (Up to January 20
4, 2008) 2, 2009) From Banks 2,24,921 2,93,243 From Other Sources* 2,74,563 1,91,470 Total Resources 4,99,484 4,84,713 * Includes borrowings from financial institutions and NBFCs as well as resources mobilised from the capital market and by way of ECBs, FCCBs, ADRs/GDRs, FDI and short-term credit as per the latest available data, adjusted for double counting.
At a disaggregated level, the year-on-year increase in bank credit to industry as of December 2008 was sharply higher than that in the previous year reflecting the substitution effect of other sources of funding by bank credit (Table 7). Table 7: Annual Sectoral Flow of Credit Sector As on December 21, 2007As on December 19, 2008 (y-o-y) (y-o-y) Amount Variations Amount Variations (Rs. crore) (%) (Rs. crore) (%) Agriculture 38,139 19.3 53,612 22.7 Industry 1,56,192 24.9 2,36,064 30.2 Real Estate 13,621 35.8 24,827 48.1 Housing 31,780 14.6 21,989 8.8 NBFCs 22,953 59.6 24,668 40.1 Overall 3,54,802 21.8 4,90,199 24.8 Credit There has been a noticeable variation in credit expansion across bank groups. Expansion of credit by public sector banks was much higher this year than in the previous year, while credit expansion by foreign and private sector banks was significantly lower. The relatively slower pace of credit expansion by foreign and private sector banks has also added to the perception of inadequate credit flow in the system. There has also been perceptible deceleration in growth of deposits with private and foreign banks (Table 8). Table 8: Bank Group-wise Deposits and Credit Bank Group Annual Growth (y-o-y) (%) As on January As on January 2, 2009 21
4, 2008 Deposits Public Sector Banks Foreign Banks Private Sector Banks Scheduled Commercial Banks * Credit Public Sector Banks Foreign Banks Private Sector Banks Scheduled Commercial Banks * * Including regional rural banks (RRBs). 19.8 30.7 24.2 21.4 28.6 16.9 11.8 24.0 24.2 34.1 26.9 25.1 24.2 12.1 13.4 21.2
Commercial banks’ holdings of SLR securities became more liquid on account of two factors. First, banks were permitted to use SLR securities to the tune of 1.5 per cent of their net demand and time liabilities (NDTL) under the LAF to meet the funding requirements of mutual funds, non-banking finance companies (NBFCs) and housing finance companies (HFCs). Second, the reduction in SLR by one percentage point to 24.0 per cent of NDTL in November 2008 released funds for credit deployment. Commercial banks’ SLR holdings declined from 27.8 per cent (28.4 per cent adjusted for LAF) of NDTL in March 2008 to 25.8 per cent (28.1 per cent adjusted for LAF) in mid-October 2008 reflecting the banks’ reliance on the repo facility under the LAF as liquidity conditions tightened. Reversing this trend by early January 2009, banks’ SLR holdings increased to 28.9 per cent of NDTL (27.1 per cent adjusted for LAF) reflecting improved liquidity conditions and increased government market borrowings. Bank deposit and lending rates, which had firmed up during the current financial year up to October 2008, started easing from November 2008. Between November 2008 and January 2009, all public sector banks, several private sector banks and some foreign banks reduced their deposit and lending rates. The magnitude of reduction by public sector banks was larger than that by foreign and private sector banks (Table 9).
Table 9: Deposit and Lending Rates of Banks (%) Bank Group/Maturity October 2008 January 2009 Domestic Deposit Rate Public Sector Banks 61-90 days 180 days – 1 year 1-3 years > 3 years Private Sector Banks 61-90 days 180 days – 1 year 1-3 years > 3 years Foreign Banks 61-90 days 180 days – 1 year 1-3 years > 3 years Benchmark Prime Lending Rate
5.25-6.00 8.00-8.75 9.50-10.50 8.75-9.75 4.00-6.25 8.00-9.00 9.00-10.10 8.50-9.75 6.00-8.50 7.00-9.50 7.50-9.00 7.50-10.00
5.25-6.00 7.25-8.00 8.00-9.00 8.25-8.50 4.00-5.50 7.75-8.00 8.00-9.00 8.00-8.75 5.25-7.00 7.50-9.00 7.50-8.50 7.50-7.75
(BPLR) Public Sector Banks 13.75-14.00 12.00-12.50 Private Sector Banks 15.25-17.25 14.75-16.75 Foreign Banks 14.25-15.50 14.25-15.50 Note: Data relate to five major public sector banks, four private sector banks and three foreign banks.
