SYNOPSIS

A STUDY ON EFFECTS OF INTEREST RATE ON SHARE MARKET PRICE

Dissertation submitted in partial fulfilment of the requirement for the

Award of the Degree of

MASTER OF BUSINESS ADMINISTRATION

OF

BANGALORE UNIVERSITY

By

SANTOSHKUMAR UDAYKUMAR

15SLCMD095

Under the guidance of

Ms. YAMUNA. K (Assistant professor)

THE OXFORD COLLEGE OF BUSINESS MANAGEMENT

BANGALORE 2015-2017

1|Page
TOPIC: A STUDY ON EFFECT OF INTEREST RATE ON SHARE MARKET PRICE

INTRODUCTION:
The interest rate that moves markets is the federal funds rate. Also known as
the overnight rate, this is the cost that depository institutions are charged for borrowing
money from Federal Reserve banks – an interest rate, repo rate other monetary policy tools.
The federal funds rate is the way the Fed attempts to control inflation (an increase in prices,
caused by too much money chasing too few goods: demand outstripping supply). Basically,
by increasing the federal funds rate, the Fed attempts to shrink the supply of money available
for purchasing or doing things, by making money more expensive to obtain. Conversely,
when it decreases the federal funds rate, the Fed is increasing the money supply and, by
making it cheaper to borrow, encouraging spending. Other countries' central banks do the
same thing for the same reason.
Why is this number, what one bank pays another, so significant? Because the prime interest
rate or prime lending rate – the interest rate that commercial banks charge their most credit-
worthy customers – is largely based on the federal funds rate. And the prime forms the basis
for mortgage loan rates, credit card APRs and a host of other consumer and business loan
rates. Stock exchanges are entity which provides dealing amenities for stash negotiator and
dealer, to buy and sell stocks and other securities.
The stock market reflects the overall health of the economy. one measure of that health is
rising or falling interest rates. the federal reserve raises lowers interest rates to fight inflation
or make it easier or companies to barrow money. Most commercial lending institutions
follow the federal reserves lead. All of this up-and-down adjustment affects the stock market.
Investors have to learn to calculate the impact of rate changes on stock prices.

2|Page
OBJECTIVES:

The primary objective is to determine the impact of interest rate on the share prices with the
case study being the All Share Index. Other specific objectives include: to examine the
relationship between the monetary policy rate and the All Share Index of the Indian stock
exchange and to assess the guideline for interpreting the behavior of the market's movement
when interest rates rises or falls.

1. To understand the factors influencing the change in RBI interest rate.

2. To find out the issues and effect of the interest rate on share market

3. To examine the fluctuation in share price movement

4. To learn the factors affecting the share price movement of Indian economy.

5. To understand the fundamental and technical analysis

RESEARCH METHODOLOGY:

RESEARCH DESIGN:

This study incorporates the descriptive statistics techniques. It involves calculating the mean
of the All Share Index percentage change based on 6 months and 12 months analysis. Their
respective charts are plotted to facilitate clear comparison of the effect of interest rate hikes
and cuts on the ASI.

The bivariate linear regression model tests the relationship between the ASI and the Interest
rate as the only predictor variable. The model is given below:
(1)

The multiple linear regression model is also adopted to control for other important variables.
Although stock prices are impacted by many factors, the research incorporates three very
basic economic indicators that affect stock prices into the multivariate model. They are the
Inflation rate, Unemployment rate and the GDP of Nigeria with the period of 25 years.
We have:

3|Page
 (2)
For models I and II:
a, b = constants of the models
a1, b1,b2, b3, b4 = coefficients of the models
e, e1= error terms
The matrix correlation between the ASI percent changes and the four predictor variables is
calculated to determine the degree of relationship between the variables.

STATEMENT OF PROBLEM :

1. How does the stock market respond to interest rate hikes?

2. What could happen to the stock market when the Central Bank begins to cut rates in an
attempt to increase the stimulus in the economy?

3. How does interest rate variable fare when other variables affecting stock prices are
controlled?

SOURCES OF DATA :

 This project study is done through secondary sources.

 Secondary data will be collected through;
 Internet
 Journals/publication
 Books

STATISTICAL TOOLS:

1) Analysis of data.

2) RBI Monitory policy review.

3) Data collection, Analyse.

4) Understanding the fundamental and technical analysis.

4|Page
LIMITATIONS:

 The report is prepared by using only secondary data .

 The time span is short.

PLAN OF ANALYSIS:

The plan of study is to do with secondary data, the data collected through company annual
report analysis will be done with the help of formula. Based on the analysis findings.
Suggestion would be given based on the analysis.

CHAPTER SCHEME:

Chapter 1: Introduction

This chapter contains introduction of the topic.

Chapter 2: Research design

This chapter includes methodology adopted, statement of problem, objectives of the study,

And tools used for data collection.

Chapter 3: Company profile

This chapter contains the brief introduction about derivatives.

Chapter 4: Data analysis and interpretation

This chapter gives clear picture of tables for the data collected.

Chapter 5: Summary of findings, conclusions and suggestions

This chapter provides the findings made and conclusions and suggestions about problem.

5|Page
REFERENCE:

http://www.bseindia.com/

https://www.nseindia.com/

https://www.rbi.org.in

http://www.investopedia.com.

NAME: SANTOSHKUMAR UDAYKUMAR PROJECT GUIDE: YAMUNA. K

STUDENT SIGNATURE ; GUIDE SIGNATURE ;

REG NO: 15SLCMD095

6|Page