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**VOLATILITY OF SHARE PRICES WITH RESPECT TO ECONOMIC FACTORS
**

Submitted in partial fulfillment of requirement for the award of the degree of

**Master of Business Administration
**

Of

Bangalore University

By

PREVEEN.NP.

Reg. No: 03XQCM6074

Under the Guidance and Supervision Of

Dr.N.S.VISHWANATH

**M.P.BIRLA INSTITUTE OF MANAGEMENT
**

Associate Bharathiya Vidya Bhavan #43, Race Course Road, BANGALORE-560001 June 2005

M P Birla Institute of Management

Acknowledgement It is with great pleasure and gratitude that I acknowledge the contribution of several individuals towards the successful completion of the project.

I sincerely thank Dr. Nagesh Malavalli, Principal, M. P. Birla institute of Management, Bangalore for granting me permission to take up the project.

I would like to express my gratitude to Dr. N.S. Vishwanath, Project guide, for his invaluable suggestion and encouragement, which are imperative for the completion of this project.

Words cannot express the immense gratitude I have for my parents who have been instrumental in shaping my career. I am thankful to all my friends and to all the unseen hands that have made this project possible.

Preveen.N.P

M P Birla Institute of Management

DECLARTION

I here by declare that this report entitled “A RESEARCH ON VOLATILITY OF SHARE PRICES WITH RESPECT TO ECONOMIC FACTORS”, has been prepared by me in partial fulfillment of the award of the degree, Master of Business Administration at Bangalore University. This report or a similar report on this topic has not been submitted for any other examination and does not form a part of any other course undergone by me.

Place: Bangalore Date: 17-06-2005

PREVEEN N.P Reg. No:03XQCM6074

M P Birla Institute of Management

t to economic factors: A Review Contents Introduction. Calculations of correlation coefficients between the share prices of each companies and the economic factors Testing for Hypothesis 17 26 43 54 Findings Conclusion o In Conclusion 56 57 References o Bibliography 59 M P Birla Institute of Management . Foreign Exchange rate and its Effect on stock market liquidity and volatility.Research on the volatility of Indian Share Market w. Scope and Methodology of the Review Process o o Introduction Problem Statement Theoretical Framework Review of literature Conceptual Definitions Criteria for selection and review of SENSEX constituents 2 4 5 7 11 13 15 o o o o o Research Methodology Review of Research in Various Fields o o o o o FII Inflows to India: Their Effect on Stock Market Liquidity and Volatility.r. Inflation rate and its Effect on sock market Liquidity and volatility.

Certain areas such as arbitrage pricing theory. we expect an explosion of work in the near future. The research includes how the share prices of various selected companies vary w.t economic factors and to enable the investors in exploring the investment opportunities using the economic indicators. a large number of works are merely descriptive or prescriptive without rigorous analysis. Simultaneously. Moreover.t. and signaling theory are virtually unrehearsed in the Indian context.Abstract This research is done in the field of Indian share markets taking into account only three years data from Feb.r. M P Birla Institute of Management . However. option pricing theory. agency theory. located books listed in the library catalogue and traced through the list of references provided in various research works. very little theoretical work has been done by researchers in India. I have searched through various Indian journals in our library. and with increasing global interest in Indian markets. to economic factors. Besides.r. The main objective is to study how share prices vary w. The research work includes the collection of data regarding the share prices of the selected companies during the past three years and the SENSEX. 2002 to Feb 2005. with improved availability of databases and computing resources.

The notion that macroeconomic factors can drive the movement of stock prices is now widely accepted. Background: It is widely believed that stock market is related to macroeconomic fundamentals of an economy. We have considered 3 macro variables for the study: Exchange Rate. FII. According to standard stock valuation model. the determinants of stock price are the expected cash flows from the stock and the required rate of return. Chen. The data consists of 36 months from feb2002 to feb2005 comprising of three macro indicators. Roll and Ross (1986) showed that economic variables have a systematic influence on stock return as a result of their effect on future dividends and discount rate and they provided the foundation for the belief in the existence of a long-term equilibrium relationship between stock price and related macroeconomic variables. A central issue in macroeconomics is the question of how financial markets are connected to the real side of the economy. However. as companies that are listed for trading in stock exchanges are the ones who contribute significantly to the economy's growth. inflation rate. it was only in the past decade or so that attempts have been made to capture the effect of economic forces in a theoretical framework and calibrate these effects empirically.Indian Evidence This paper attempts to study the relationship of stock returns with macroeconomic variables in Indian context. The issue has gained momentum due to increasing cross border movement of funds as fund managers try to move to markets where possibility of higher returns vis-à-vis risk is high.INTRODUCTION Macroeconomic Indicators and Stock Prices . The ongoing integration of international capital markets and the repeated occurrence of large financial crises have raised the concern about the M P Birla Institute of Management .

topic beyond academic circles. The co-integration of macroeconomic variables and stock market has been an extensive area of research in financial econometrics. In financial economics, there have been a number of studies concerning developed markets like US, Japan, UK and European markets This study also investigates the short run causal relationship between the stock market and other macroeconomic variables in India for the period Feb. 2002 to Feb. 2005. .

M P Birla Institute of Management

Problem Statement:

Volatile markets are characterized by wide price fluctuations and heavy trading within a short span of time. Volatility is a traditional worry of investors, and is associated with fast-growing stocks, high P/Es, smaller companies, Information Technology (IT) firms. Volatility of stock market is usually caused by company news, economic factors like changes in forex rates, inflation rates, interest rates etc. Share prices fluctuations affect the investor’s wealth creation. In this context, the study of the impact of economic events on the movement of share prices in stock market is undertaken. Objectives of the study: 1. 2. To study how share prices fluctuate w.r.t economic factors To enable the investors in exploring the investment opportunities using the

economic indicators

Hypothesis: Null hypothesis (H0): Economic factors do not affect the movement of share prices. Alternate hypothesis (H1): Economic factors affect the movement of share prices.