The interest rate response to monetary policy easing has been faster in the money and bond markets as compared to the credit market because of several structural factors. First, the administered interest rate structure on small savings could potentially constrain the reduction in deposit rates below some threshold. Second, a substantial portion of bank deposits is mobilised at fixed interest rates with an asymmetric contractual relationship. During the upturn of the interest rate cycle, depositors have the flexibility to prematurely terminate the existing deposits and re-deposit the funds at higher interest rates. However, in the downturn of the interest rate cycle, banks have to necessarily carry these deposits at 23
higher rates of interest till their maturity. Third, competition among banks for wholesale deposits for meeting the higher credit demand in the upswing leads to an increase in the cost of funds. Fourth, linkage of concessional lending rates to banks’ BPLRs makes overall lending rates less flexible. Fifth, persistence of the large market borrowing programme of the government hardens interest rate expectations. Sixth, with increase in risk aversion, lending rates tend to be high even during a period with falling credit demand. From the real economy perspective, however, for monetary policy to have demand inducing effects, lending rates will have to come down. Notwithstanding the various factors that impede monetary transmission, market interest rates do respond to changes in policy interest rates. As such, current deposit and lending rates have significant room for further reduction. Interest rates in the money and bond markets have already declined perceptibly since their peaks in October 2008 (Table 10). Major public sector banks have also reduced their term deposit rates in the range of 50150 basis points. Benchmark prime lending rates (BPLRs) of major public sector banks have come down by 150-175 basis points. Major private sector banks have reduced their BPLRs by 50 basis points, while major foreign banks are yet to do so. As a result of several measures initiated by the Reserve Bank since mid-September 2008, banks’ cost of funds would come down. This should encourage banks to reduce their lending rates in the coming months.
OVER ALL SCENARIO
At the heart of the global financial crisis lie the non-functional and frozen financial markets. In sharp contrast to their international counterparts, the financial system in India has been resilient and stable. Barring some tightness in liquidity during mid-September to 24
early October, the money, foreign exchange and government securities markets have been orderly as reflected in market rates, spreads and transaction volumes relative to those observed during normal times. India’s banking system remains healthy, wellcapitalised, resilient and profitable. Credit markets have been functioning well and banks have been expanding credit, notwithstanding the perceptions in some quarters of lack of adequate credit from the banks to the commercial sector. Over the last five years, India clocked 8.8 per cent average annual growth, driven largely by domestic consumption and investment even as the share of net exports rose. While the benign global environment, easy liquidity and low interest rates helped, at the heart of India’s growth have been its growing entrepreneurial spirit and rise in productivity. These fundamental strengths continue to be in place. Nevertheless, the global crisis will dent India’s growth trajectory as investments and exports slow. Clearly, there is a period of painful adjustment ahead of us. However, once the global economy begins to recover, India’s turnaround will be sharper and swifter, backed by our strong fundamentals and the untapped growth potential. Meanwhile, the challenge for the Government and the Reserve Bank is to manage the adjustment with as little pain as possible. Since September 2008, international developments have largely circumscribed domestic policy responses. There have been severe disruptions in the international money and foreign exchange markets since September 2008. Policymakers in governments, central banks and in other regulating agencies of financial institutions around the world responded to the crisis with aggressive, radical and unconventional measures to restore calm and confidence in financial markets and bring them back to normalcy. The immediate challenge was to maintain financial stability, which moved up in the hierarchy ofobjectives.
It is needless to say that the financial markets (banks and the securities markets) finance economic growth. They channelise savings to investments and thereby decouple these two activities. As a result, savers and investors are not constrained by their individual 25
abilities, but by the economy’s ability to invest and save respectively, which inevitably enhances savings and investment in the economy. To the extent the growth of an economy depends on the rate of savings and investment, financial markets promote economic growth. TYPES OF FINANCIAL MARKETS: 1. Money Market 2. Capital Market a) Primary Market b) Secondary Market i. ii. Regional Stock Exchanges OTCEI
1. MONEY MARKET: Money market is a market for debt securities that pay off in the short term usually less than one year, for example the market for 90-days treasury bills. This market encompasses the trading and issuance of short term non equity debt instruments including treasury bills, commercial papers, bankers acceptance, certificates of deposits, etc. 2. CAPITAL MARKET: Capital market is a market for long-term debt and equity shares. In this market, the capital funds comprising of both equity and debt are issued and traded. This also includes private placement sources of debt and equity as well as organized markets like stock exchanges. Capital market can be further divided into primary and secondary markets. PRIMARY MARKET: The primary is that part of the capital markets that deals with the issuance of new securities. Companies, governments or public sector institutions can obtain funding through the sale of a new stock or bond issue. This is typically done through a syndicate of securities dealers. In the case of a new stock issue, this sale is an initial public offering (IPO).