M P Birla Institute of Management

Theoretical Framework

Volatility: Definition and Measurement In pure financial terms, volatility is defined as, 'the degree to which the price a of security, commodity, or market rises or falls within a short-term period’. As is evident from the definition, volatility relates to the variability in the price of a security. In the context of the stock market, volatility of the market refers to the volatility of the indices of the securities within the market. In India, for instance, the Bombay Stock Exchange (BSE) SENSEX (a 30 scrip weighted index of market capitalization) would be one of the relevant indices to look into for examining stock market volatility. When examining the issue of stock market volatility, it is relevant to measure percentage volatility of stock return. This reflects the percentage change in the value of the amount invested in the stock market. It reflects the change in the investor's wealth. Theorists use various measures of volatility like standard deviation, variance, co-efficient of variation, to measure volatility of stock market return. Stock market volatility is often classified as historical (actual) volatility or implied volatility. The most common measure of historical or actual stock market volatility is the standard deviation. In simple terms, standard deviation measures the deviation of the returns of equity from its mean return. It is a relative measure i.e. standard deviation of stock returns in one period can be compared with standard deviation of another period to understand which period has been more volatile. Generally, rolling standard deviation is used to measure actual stock market volatility. The other measurement of volatility is the conditional volatility

M P Birla Institute of Management

e. The. volatility that is conditional upon variables other than the variable being measured. M P Birla Institute of Management . developed by Bollerslev (1989).measured by a GARCH (1. Arbitrageurs have used this fact to profit by determining whether a security is improperly priced relative to its derivative (Mullins. is widely used to measure conditional volatility i. This measure is the result of an important fact about derivatives: The price of the derivative along with the price of the underlying security produces two observations of the security's price.. but important measure of volatility is 'implied volatility'. 2000). 1) model. The less known. It measures the impact of the variance (or standard deviation) lag of a variable and the variance (standard deviation) of its residuals in predicting the current value of the variable. GARCH measure of volatility.

Mukherjee and Naka (1995) found that Jam\pese stock prices are linked to money supply. Naka. Chen. real economic activity. Geske and Roll (1983) found the linkage between macroeconomic variables and stock prices in US but found a negative relationship between stock prices and inflation. In another study. Leigh (1997). Maysami and Koh(2000). (1999) showed that the stock returns respond negatively to the change in the interest rate in Norway and found a positive relationship of stock returns with oil prices and real economic activity.Review of Literature In an early study. Roll and Ross (1986) found that economic variables like industrial production index. (2003a). long-term government bond rate. inflation. In another study. industrial production is the largest determinant of stock prices while inflation is the largest negative determinant. In a study by Nath and Samanta. they found using Geweke's feedback measures strong bi-directional as well as contemporaneous causal relationship between these M P Birla Institute of Management . Asian markets have been studied by Fung and Lie (1990). exchange rate and interest rate. change in risk premium and inflation have a systematic influence on stock return and showed the existence of a long run equilibrium relationship. they also found that oil prices and consumption did not have significant effect on stock prices. Nath and Samanta (2003b) examined the changing pattern in extent of integration between foreign exchange and capital markets in India using daily data and found that in V AR-framework empirical results do not point much impressive causal relationship between returns except in some specific years. it was found that the stock market and the exchange rate were not generally co integrated in India and some amount of causal effect could be noticed only late in 1990s. Lee (1992) showed a positive Ii relationship between stock returns and the real economy in US. Gjerde and Saettem . Granger. However. Mukherjee and Tufte (1999) found that in Indian market. Kwon and Shin (1999). Huang and Yang (1998). However. In another study.

The author points out that drops in the stock market often translate into decreased net worth for both households and businesses. Importantly. war can have a significant economic impact as well. thereby. any market rally would be quashed. Savage notes that almost all Americans are familiar with the textbook example that World War II played an important part in stimulating America's economy. decreasing consumer spending and confidence. Japan while for other markets the same cannot be said for certainty. He notes that markets often soar in anticipation of a quick victory. Economist Robert Genetski notes that there are several important caveats on war's impact on the economy. From the Paper: "Certainly. therefore. but that if the "battle was to be prolonged. This prediction bodes poorly M P Birla Institute of Management . The paper concludes that one of a number of solutions proposed to help stimulate the US economy includes tax rate cuts. given America’s recent actions in Iraq.markets. Paper Summary: This paper relates that stock market declines have a wide-ranging effect on many sectors of the economy. the stock market is only one of the factors that can impact the economy. Paper 1: The Stock Market and the Economy This paper discusses that the stock market and the economy are deeply Intertwined so that when something happens in one it affects the other. the linkage between macroeconomic variables and stock prices have been established for major markets like US. the health of the stock market is seen as an indicator of the general economic health. From the existing literature. which damages the economy.

Also discussed are to what extent the economy effects the stock market and how much the two are intertwined. any decline in the stock market is often seen as a negative prediction for the economy. economy. Importantly. and thereby decrease consumer spending and confidence. It looks at the effects of a declining stock market and a rising stock market. The paper also includes opinions and analyses from different experts in economics. Thus. From the Paper: Recent declines in the stock market have had a detrimental impact the economy both in the United States and abroad. stock market declines have a wide-ranging effect on many sectors of the economy.S. the health of the stock market is seen as an indicator of the general economic health. the stock market has on the U. which help explain the relationship between the stock market and the economy. resulting damage to the economy. The stock market and the economy are deeply intertwined." M P Birla Institute of Management . Drops in the stock market often translate into decreased net worth for both households and businesses. As such.for the economy given recent news of continuing American deaths in the ongoing crisis in Iraq Paper 2: The Impact of the Stock Market on the Economy This paper looks at the effect.

suffer from inefficiency as centralized decisions about production and prices create artificial distortions in the economy and the lack of profit motive creates lethargy. From the paper "A "free market economy" is one in which most businesses are privately owned and where individual producers and consumers determine the kinds of goods and services produced as well as the prices of such products through a voluntary exchange of goods and services. Competition is a key factor in market economies as it keeps the prices of products in check. the profit motive provides the strongest incentive to individuals and firms to allocate resources for their most productive use and to produce goods and services that the public wants. The paper explains that controlled economies. M P Birla Institute of Management . using the most efficient means of production. The paper contends that most economists argue that free market economies are superior to controlled economies because free markets are more efficient. forces the competitors to enhance the efficiency of their production process. contrastingly. they encourage individual responsibility for decisions. Another important feature of a free market economy is that income is distributed largely through the operation of markets. and drives the inefficient producers out of the market.Paper 3: An analysis of free market economies as opposed to controlled economies Abstract This paper discusses the concept of free market economies.

technical analysts of the market. 2) Inflation rates any significant changes (highest and lowest interest rates) for every three months during period. Business newspaper.com”. it has been widely accepted as a fair reflector of the trend of prices on the Mumbai stock market The following economic indicators and events will be taken into consideration for the period from 1st March 2002 to 28th Feb 2005. is because the index has established a place amongst investors. chartists.Research Methodology: Secondary Data: Data collected was of BSE-SENSEX for the period From Feb 2002 to Feb. The Reason for choosing BSE-SENSEX comprising of 30 scrips from a specified and non-specified list.com”.com”. “economictimes. Moreover. M P Birla Institute of Management . Tools: Tool to be used is correlation analysis using coefficient of determination and T-test for hypothesis testing . 3) Foreign exchange rates for US $/ Re would be considered as majority of Foreign exchange transaction takes place in US $. the newspapers and all other concerned with the securities market. bseindia. 2005 . The data would be collected from websites like “domain-b. Any significant changes (highest and lowest interest rates) for every three months during period. and journals. 1) FII: Any significant flow in FIIs to the equity market in these 36 months would be considered for the study.