SECONDARY MARKET: Secondary Market refers to a market where
securities are traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. Majority of the trading is done in the secondary market. Secondary market comprises of equity markets and the debt markets. For the general investor, the secondary market provides an efficient platform for trading of his securities. For the management of the company, Secondary equity markets serve as a monitoring and control conduit—by facilitating value-enhancing control activities, enabling implementation of incentive-based management contracts, and aggregating information (via price discovery) that guides management decisions. Secondary market could be either auction or dealer market. While stock exchange is the part of an auction market, Over-the-Counter (OTC) is a part of the dealer market.
REGIONAL STOCK EXCHANGES: A stock exchange in India is recognized by the Central Government under section 4 of Securities Contracts (Regulation) Act, 1956 (SCRA). Over a period of time, stock exchanges came to be set up almost in every State. These stock exchanges set up regionally were known as the Regional Stock Exchanges (RSEs). The objective of establishing the RSEs was to enable regional companies in the respective geographical locations to raise capital and to help spread the equity cult amongst investors across the length and breadth of the country.
(ii)OTCEI: Over the Counter Exchange of India was incorporated in 1990 as a
Section 25 company under the Companies Act 1956 and is recognized as a stock exchange under Section 4 of the Securities Contracts Regulation Act, 1956. The Exchange was set up to aid enterprising promoters in raising finance for new projects in a cost effective manner and to provide investors with a transparent & efficient mode of trading. Modelled along the lines of the NASDAQ market of USA, OTCEI introduced many novel concepts to the Indian capital markets such as screen-based nationwide trading, sponsorship of companies, market making and scripless trading. As a measure of success of these efforts, the Exchange today has 115 listings. 27
BOMBAY STOCK EXCHANGE
VISION: “Emerge as the premier Indian stock exchange by establishing global
INTRODUCTION: Bombay Stock Exchange Limited is the oldest stock exchange in
Asia with a rich heritage. Popularly known as "BSE", it was established as "The Native Share & Stock Brokers Association" in 1875. It is the first stock exchange in the country to obtain permanent recognition in 1956 from the Government of India under the Securities Contracts (Regulation) Act, 1956.The Exchange's pivotal and pre-eminent role in the development of the Indian capital market is widely recognized and its index, SENSEX, is tracked worldwide. Earlier an Association of Persons (AOP), the Exchange is now a demutualised and corporatised entity incorporated under the provisions of the Companies Act, 1956, pursuant to the BSE (Corporatisation and Demutualisation) Scheme, 2005 notified by the Securities and Exchange Board of India (SEBI).With demutualisation, the trading rights and ownership rights have been de-linked effectively addressing concerns regarding perceived and real conflicts of interest. The Exchange is professionally managed under the overall direction of the Board of Directors. The Board comprises eminent professionals, representatives of Trading Members and the Managing Director of the Exchange. The Board is inclusive and is designed to benefit from the participation of market intermediaries. The Exchange has a nation-wide reach with a presence in 417 cities and towns of India. The systems and processes of the Exchange are designed to safeguard market integrity and enhance transparency in operations. During the year 2004-2005, the trading volumes on the Exchange showed robust growth and in January 2008 it scaled new heights of 20000 mark then it started crashing sharply due to global recession and negative market sentiments which led it back to 8000 mark. The Exchange provides an efficient and transparent market for trading in equity, debt instruments and derivatives. The BSE's On Line Trading System (BOLT) is a proprietory system of the Exchange and is BS 7799-2-2002 certified. The surveillance and clearing & settlement functions of the Exchange are ISO 9001:2000 certified.
SENSEX - BAROMETER OF INDIAN CAPITAL MARKETS INTRODUCTION: For the premier Stock Exchange that pioneered the stock
broking activity in India, 128 years of experience seems to be a proud milestone. A lot 29
has changed since 1875 when 318 persons became members of what today is called "The Stock Exchange, Mumbai" by paying a princely amount of Re1Since then, the country's capital markets have passed through both good and bad periods. The journey in the 20th century has not been an easy one. Till the decade of eighties, there was no scale to measure the ups and downs in the Indian stock market. The Stock Exchange, Mumbai (BSE) in 1986 came out with a stock index that subsequently became the barometer of the Indian stock market.SENSEX is not only scientifically designed but also based on globally accepted construction and review methodology. First compiled in 1986, SENSEX is a basket of 30 constituent stocks representing a sample of large, liquid and representative companies. 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 Index was initially calculated based on the "Full Market Capitalization" methodology but was shifted to the free-float methodology with effect from September 1, 2003. The "Free-float Market Capitalization" methodology of index construction is regarded as an industry best practice globally.
SENSEX Calculation Methodology
SENSEX is calculated using the "Free-float Market Capitalization" methodology. As per this methodology, the level of index at any point of time reflects the Free-float market value of 30 component stocks relative to a base period. The market capitalization of a company is determined by multiplying the price of its stock by the number of shares issued by the company. This market capitalization is further multiplied by the free-float factor to determine the free-float market capitalization. .
NATIONAL STOCK EXCHANGE
ORIGIN: The National Stock Exchange of India was promoted by leading financial
institutions at the behest of the Government of India, and was incorporated in November 1992 as a tax-paying company. In April 1993, it was recognized as a stock exchange 30
under the Securities Contracts (Regulation) Act, 1956. NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. The Capital Market (Equities) segment of the NSE commenced operations in November 1994, while operations in the Derivatives. The National Stock Exchange of India Limited (NSE), is a Mumbai-based stock exchange. It is the largest stock exchange in India and the third largest in the world in terms of volume of transactions. NSE is mutually-owned by a set of leading financial institutions, banks, insurance companies and other financial intermediaries in India but its ownership and management operate as separate entities. As of 2006, the NSE VSAT terminals, 2799 in total, cover more than 1500 cities across India. In March 2008, the NSE indices started crashing due to global meltdown and sentiments and it led it from 6000 mark to back it at 2600 mark. It is the second-largest stock market in South Asia in terms of market-capitalization. INDICES: NSE also set up as index services firm known as India Index Services & Products Limited (IISL) and has launched several stock indices, including: • • • • • S&P CNX Nifty CNX Nifty Junior CNX 100 (= S&P CNX Nifty + CNX Nifty Junior) S&P CNX 500 (= CNX 100 + 400 major players across 72 industries) CNX Midcap (introduced on 18 July 2005 replacing CNX Midcap 200)
S&P CNX Nifty: The S&P CNX Nifty (nicknamed Nifty 50 or simply Nifty) (Ticker
NSE:^NSEI), is the leading index for large companies on the National Stock Exchange of India. S&P CNX Nifty is a well diversified 50 stock index accounting for 22 sectors of the economy. It is used for a variety of purposes such as benchmarking fund portfolios, index based derivatives and index funds.
CURRENT STATUS OF CAPITAL MARKETS IN INDIA:
The overnight interest rates generally ruled above the ceiling of the LAF rate corridor at the beginning of October 2008 when the domestic money and foreign exchange markets came under pressure. The overnight interest rates eased in mid-October 2008 in response to the successive monetary easing measures by the Reserve Bank which alleviated the liquidity pressures. The overnight interest rates have remained below the upper bound of the LAF corridor since November 3, 2008. Interest rates on various other segments of the money market and government securities market have also softened markedly (Table 10). Table 10: Interest Rates (%) Segment/Instrument October 2008January 23, 2009 Call Money 9.90 4.21 CBLO 7.73 3.85 Market Repo 8.40 4.24 Commercial Paper 14.17 10.98* Certificates of Deposit 10.00 8.85* 91-day Treasury Bills 7.44 4.67 10-year Government Securities 7.45 5.87 * Pertains to December 2008. The rupee had appreciated against major currencies in 2007-08 due to large capital inflows. It depreciated during 2008-09 so far reflecting extraordinary developments in international financial markets and portfolio outflows by foreign institutional investors (FIIs). It has remained range-bound since November 2008 (Table 11).