Interest rates. M P Birla Institute of Management . Only three years1st March 2002 to 28th Feb 2005 data will be taken Only Economic factors will be considered. Due to time & resource constraints only four economic factors like Government policies.Scope of the study: Since there are problems associated with volatile stock markets. the study can help the investors to take informed decisions regarding buying or selling of stock. The study is restricted to BSE 30. 2. for the study. 4. 3. Inflation rate and foreign Exchange rates will be considered. Limitation of the study: 1.

and legal/estate planning for a fee. The main function of wealth management includes maximizing the Return on Investment (ROI) involved in various investments with minimum risks to the investor. In general. a high P/E means high projected earnings in the future. Calculated as: P/E shows how much investors are willing to pay per rupee of earnings. In general.Operational Definitions: 1) Wealth management: Wealth management can be defined as a professional service. or to the market in general. the P/E ratio actually doesn't tell us a whole lot by itself. or against the company's own historical P/E. wealth management is more than just investment advice as it can encompass all parts of a person's financial life. It's usually only useful to compare the P/E ratios of companies in the same industry. accounting/tax services. 2) High P/E: P/E can be defined as a valuation ratio of a company's current share price compared to its per-share earnings. M P Birla Institute of Management . However. which is the combination of financial/investment advice.

the expectation of the growth of the economy is favorable for the stock market. M P Birla Institute of Management . An investment in the equity of any company is likely to be most profitable if the economy is strong and prosperous. a strong and stable economy with real growth is favorable for investment. The growth of the national economy can be used to forecast the growth of an industry or company and thus to determine those areas offering good opportunities. So. As a principle.3) Owner’s wealth: Owner’s wealth can be defined as the product of number of shares held by an investor to the market price of the share. This process will also help to point out industries and companies that should be avoided because they appear to offer less attractive opportunities.

000.000.000.000.000. Criteria for Selection and Review of SENSEX Constituents The scrip selection and review policy for BSE Indices is based on the objective of.86 in February 2005.00 3.00 2.000.00 1.000.00 Close The above graph shows the movement of SENSEX from February 2002 to February 2005.31 in February 2002 to 6713.00 month end close 6.00 4.00 5. Fe b0 M 2 ay -0 Au 2 g0 No 2 v-0 Fe 2 b0 M 3 ay -0 Au 3 g0 No 3 v-0 Fe 3 b0 M 4 ay Au 04 g0 No 4 v-0 Fe 4 b05 month/year M P Birla Institute of Management .As shown in the graph SENSEX has moved from 3562.00 0.00 7.Graph showing the SENSEX movement: Sensex movement 8.000.

M P Birla Institute of Management . Quantitative Criteria: 1. The final rank is arrived at by assigning 75% weight age to the rank on the basis of six-month average full market capitalization and 25% weight age to the liquidity rank based on six-month average daily turnover & six-month average impact cost. 4. Exceptions can be made for extreme reasons like scrip suspension etc.5% of the Index. Trading Frequency: The scrip should have been traded on each and every trading day for the last six months. 3. Industry Representation: Scrip selection would take into account a balanced representation of the listed companies in the universe of BSE. Market Capitalization Weightage: The weight of each scrip in SENSEX based on six-month average Free-Float market capitalization should be at least 0. The index companies should be leaders in their industry group. Final Rank: The scrip should figure in the top 100 companies listed by Final Rank. 2.• • • • Improvement Transparency Simplicity QualificationCriteria: The general guidelines for selection of constituent scrips in SENSEX are as follows • A.

In case of a revision in the Index constituents. (All the co-efficient have been calculated) M P Birla Institute of Management .B. the announcement of the incoming and outgoing scrips is made six weeks in advance of the actual implementation of the revision of the Index. every review meeting need not necessarily result in a change in the index constituents. and also from the day they are included in SENSEX from March 2002. However. the company should have an acceptable track record Index Review Frequency: The Index Committee meets every quarter to review all BSE indices. Qualitative Criteria: Track Record: In the opinion of the Committee. which was there in SENSEX on Feb 2005. While selecting scrip from SENSEX. only those scrips were taken for study.

The paper uses Engel-Granger test of co-integration to examine the impact of FII inflows on the Indian stock markets. a consistent stock market boom can dampen the level and rate of savings in the country as agents move from a low-return deposit market to a high-return stock M P Birla Institute of Management . Stock market liberalization is a decision by a country's government to allow foreigners to purchase shares in that country's stock market (Henry 2000). whether this boom is good for the economy is an issue that has not yet been completely settled in the studies so far. A stock market boom has a 'wealth effect' on the investors in the stock market and this can lead to a rise in aggregate demand (through consumption). One of the immediate effects of episodes of capital inflows on the stock market is the boom that it causes in the stock price indices. The stock-market boom. This paper examines two consequences-liquidity (positive) and volatility (negative) in the past decade on the Indian stock market(s). in the nineties. the stock market boom in several emerging economies has coincided by the increase of capital inflows to these countries (Levine. typically. This has been true in the emerging markets of Asia.FII Inflows to India: Their Effect on Stock Market Liquidity and Volatility Stock markets in India were opened to foreign capital flows in 1992. with its ramifications (both positive and negative). On the other hand. They usually start with the initial surge in the capital inflows and end before the episode of capital inflows completely subsides. Stock market liquidity is definitely higher post-liberalization. 1997). It finds that Foreign Institutional Investment (FII) flows have enhanced liquidity of the Indian stock market. However. does not last for the entire period of capital inflows. There is not much evidence to support the hypothesis that FII inflows have led to volatility in the returns in the Indian stock market(s). In fact. Latin America and Africa.

liquidity and volatility in some depth in the case of India. This paper is divided into two sections. Sudden stops or reversals in these flows can leave the economy devoid of funds to sustain growth and development. These papers briefly examine the consequences and study two of these consequences viz. Section 1 evaluates the impact of capital inflows on stock market liquidity and Section 2 examines the impact on stock market volatility. Given this fact. M P Birla Institute of Management . Such shift in investor preference can be damaging in cases where the stock market boom is led by capital inflows. 1997). This has found to be true in Mexico and Argentina (Levine. the consequences of such inflows on the stock market become an important aspect of any study of capital inflows to a country.market..

04% of the time the predicted value is correct.762369. while comparing the changes in the FII’s with the changes in the ACC’s Share price. we get a correlation of 0.9604. r2 = 0.12times. r2 = 0. r2 = 0.04 %. we get a correlation of 0. we can interpret that change in FII’s affects the BSE SENSEX Values positively.725664306.5266. 2) ACC Share price: Correlation coefficient (r) = 0.66%.5812.96. There is error of around 40%. Therefore from the above. Therefore from the above. Now r2 * 100 = 58.725664306 From the above table.Analysis of the Influence of Financial Institutional Investors on share prices of different companies: 1) Effect of Changes in FII’s on BSE SENSEX Values: Correlation coefficient (r) = 0. Now r2 * 100 = 96. while comparing the changes in the FII’s with the changes in the BSE SENSEX Values. Now r2 * 100 = 52.762369 From the above table.12%. we can interpret those changes in FII’s affects the ACC’s Share price predicted are true by 58. 3) Bajaj Auto Share price: Correlation coefficient (r) = 0. while comparing the changes in the FII’s with the changes in the Bajaj Auto’s share price.979998. Effect of Changes in FII’s on various companies listed below. M P Birla Institute of Management .979998 From the above table. we get a correlation of 0.

7) Dr.868579 From the above table.9853. while comparing the changes in the FII’s with the changes in the BHEL Share price. while comparing the changes in the FII’s with the changes in the Cipla Share price.related 6) CIPLA Share price: Correlation coefficient (r) = -0.973186 M P Birla Institute of Management . Reddy Share price: Correlation coefficient (r) = 0.00495. we get a correlation of 0.Therefore from the above.443%.070323732 From the above table. Therefore from the above.868579. 5). Now r2 * 100 = 0. r2 = 0. r2 = 0. r2 = 0.992611 From the above table. we can interpret that changes in FII’s affects the Bharti Tele share price positively. we get a correlation of 0. 4) Bharti Tele Share price: Correlation coefficient (r) = 0.070323732. Now r2 * 100 = 98. BHEL Share price: Correlation coefficient (r) = 0. Therefore the two factors are almost negatively correlated.495%. we can interpret those changes in FII’s affects the Bajaj Auto’s share price considerably. Therefore from the above.75443.53%. we get a correlation of -0. we can interpret that FII’s and B HEL share price are almost perfectly co. while comparing the changes in the FII’s with the changes in the Bharti Tele Share price.992611. Now r2 * 100 = 75.

999952.9471. we get a cor relation of 0. r2 = 0. r2 = 0.99523. while comparing the changes in the FII’s with the changes in the Dr Reddy’s Share price. Now r2 * 100 = 94. while comparing the changes in the FII’s with the changes in the Grasim Share price.973186. we can interpret that the change in FII’s affects the Grasim’s share price not very much. we get a correlation of 0.999976 From the above table.. e.713656.999976. Now r2 * 100 = 99. we get a correlation of 0.9952%. Now r2 * 100 = 99. r2 = 0.71% .523%.Positively correlated. 8) Grasim Share price: Correlation coefficient (r) = 0. Therefore from the above. we can interpret that change in FII’s affects the Dr Reddy’s share price i. r2 = 0. while comparing the changes in the FII’s with the changes in the HLL’s Share price.997634.From the above table.997634 From the above table. Now r2 * 100 = 50. while comparing the changes in the FII’s with the changes in the Hindalco’s Share price. 10) HLL Share price: Correlation coefficient (r) = 0. Therefore from the above. Both have a perfect correlation. Both have a perfect correlation M P Birla Institute of Management . 9) GACL Share price: Correlation coefficient (r) = 0.93%.5093. we get a correlation of 0.713656 From the above table.

Now r2 * 100 = 6. while comparing the changes in the FII’s with the changes in the HPCL Share price.253972.253972 From the above table.886%.0645. Predicted value is correct only up to 52. Negligible correlation 13) ITC Share price: Correlation coefficient (r) = 0.9542.72273. we get a correlation of 0.11) HPCL Share price: Correlation coefficient (r) = -0. r2 = 0. r2 = 0.979213 From the above table.45%. r2 = 0. we get a correlation of 0. Error prediction is only up to 5% M P Birla Institute of Management .976829. Error prediction is only up to 3% 14) Ranbaxy Share price: Correlation coefficient (r) = 0.234% 12) Infosys Technologies Share price: Correlation coefficient (r) = 0.976829 From the above table.42%. we get a correlation of -0. Now r2 * 100 = 95.234%.979213. Now r2 * 100 = 52. while comparing the changes in the FII’s with the changes in the cc Share price.95886.52234.72273 From the above table. while comparing the changes in the FII’s with the changes in the Infosys Technologies Share price. r2 = 0. Now r2 * 100 = 95. while comparing the changes in the FII’s with the changes in the ITC’s Share price. we get a correlation of 0.

6336. Now r2 * 100 = 12.990304. we get a correlation of 0. 18) SBI Share price: Correlation coefficient (r) = 0. Now r2 Perfect correlation 19) TATA Motors Share price: Correlation coefficient (r) = 0. r2 = 0.9807.15) REL Share price: Correlation coefficient (r) = 0. while comparing the changes in the FII’s with the changes in the REL Share price.9986. r2 = 0. while comparing the changes in the FII’s with the changes in the TATA Motors Share price. While comparing the changes in the FII’s with the changes in the SBI Share price.999297 From the above table.135%.12135.07%.999297.795997 From the above table.36%. Now r2 * 100 = 98. M P Birla Institute of Management * 100 = 99. Positively correlated. while comparing the changes in the FII’s with the changes in the RIL Share price.348353. r2 = 0.86%. r2 = 0. Correlated up to a certain extent 16) RIL Share price: Correlation coefficient (r) = 0. we get a correlation of 0.795997. Now r2 * 100 = 63. . we get a correlation of 0.348353 From the above table. we get a correlation of 0.990304 From the above table.