Table 11: Rupee Exchange Rate Rupee per Unit of Range AprilNovemberJanuary* 2008 2008 2009 US Dollar Maximum40.46 50.52 49.19 Minimum39.89 47.18 48.37 Euro Maximum63.80 64.68 68.09 Minimum62.25 60.57 63.60 Pound Sterling Maximum79.94 80.26 74.42 Minimum78.66 72.14 67.61 100 Japanese Yen Maximum39.58 53.12 55.58 Minimum38.36 47.31 51.90 * Up to January 23, 2009. 32
Equity markets weakened sharply till end-October 2008 in tandem with global stock markets, particularly Asian markets, reflecting further deterioration in the global financial market sentiment, FII outflows, slowdown in industrial growth and lower corporate profits. The BSE Sensex declined from an all-time high of 20873 on January 8, 2008 to a low of 8451 on November 20, 2008. The equity market has since remained generally range-bound; the BSE Sensex was at 8674 on January 23, 2009. The outlook for the domestic financial markets will be determined largely by the developments in global financial markets and domestic liquidity conditions. The banking system has been in surplus liquidity mode since mid-November 2008. The pressure on the exchange rate of the rupee has eased due to moderation in capital outflows. In addition, the decline in global commodity prices, particularly crude oil, is expected to further ease the pressure on foreign currency on account of oil imports.
Indian Capital Market since liberalizations has undergone tremendous changes and has evolved as a vibrant system of investment flows. A dynamic capital market is an important segment of the financial system of any country as it plays a significant role in mobilizing savings and channeling them for productive purposes.In recent times, studies on the relationship between macroeconomic variables and national stock market have been the cornerstone of most economic literature. Among the many macroeconomic variables, the relationship between money supply and stock prices has been widely studied because of the belief that money supply changes have important direct effects through portfolio changes, and indirect effects through their effect on real economic activity, which in turn postulated to be the fundamental determinants of stock prices. Despite extensive investigations, the precise nature of the relationship between money supply and the stock market remains ambiguous.Other macroeconomic variables apart from money supply are equally important because there is a strong relationship between stock returns with other macroeconomic variables, notably, inflation and national output as well as industrial production. The inflation rate is an important element in determining 34
stock returns due to the fact that during the times of high inflation, people recognize that the market is in a state of economic difficulty. People are laid off work, which could cause production to decrease. When people are laid off, they tend to buy only the essential items. Thus production is cut even further. This eats into corporate profits, which in turn makes dividends diminish. When dividends decrease, the expected return of stocks decrease, causing stocks to depreciate in value.
• • To know that whether the Indian stock market acts as a barometer of the Indian economy’s growth and development or not. To find out the correlation between macroeconomic variables and stock market indices.
SCOPE: The scope of the study includes BSE Sensitive Index, S&P CNX NIFTY and
the macroeconomic variables, viz., • • • • • • • • Index of industrial production Agriculture production Service sector’s contribution towards GDP Money supply Per capita income Net domestic savings Market capitalization Exchange rate of Indian Rupee vis-à-vis US Dollar
Correlation test has been applied to establish the relationship between the Indian stock indices and macroeconomic variables. • Trend of movement of the stock indices against the macroeconomic variables has been examined with the help of line charts.
PERIOD: The data for the purpose is restricted to the period between 1995-96 to
1.) CAUSAL RELATIONSHIP BETWEEN THE STOCK MARKET
INDICES AND THE GDP AT FACTOR COST.
200 180 160 140 120 PERCENTAGE 100 80 60 40 20 0 -20 -40 -60
19 95 19 96 96 19 97 97 19 98 98 19 99 99 20 00 00 20 01 01 20 -02 02 20 03 03 20 04 04 20 05 05 20 06 06 20 07 07 20 08 08 -0 9
NIFTY GDP SENSEX
-80 -100 YEARS
Source: Economic Survey 2008
SENSEX 0.721198776 S&P CNX NIFTY 0.740981009
GDP AT FACTOR COST
Moderate degree of positive correlation.
Does Sensex trace GDP growth?
An answer to this question is that in the series of fourteen years of data of growth rate of GDP and both indices, there is a clear correlation between them. On an annual basis in the last ten years the BSE Sensex and S&P CNX NIFTY have had a very volatile trend but GDP at factor cost has been growing at a steady rate because GDP of the economy is the collective output of the agriculture, industrial and services sector. Economy goes through cycles of recovery, peak, slowdown and depression over the longer period of time. Similarly, stock markets also have cycles, depending on how the economy is performing. Therefore, even if India's GDP grows at 12% in one year, the Sensex may not gain a similar percentage during the year. However, the relationship may hold true over the longer-term. The often repeated story of developments in stock markets continues to be breath-taking. From quarterly average of 3138 points in Oct-Dec 2001, within about six years, the Sensex has reached an average level of 20000 points in Dec 2008. Nobody should think that the Sensex is up simply because India's GDP has accelerated to 9% in the first half of the year.