Now r2 * 100 = 6. r2 = 0. r2 = 0. while comparing the changes in the FII’s with the changes in the ZEE TeleFilm Share price. we can interpret that change in FII’s affects the ZEE TeleFilm share price positively.8371. Now r2 * 100 = 83. we get a correlation of 0. Therefore from the above. while comparing the changes in the FII’s with the changes in the TISCO Share price. we can interpret that changes in FII’s affects the TISCO share price by 6.245828 From the above table.0431%. 21) ZEE TeleFilm Share price: Correlation coefficient (r) = 0. To illustrate.060431.71% . then the TISCO Share price would decrease by 6.914935.0431% .Only 12% of the time the predicted value is correct 20) TISCO Share price: Correlation coefficient (r) = 0. we get a correlation of 0. M P Birla Institute of Management .0431%.914935 From the above table. if FII’s invest more in the BSE. Therefore from the above.245828.

in terms of the commodity in question) the value of the rupee would have declined from 1 gram of gold for Rs 500 to only 0. In nt fact over the long-term the `damage' is significant enough to make the most unflappable investor sit up and take notice. `Inflation is when you pay fifteen dollars for the ten dollar haircut you used to get for five dollars when you had hair. As products/services are scarce in relation to the money available in the hands of buyers. an inflationary situation is where there is `too much money chasing too few goods'.91 gram of gold for Rs 500. However.high demand combined with limited supply leads to higher prices. This may sound complicated but it's a thumb rule of demand supply . In other words. Now you know why that haircut does not cost the same as it did even 2 years ago! M P Birla Institute of Management .e. The obvious implication is that gold prices will rise to adjust for the sustained demand at lower supply.Inflation This was written for Business India. in real terms (i. Let's say gold prices rise by 10%. prices of the products/services rise to adjust for the larger quantum of money chasing them.' But the de inflation makes in your investments is far from humorous. Simply speaking. Let's understand this with the help of an example. Let's assume Rs 500 fetches you 1 gram of gold. the same quantum has money now fetches you fewer goods. 2004 issue with the same title. Suppose there is a shortfall in the global supply of gold. let's understand inflation a little better. First. So the value of the rupee has eroded. and was carried in its July 19. The revised rate of 1 gram of gold will be Rs 550. As someone once said with a dash of humor.

nothing could be further from the truth. As a matter of fact.inflation! Inflation eats into the returns offered by assured return schemes like fixed deposits and small savings schemes. the central bank of the country aims to reduce demand in the economy by raising the cost of money. M P Birla Institute of Management .Another important implication linked to inflation is higher interest rates. Mr. you also need to review existing investments. So how does the risk-averse investor counter this menace? There are 2 options at his disposal. In other words. thereby leaving investors with dismal real returns. Risk-averse investors who traditionally shun risk and embrace the safety of assured returns probably feel they are immune to inflation and its effects. the security and comfort associated with assured return schemes comes at a price . In his exclusive interview with Personalfn. However.Reserve Bank of India) put things in perspective by stating that inflation was fuelled more by higher prices of commodities like steel and petroleum at the global level than by consumer goods like food products at the domestic level. the danger posed by inflation is real and present and as an investor you have to take steps to safeguard your interests. Nonetheless. the fact of the matter is whether you like/understand it or not. This could be as good a time as any what with the Wholesale Price Index (WPI) breaching the 6% level. When prices in the system are in an upward spiral due to persistent demand. you need to bring a fresh perspective to your investments. bond/fixed deposit investor. You not only need to be careful about future investments. If there is one class of investor category who are completely exposed to the `menace' of inflation it's the risk averse. Rakesh Mohan (Deputy Governor . So it may appear that the inflationary situation we see today is more of a comment on the price spiral at the global level than the domestic level.

Under inflationary conditions. This is because rising inflation is generally followed by rising interest rates as explained earlier. choose short-term deposits. These investments will give you the required liquidity you need while ensuring that you do not lose out in case interest rates were to rise.Short term deposits and funds Typically. Again the way to counter this threat is to stick to short-term bond funds. Capital indexed bonds These bonds compensate you for the rise in inflation (or the decline in the purchasing power of the currency). M P Birla Institute of Management . These bonds are the worst hit when the debt market is in the grip of inflation frenzy. Inflation is a damper on the price of longer maturity bonds. which are relatively immune from the peril of inflation. By the same logic. As yet they do not have a presence in the domestic debt market. shun long-term debt funds. Banks/institutions raise their deposit/coupon rates so investors who are already invested in these deposits/bonds witness what is known as an `opportunity loss'. bond prices fall and this pulls down the net asset values (NAVs) of bond /gsec funds. fresh investors will clock a higher return on their deposits/bonds. The good news is that the Reserve Bank of India (in consultation with Government of India) proposes to introduce Capital Indexed Bonds in the country. So when there is even a likelihood of rates on deposits/bonds rising. in inflationary times you should not lock your money in long-term bonds (like the RBI Bond for instance) and in fixed deposits with a longer tenure (over 1-Yr). However. So existing investors see erosion in their debt fund NAVs.

Equities It's no secret that no asset class evokes as much excitement as stocks/equities. the coupon rate will be applied to this revised sum and interest payments made accordingly. 2004 with a fixed coupon of 3. the principal amount will be recalculated based on the existing inflation levels. The same CIB worth Rs 100 bond could now be worth Rs 110 on account of the rising prices. This would be achieved by adjusting the principal amount in tune with changing inflation rate. risk-taking investor stocks have a higher appeal .g. in our view this excitement is often misplaced. the risk-taking investor has one more option to counter inflation . M P Birla Institute of Management .equities. Six months henceforth when the first interest payment is due. For the serious. This is pretty much what the risk-averse investor has on his plate in inflationary times. Investors take to stocks because of their ability to clock exponential growth over a shorter time frame.their ability to effectively counter inflation and give superior real returns over the long-term visà-vis any other asset class. Stocks stimulate unbridled enthusiasm and fervor for the wrong reasons. Interest payments would be computed at a fixed rate on the adjusted principal amount. On the other hand.00%. However.Key features of the proposed Capital Indexed Bonds: Offer inflation-linked returns on both the coupon rate (interest rate offered ¡ by the instrument) and principal repayments as well. For e. This is a fact attested to by several studies. say the bond is issued at Rs 100 on June 1.

stocks carry significant risk. In addition to the asset classes we have outlined.Busting inflation (Growth indicates avg. Equally evident is the narrow gap between inflation and peer asset classes . For those who wish to minimize this risk. especially if one is attempting to build his/her own portfolio of stocks. investment avenues to outpace inflation. but effective. Graph sourced from HDFC Mutual Fund) The yawning void between inflation and investment in equities is evident from the above graph. diversified equity funds are an option.fixed deposits and gold. However. there are some other unconventional. growth rate over a 15-Yr time frame. Commodities The key factors that determine the price of a commodity like gold for example (mine output for one) are different from factors that impact the value of other M P Birla Institute of Management .

We do not suggest that they will most certainly do well. An alternative can be real estate mutual funds. Moreover.investments like shares and bonds. Fortunately for you. which are quite popular in international markets. gold can now be deposited with institutions like the State Bank of India. Investing in a commodity takes care of the risk arising due to erosion in value of the currency (since most currencies are priced in terms of US Dollars). If SEBI and AMFI have their way. So while inflation is a concern there is no need for you to be a sitting duck every time it rears its head. this could become a reality in the Indian context. investors do find them holding up well against the sharply eroding currency value. even an under-developed financial market like India offers you enough interesting and rewarding opportunities to make inflation seem like just another day at the office. but in inflationary times. it will nevertheless take care of storage costs etc. Property Property is again a preferred investment avenue as in such times prices tend to rise upwards in line with the increase in cost of construction. While this will earn you a very marginal interest. M P Birla Institute of Management . Investing in commodities therefore helps in diversifying the risk element in your portfolio. The only deterrent here is that the minimum amount you need to invest here is substantial and beyond the reach of most investors.

M P Birla Institute of Management .

While comparing the changes in the inflation rate with the changes in the BSE SENSEX values.00021 M P Birla Institute of Management .392% effect on the BSE SENSEX values. which is quite minute. 2) ACC Share price: Correlation coefficient (r) = -0. Therefore we can interpret that changes in inflation rate have only 0. we get a correlation of 0.00392.0626117 From the above table. Now r2 * 100 = 0.392% . r2 = 0.0626117.Effect of Inflation: high-low Monthly inflaton 9 8 7 inflation in % 6 5 4 3 2 1 0 march April may june july august september october november december January February March April May June July August September October November December January February March April May June July August September October November December January February High Low 2002 2003 Month/year 2004 2005 1)Effect of Changes in Inflation rate on BSE SENSEX Values: Correlation coefficient (r) = 0.

while comparing the changes in the inflation rate with the changes in the Bajaj Auto’s Share price get a correlation of 0. Therefore we can interpret that changes in inflation rate have only 0.0000044%. M P Birla Institute of Management . Therefore from the above.From the above table.699% . r2 = 0.52%. r2 = 0. Now r2 * 100 = 0. while comparing the changes in the inflation rate with the changes in the ACC’s Share price.699% effect on the Bajaj Auto’s Share price .52% . 4) Bharti Tele Share price: Correlation coefficient (r) = 0. 3) Bajaj Auto Share price: Correlation coefficient (r) = 0.1452. we can interpret those changes in inflation rate affects the Bharti Tele’s Share price value by 14. Now r2 * 100 = 0. Now r2 * 100 = 14. while comparing the changes in the inflation rate with the changes in the Bharti Tele’s Share price.00021. we get a correlation of 0.08365. r2 = 0.000000044. we get a correlation of 0.381008 From the above table.08365 From the above table.0000044% effect on the ACC’s Share price . Therefore we can interpret that changes in inflation rate have only 0. which is quite minute.381008.00699. which is quite minute.

8033% effect on the BHEL Share price. while comparing the changes in the inflation rate with the changes in the Dr Reddy’s Share p rice.3034% effect on the Cipla Share price. Therefore we can interpret that changes in inflation rate have only 0. Now r2 * 100 = 0.01984.089626. which is quite minute. while comparing the changes in the inflation rate with the changes in the BHEL Share price.01984 From the above table. which is quite minute. Therefore we can interpret that changes in inflation rate have only 0.003034.000394.3034% .0394% effect on the Dr Reddy’s Share price . Therefore we can interpret that changes in inflation rate have only 0. we get a correlation of 0.0394% . r2 = 0. which is quite minute. 7)Dr Reddy Share price: Correlation coefficient (r) = 0. 6) Cipla Share price: Correlation coefficient (r) = 0.055085. M P Birla Institute of Management . we get a correlation of 0. r2 = 0.089626 From the above table.055085 From the above table.5) BHEL Share price: Correlation coefficient (r) = 0. r2 = 0.008033. we get a correlation of 0. while comparing the changes in the inflation rate with the changes in the Cipla Share price. Now r2 * 100 = 0. Now r2 * 100 = 0.8033% .

Therefore from the above. while comparing the changes in the inflation rate with the changes in the GACL Share price. r2 = 0. we can interpret that changes in inflation rate affects the Grasim Share price value by 8. Therefore from the above.120155 From the above table. M P Birla Institute of Management . 9) Grasim Share price: Correlation coefficient (r) = 0.05093 From the above table. 10)HDFC Bank Share price: Correlation coefficient (r) = 0.6% . Now r2 * 100 = 2. we get a correlation of 0.034%.44% .05093. r2 = 0. we get a correlation of 0. we can interpret that changes in inflation rate affects the GACL Share price value by 2. Therefore we can interpret that changes in inflation rate have only 1. we get a correlation of 0.8) GACL Share price: Correlation coefficient (r) = -0. while comparing the changes in the inflation rate with the changes in the HDFC Bank’s Share price. which is quite minute.034% . Now r2 * 100 = 8. Now r2 * 100 = 1.44% effect on the HDFC Bank’s Share price .6%.0026. while comparing the changes in the inflation rate with the changes in the Grasim Share price.28345.0144.08034. r2 = 0.120155.28345 From the above table. Negligible correlation.

r2 = 0.392% .203978. we get a correlation of 0. 12) Hindalco Share price: Correlation coefficient (r) = 0. while comparing the changes in the inflation rate with the changes in the Hero Honda Motors Share price.0416. r2 = 0. we get a correlation of 0.064153 From the above table.16%.412% effect on the HLL’s Share price .06263. Therefore we can interpret that changes in inflation rate have only 0. r2 = 0.00412. we get a correlation of -0.203978 From the above table. Negligible correlation.16%. which is quite minute. while comparing the changes in the inflation rate with the changes in the HLL’s Share price. Now r2 * 100 = 0.392% effect on the Hero Honda Motors Share price. we can interpret that the changes in inflation rate affects the Hindalco’s Share price value by 4. while comparing the changes in the inflation rate with the changes in the Hindalco’s S hare price.064153.00392. Now r2 * 100 = 4. Now r2 * 100 = 0. 13) HLL Share price: Correlation coefficient (r) = 0.412% .11) Hero Honda Motors Share price: Correlation coefficient (r) = -0. Therefore we can interpret that changes in inflation rate have only 0.06263 From the above table. Therefore from the above. which is quite minute. M P Birla Institute of Management .

01412. r2 = 0. we get a correlation of -0.067 From the above table.02813.118833. we get a correlation of 0. M P Birla Institute of Management . while comparing the changes in the inflation rate with the changes in the Infosys Technologies Share price.067.412%.412% . r2 = 0.449% . Therefore from the above. we get a correlation of 0. r2 = 0. we can interpret that changes in inflation rate affects the HPCL Share price value by 2. Therefore from the above. Now r2 * 100 = 2.813%. 15) ICICI Bank Share price: Correlation coefficient (r) = 0.118833 From the above table. while comparing the changes in the inflation rate with the changes in the ICICI Bank’s Share price.14) HPCL Share price: Correlation coefficient (r) = 0.167722.813% . while comparing the changes in the inflation rate with the changes in the HPCL Share price.00449. 16) Infosys Technologies Share price: Correlation coefficient (r) = -0. Now r2 * 100 = 1. Now r2 * 100 = 0.167722 From the above table. we can interpret those changes in inflation rate affects the ICICI Bank’s Share price value by 1.