2.) CAUSAL RELATIONSHIP BETWEEN THE STOCK MARKET
INDICES AND THE AGRICULTURE PRODUCTION.
200 180 160 140 120 100 80 60 40 20 0 -20 -40 -60 -80 -100 -120
G A T N C R E P
Source: Economic Survey 2008
SENSEX 0.635073379 S&P CNX NIFTY 0.656944965
AGRICULTURE – SENSEX: Moderate degree of positive correlation. AGRICULTURE – NIFTY: Moderate degree of positive correlation.
There is a moderate degree of correlation between the agriculture production and the stock market indices. It did not come out with a high degree of correlation simply because agriculture sector of the economy indirectly helps in the growth of the market indices. As we all know that farmers do not go to capital market or they do not invest 41
their money in the capital market but in fact they assist others, like manufacturing sector, to grow and increase GDP of the economy. It puts an indirect impact on the capital market as it is having the lowest contribution in the country’s GDP as compare to other sectors, that is, 19.01 per cent in 2005-06 as given by the Economic survey of 2006-07. Its contribution has been declined from 19.01 per cent of 2005-06 to 16 per cent in 2008-09 The Economic Survey for 2008 has estimated a growth rate of 3.9% in the agricultural production. The total foodgrains production is estimated to be 219.3mn tons in the year 2007-08 against 204.6mn tons in 2004-05 and 227.3 in 2008-09. On the global level, India was the second largest producer of both fruits and vegetables with a production of 69mn tons and 105mn tons respectively in 2007-08. India occupies the first position in production of cauliflower, second in onion and third in cabbage.
3.) CAUSAL RELATIONSHIP BETWEEN THE STOCK MARKET
INDICES AND THE INDUSTRY.
250 200 150 100
g a t n c r e p
-50 -100 -150
Source: Economic Survey 2008
SENSEX 0.671820723 S&P CNX NIFTY 0.695490596
INDUSTRY – SENSEX: Moderate degree of positive correlation. INDUSTRY – NIFTY: Moderate degree of positive correlation.
There is a clear correlation between the stock market indices and the industrial production in the economy. It means industrial production puts a direct impact on the capital market. It could be because of two main reasons. Firstly, it has been growing at a 43
faster rate than the agriculture sector. Its growth rate is estimated at 11.1 per cent in the 2007-08 as compare to 9.58 per cent in the 2005-06. Secondly, capital market includes number of manufacturing companies. So, with the growth rate in the industrial sector, capital market also grows. In November, the index of industrial production (IIP) showed very dismal performance as people bought less cars, mobiles, houses, and consumer durables. With salary growth reducing, expenditure across sectors, consumption is decling; businessmen, responding to decrese in demand for their goods, are investing less in factories and industrial capacities, pushing demand down to lower level. As countries develop economically, the structures of economic and social organisations change. At first, the industrial sector tends to grow at the expense of the agriculture sector, and subsequently the service sector increases as a share of the economy. As the population becomes more urbanised, traditional social structures may become less important, and the distribution of income may change.
4.) CAUSAL RELATIONSHIP BETWEEN THE STOCK MARKET
INDICES AND THE SERVICE SECTOR’S CONTRIBUTION TOWARDS GDP.
SERVICE SECTOR (SENSEX,NIFTY)
250 200 PERCENTAGE 150 100 50 0 -50
19 95 19 -96 96 19 -97 97 19 -98 98 19 -99 99 20 -00 00 20 -01 01 20 -02 02 20 -03 03 20 -04 04 20 -05 05 20 -06 06 20 -07 07 20 -08 08 -0 9
NIFTY SERVICE SECTOR SENSEX
-100 YEARS Source: Economic Survey 2008
SENSEX 0.619711 S&P CNX NIFTY 0.699453
SERVICE SECTOR-SENSEX: Moderate degree of positive correlation. SERVICE SECTOR-NIFTY: Moderate degree of positive correlation.
There has been a moderate degree of correlation between stock market indices and service sector’s contribution in the economy’s GDP. It is so because the contribution of the service sector is highest, as compare to other sectors, in the GDP of the economy and it has been growing at the fast rate too. 45
The services sector has been the key driver of our growth, registering growth rates of 11.98, 11.2% over the last two years. We expect the growth rate to moderate marginally to 14% this year since some of the sub-sectors such as communication which saw very rapid growth in recent years are likely to confront subdued demand.