To illustrate.048375 From the above table.594%.234% . r2 = 0.Therefore we can interpret that changes in inflation rate have only 0.189582 From the above table.234% effect on the MarutiUdyog Share price. we get a correlation of -0. 17) ITC Share price: Correlation coefficient (r) = -0. Therefore we can interpret that changes in inflation rate have only 0.412%. To illustrate. 19) Maruti Udyog Share price: Correlation coefficient (r) = 0. we get a correlation of 0. we can interpret those changes in inflation rate affects the ICICI Bank’s Share price value by 1. 18) L&T Share price: Correlation coefficient (r) = 0.189582.594% . if inflation increases. r2 = 0.01299. r2 = 0.11398 From the above table. we can interpret that changes in inflation rate affects the L&T Share price value by 3.449% effect on the Infosys Technologies Share price. Now r2 * 100 = 0.03594. Therefore from the above. which is quite minute. Therefore from the above. Now r2 * 100 = 1. then the L&T Share price would increase by 3.048375. while comparing the changes in the inflation rate with the changes in the ITC’s Share price. while comparing the changes in the inflation rate with the changes in the MarutiUdyog Share price. we get a correlation of 0.412%. if inflation increases.299% .594%. Now r2 * 100 = 3.11398.00234. while comparing the changes in the inflation rate with the changes in the L&T Share price. M P Birla Institute of Management . which is quite minute. then the ICICI Bank’s Share price would decrease by 1.

Therefore we can interpret that changes in inflation rate have only 0.09502 From the above table.005863.013216.076568 From the above table.000175. Now r2 * 100 = 0. Therefore we can interpret that changes in inflation rate have only 0. while comparing the changes in the inflation rate with the changes in the Ranbaxy share price. r2 = 0. M P Birla Institute of Management . while comparing the changes in the inflation rate with the changes in the RIL Share price.5863% effect on the RIL Share price.903% effect on the REL Share price. r2 = 0. which is quite minute.0175% effect on the Ranbaxy share price.076568. which is quite minute. we get a correlation of 0. Now r2 * 100 = 0.09502. r2 = 0. we get a correlation of -0. we get a correlation of 0. while comparing the changes in the inflation rate with the changes in the REL Share price. which is quite minute 21) RELShare price: Correlation coefficient (r) = -0.5863% .903% .00903. Therefore we can interpret that changes in inflation rate have only 0. 22) RIL Share price: Correlation coefficient (r) = 0.0175% . Now r2 * 100 = 0.20)Ranbaxy Share price: Correlation coefficient (r) = 0.013216 From the above table.

r2 = 0. which is quite minute. Negligible correlation.3022% effect on the Satyam Share price. Now r2 * 100 = 3. Therefore from the above. we get a correlation of 0. while comparing the changes in the inflation rate with the changes in the SBI Share price.0215.23) Satyam Share price: Correlation coefficient (r) = 0.0215 From the above table.3022% .088% .0004622.088%.04622% . Therefore we can interpret that changes in inflation rate have only 0. which is quite minute.03088. r2 = 0. 25) TATA Motors Share price: Correlation coefficient (r) = -0. Therefore we can interpret that changes in inflation rate have only 0. 26) TATA Power Share price: M P Birla Institute of Management . we can interpret that changes in inflation rate affects the SBI Share price value by 3. Now r2 * 100 = 0. while comparing the changes in the inflation rate with the changes in the Satyam Share price. while comparing the changes in the inflation rate with the changes in the TATA Motors Share price.04622% effect on the TATA Motors Share price.003022. Now r2 * 100 = 0. we get a correlation of 0. 24) SBI Share price: Correlation coefficient (r) = 0. we get a correlation of 0.054975.054975 From the above table. r2 = 0.175731.175731 From the above table.

Correlation coefficient (r) = 0.777%. r2 = 0. we get a correlation of 0. M P Birla Institute of Management .218562 From the above table.04777.185%.777% . Now r2 * 100 = 3.1556% . Now r2 * 100 = 0.001556. Therefore from the above. we get a correlation of 0.03945 From the above table.178484 From the above table. Therefore from the above. While comparing the changes in the inflation rate with the changes in the Wipro Ltd Share price. While comparing the changes in the inflation rate with the changes in the TISCO Share price.03185. we can interpret that changes in inflation rate affects the TATA Power Share price value by 4. r2 = 0.218562. 28) Wipro ltd Share price: Correlation coefficient (r) = 0. 27) TISCO Share price: Correlation coefficient (r) = -0. we get a correlation of 0. which is quite minute. r2 = 0.178484. Therefore we can interpret that changes in inflation rate have only 0.185% .03945. Now r2 * 100 = 4.1556% effect on the TISCO Share price. we can interpret that changes in inflation rate affects the Wipro Ltd Share price value by 3. while comparing the changes in the inflation rate with the changes in the TATA Power Share price.

4816% effect on the ZEE TeleFilm Share price. Therefore we can interpret that changes in inflation rate have only 0.0694.004816. we get a correlation of 0.0019122.29) ONGC share price: Correlation coefficient (r) = 0. M P Birla Institute of Management . which is quite minute. While comparing the changes in the inflation rate with the changes in the ONGC Share price. r2 = 0. While comparing the changes in the inflation rate with the changes in the ZEE TeleFilm Share price.043729 From the above table.19122% effect on the ONGC Share price. 30) ZEE TeleFilm Share price: Correlation coefficient (r) = -0. Now r2 * 100 = 0. we get a correlation of 0. which is quite minute.19122% . r2 = 0. Therefore we can interpret that changes in inflation rate have only 0.043729.0694 From the above table.4816% . Now r2 * 100 = 0.

06 in March 2002 to 43.dollar is not acceptable means of payment in many other countries.S.S. The trading of currencies takes place in foreign exchange market whose primary function is to facilitate international trade and investment Graph showing movement of Re-$ Exchange rate: rupee high-low in last 36 months 50 49 48 47 46 re/$ 45 44 43 42 41 40 M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F 2003 month/year 2004 2005 high low The above graph shows the movement of Re-$ from March 2002 to February 2005.Exports of goods and services by the U.4 in February 2005. now total more than 10% of the GDP. Currencies must be bought and sold because the U.Analysis of the influence of Re-$ exchange rate on share price: The volume of international transactions has grown enormously over the past 50 years . Re has strengthened from 49. M P Birla Institute of Management .