5.) CAUSAL RELATIONSHIP BETWEEN THE STOCK MARKET
INDICES AND THE MONEY SUPPLY.
SENSEX BROAD MONEY
S&P CNX NIFTY
BROAD MONEY-SENSEX: High degree of positive correlation. BROAD MONEY-NIFTY: High degree of positive correlation.
Last ten year data of broad money and indices show a clear correlation between them. Where broad money includes: Currency with the public + Demand deposits with banks + Time deposits with banks + Other deposits with RBI. Despite having a steady growth in the broad money, indices have had a volatile trend in the last ten years. In this data we can easily trace out that broad money has been increasing continously.Correlation shows that money supply does put an impact on the stock market because if broad money increases in the economy, it would increase the money in the hands of the public which would increase the purchasing power or the real money of the public. No doubt at all that it will also lead to an inflation in the economy but this issue is often well being taken care by the government with the help of monitory policy. Increase in the broad money supply up to September 2008 was 13%. During this period both commercial and government borrowings also increased by 4.3% and 9.2% respectively. Aggregate deposits of scheduled commercial banks rose by 9.2% But recent reduction in the Repo rate might lead to rise in the money supply growth and decline in lending rates in the coming months.
6.) CAUSAL RELATIONSHIP BETWEEN THE STOCK MARKET
INDICES AND THE PER CAPITA INCOME
Source: India 2008
SENSEX 0.77701817 S&P CNX NIFTY 0.790154883
PER CAPITA INCOME • •
PCI – SENSEX: High degree of positive correlation. PCI – NIFTY: High degree of positive correlation.
There is a very high degree of correlation between Sensex and per capita income although per capita income is known to be better measure for the economic development but above drawn graph shows that this macroeconomic variable does affect the growth rate of capital market indices. . The per capita income at current prices is estimated at Rs. 38084 during 2008-09 as against Rs. 33284 in the previous year, a growth of 14 per cent. But the per capita income has a 0.953515 correlation with the GDP at factor cost which means high degree of positive correlation.
7.) CAUSAL RELATIONSHIP BETWEEN THE STOCK MARKET
INDICES AND THE NET DOMESTIC SAVINGS (Till 31, March 2008).
Source: Reserve Bank of India2008
SENSEX 0.921193844 S&P CNX NIFTY 0.933032683
NET DOMESTIC SAVINGS
SAVINGS – SENSEX: High degree of positive correlation • SAVINGS – NIFTY: High degree of positive correlation.
This data shows that there is high degree of correlation between the net domestic savings and the stock market indices. As we know that the increase in savings depends on higher economic growth rate and a declining dependency ratio which means domestic savings is the good indicator of the economy growth. In my opinion, high degree of correlation between domestic savings and stock market indices because securities market channelise savings to investments and thereby decouple these two activities. As a result, savers and investors are not constrained by their individual abilities, but by the economy’s ability to invest and save respectively, which inevitably enhances savings and investment in the economy. But it could also be possible that whole of the savings are not mobilizing towards the investments in the capital market but channelising in some other investment alternatives like real estate and gold. It could be because of the inefficiency of the capital market in terms of inadequate information, illiteracy etc. Gross domestic savings as a proportion of GDP continued with its upward trend. The savings ratio increased to 45 in FY2008 compared to 22% in FY2009. Savings from private corporate and household sector led the surge in domestic savings rate whereas public sector savings witnessed a marginal fall.
8.) CAUSAL RELATIONSHIP BETWEEN THE STOCK MARKET
INDICES AND THE EXCHANGE RATE OF INDIAN RUPEE VIS-À-VIS US DOLLAR.
YEARS BSE Exchange Rate NSE 1995 3,618.54 31.375 1996 2,931.84 36.48 1997 3,382.47 35.88 1998 3,224.36 38.915 1999 3,315.57 42.5 2000 5,205.29 43.635 2001 4,326.72 46.415 2002 3,311.03 48.575 2003 3,250.38 47.8 2004 5,695.67 43.305 2005 6,555.94 43.695 2006 6,492.82 43.554 2007 13,075.00 45.25 2008 18,048.00 40.41 2009 8,842.00 50
SENSEX 1071.23 848.42 972.65 963.45 966.2 1546.2 1371.7 1075.4 1041.85 1809.75 2057.6 2035.65 3822 5277 2620 0 -18.97726707 15.3702112 -4.674394747 2.828778424 56.9953281 -16.87840639 -23.4748262 -1.831756281 75.23089608 15.10392983 16.13816 91.23 19.28 -40.42
Exchange Rate NIFTY 0 0 16.27092 -20.79945 -1.644737 14.64251 8.458751 -0.94587 9.212386 0.285433 2.670588 60.02898 6.371032 -11.28573 4.653668 -21.60093 -1.595471 -3.119769 -9.403766 73.70543 0.900589 13.69526 -0.3226 9.8269 3.894 87.81 -10.696 38.06 23.73174 -50.35
Note: Data are based on FEDAI (Foreign Exchange Dealers' Association of India) indicative rates
SENSEX 0.16287582 S&P CNX NIFTY 0.188455009
EXCHANGE RATE-SENSEX: Low degree of positive correlation. EXCHANGE RATE-NIFTY: Low degree of positive correlation
There has been a poor correlation between the capital market indices and the exchange rate of Indian rupee against US dollar. Because mainly exchange rate affects the international trade, that is, imports and exports. But it may indirectly help in the growth of the capital market in terms of the following reforms in this area: 53
Foreign Institutional Investors are allowed to invest in Indian equities subject to restrictions on maximum holdings in individual companies. Restrictions remain on investment in debt, but these too have been progressively relaxed.
Indian companies are allowed to raise equity in international markets subject to various restrictions.
Indian companies are allowed to borrow in international markets subject to a minimum maturity, a ceiling on the maximum interest rate, and annual caps on aggregate external commercial borrowings by all entities put together.
Indian mutual funds are allowed to invest a small portion of their assets abroad. Indian companies are given access to long dated forward contracts and to cross currency options.
The main objective of the project is to determine the lead and lag relationships between the Indian stock market and key macroeconomic variables. Certain quarters of the investors believe that the positive growth in the gross national product will result in an 54
improvement in the performance of the stock markets. The endeavor of the study is to investigate the question: Can the Indian stock market act as a barometer for the Indian economy’s growth and development? This is of course an empirical question. To test this, the correlation test has been employed and the results are summarized as follows: i. Moderate degree of positive correlation between GDP at factor cost and all its three sectors with the SENSEX and S&P CNX NIFTY. Manufacturing sector has shown the better correlation as compare to others. ii. High degree of positive correlation between broad money and the S&P CNX NIFTY.
High degree of positive correlation of per capita income with the SENSEX but it has shown a high degree of positive correlation with the GDP at factor cost. High degree of positive correlation between net domestic savings and the SENSEX . Low degree of positive correlation of exchange rate of an Indian rupee against US dollar and the both indices.
The Indian stock market is influenced by changes in the Indian economy and Indian stock market acts as a barometer of Indian economy as it is proved by the high degree of positive correlation between stock market indices and key macroeconomic variables, such as, Domestic savings, money supply and GDP growth rate. But on the other hand, other macroeconomic variable such as and Exchange rate have low degree of correlation with respect to Indian stock market
-RBI Bulletin (Volume LXIII Number 2)” Monetary Policy” Rekha Mishra, Feb.2009,Q3 -Indian capital market. (2006-07). Economic survey -Current state of indian economy 2008, Federation of Indian Chambers of Commerce and Industry, New Delhi. 55
-India-watch: India at a glance. article retrieved on March 28, 2007, from http://indiandata.com. Latest economic data. (2008). India -Macroeconomic variables, article retrieved on April 1, 2008, from http:// rbi.org.in/scripts/annual publications. -Monthly economic analysis. article retrieved on March 28, 2008, from http://indianbusiness.nic.in. -Stock prices, article retrieved on Apri 5, 2008, from http://bseindia.com -Stock prices, article retrieved on Apri 5, 2008, from http://nseindia.com -Economic survey 2008 -Economic Indicators -http://www.tradingeconomics.com/Economics/Inflation Symbol=INRcs.com/Economics/Stock-Market.aspx?Symbol=INR -http://www.tradingeconomics.com/Economics/GDP-Growth.aspx?Symbol=INR -http://www.tradingeconomics.com/Economics/GDP.aspx?Symbol=INR -http://www.tradingeconomics.com/Economics/GDP-Per-Capita.aspx?Symbol=INR -http://www.tradingeconomics.com/Economics/Industrial-Production.aspx?Symbol=INR -http://www.tradingeconomics.com/Economics/Government-Budget.aspx?Symbol=INR -http://pib.nic.in/archieve/others/2007/feb07/r2007020702.pdf -http://exim.indiamart.com/budget-2009-10/ CPI.aspx?
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