2) ACCShare price: Correlation coefficient (r) = 0.42681 From the above table.001581 From the above table. Therefore we can interpret that the change in Re-$ exchange rate have only 0.42681. we get a correlation of 0. 4) Bharti Tele Share Price: M P Birla Institute of Management .226 % . 3) Bajaj Auto Share price: Correlation coefficient (r) = -0. we get a correlation of 0. While comparing the changes in the Re-$ exchange rate with the changes Bajaj Auto’s Share price . we can interpret that the changes in Re-$ exchange rate affects the ACC share price value negligibly. Therefore from the above.319779.22 % . Now r2 * 100 = 0. While comparing the changes in the Re-$ exchange rate with the changes in the BSE SENSEX values. Negligible correlation. we get a correlation of 0.0000025.00025 % effect on the BSE SENSEX values. Now r2 * 100 = 18.Re-$ Exchange Rate: 1) Effect of Changes in Re-$ Exchange Rate on BSE SENSEX Values: Correlation coefficient (r) = 0. r2 = 0. which is quite minute.001581. While comparing the changes in the Re-$ exchange rate with the changes in the BSE SENSEX values.1822.10226.00025 % .319779 From the above table. r2 = 0. Now r2 * 100 = 10. r2 = 0.

Now r2 * 100 = 0. Negligible correlation. While comparing the changes in the Re-$ exchange rate with the changes in the BHEL Share price.025112.913 % . which is quite minute. Therefore from the above. To illustrate. r2 = 0. Therefore from the above.26874. we can interpret those changes in Re-$ exchange rate affects the BHEL share price value by 7. we get a correlation of 0.22 % .0722.Correlation coefficient (r) = -0.913%. Therefore we can interpret those changes in Re-$ exchange rate has only 0.000631.26874 From the above table.13832 From the above table. if the Re strengthens against the dollar. While comparing the changes in the Re-$ exchange rate with the changes in the BSE SENSEX values. 5)BHEL Share price: Correlation coefficient (r) = 0. r2 =0. Now r2 * 100 = 1.025112 From the above table.01913. While comparing the changes in the Re-$ exchange rate with the changes in the BSE SENSEX values. we get a correlation of 0.22 %. we can interpret those changes in Re-$ exchange rate affects the Bharti Tele’s share price value by 1. M P Birla Institute of Management .22% 6) Cipla Share price: Correlation coefficient (r) = 0.0631% effects on the Cipla Share price.0631% .13832. r2 = 0. then the BHEL share price would increase by 7. we get a correlation of 0. Now r2 * 100 =7.

r2 = 0. 8) Grasim Share price: Correlation coefficient (r) = 0.0159.7) Dr. Therefore from the above. we get a correlation of 0.20533. r2 = 0.126081 From the above table.103485.71 %. Reddy Share price: Correlation coefficient (r) = 0. r2 = 0.20533 From the above table. Therefore from the above. Now r2 * 100 = 10. While comparing the changes in the Re-$ exchange rate with the changes in the HDFC Ltd Share price. Now r2 * 100 = 4.126081.1071. we can interpret those changes in Re-$ exchange rate affects the Grasim’s share price value by 10.0422. Now r2 * 100 = 1.22 % .59% . While comparing the changes in the Re-$ exchange rate with the changes in the Grasim Share price.59%. While comparing the changes in the Re-$ exchange rate with the changes in the BSE SENSEX values. M P Birla Institute of Management .103485 From the above table. we get a correlation of 0. we get a correlation of 0. 9)HDFC Ltd Share price: Correlation coefficient (r) = -0.71 % . we can interpret those changes in Re-$ exchange rate affects the Dr Reddy’s share price value by 1.

we get a correlation of 0.13852 From the above table. we can interpret that changes in Re-$ exchange rate affects the Hero Honda Motor’s share price value by 1. which is quite minute. 10) Hero Honda Motor Share price: Correlation coefficient (r) = -0. Therefore from the above. 11) Hindalco Share price: Correlation coefficient (r) = -0. r2 = 0. we can interpret those changes in Re-$ exchange rate affects the HDFC Ltd Share price value by 4. While comparing the changes in the Re-$ exchange rate with the changes in the Hero Honda Motor’s share price.017593 M P Birla Institute of Management .00084. While comparing the changes in the Re-$ exchange rate with the changes in the Hindalco’s share price. we get a correlation of -0.22 %.084 % .0199. To illustrate.084 % effect on the Hindalco’s share price. then the HDFC Ltd Share price would decrease by 4. Now r2 * 100 = 1. if the Re strengthens against the dollar.02895.99 % . Now r2 * 100 = 0.Therefore from the above.02895 From the above table. 12) HLL Share price: Correlation coefficient (r) = 0. r2 = 0. Therefore we can interpret those changes in Re-$ exchange rate has only 0.22 %.13852.99.

r2 = 0. then the HPCL Share price would increase by 6.00031. Now r2 * 100 = 0.From the above table. While comparing the changes in the Re-$ exchange rate with the changes in the HLL’s Share price. While comparing the changes in the Re-$ exchange rate with the changes in the ICICI Bank Share price.51 % . Therefore we can interpret those changes in Re-$ exchange rate has only 0. we get a correlation of 0.139 % .247765. r2 = 0. if the Re strengthens against the dollar. Therefore we can interpret those changes in Re-$ exchange rates have only 0. M P Birla Institute of Management .139 % 14) ICICI Bank Share price: Correlation coefficient (r) = -0. which is quite minute. 13) HPCL Share price: Correlation coefficient (r) = 0. which is quite minute. r2 = 0. While comparing the changes in the Re-$ exchange rate with the changes in the HPCL Share price. Now r2 * 100 = 0.031 % effect on the HLL’s Share price . Therefore from the above.017593. we can interpret that changes in Re-$ exchange rate affects the HPCL Share price value by 6.0051.031 % .0712.51 % effect on the ICICI Bank Share price.06139 Now r2 * 100 = 6.To illustrate. we get a correlation of 0. we get a correlation of -0.139 % .0712 From the above table.247765 From the above table.

To illustrate. Now r2 * 100 = 0. r2 = 0. we get a correlation of -0.874%.097% effect on the ITC’s Share price. which is quite minute.874% . we can interpret that changes in Re-$ exchange rate affects the L&T Share price value by 14.068%. Therefore from the above.874% 16) ITC Share price: Correlation coefficient (r) = 0.068% .26218. if the Re strengthens against the dollar. we get a correlation of 0. Now r2 * 100 = 6. M P Birla Institute of Management .To illustrate.031124 From the above table. we get a correlation of 0. r2 =0.097% . we can interpret that changes in Re-$ exchange rate affects the Infosys Technologies share price value by 6.375067 From the above table. r2 = 0. then the Infosys Technologies share price would decrease by 6.00097. While comparing the changes in the Re-$ exchange rate with the changes in the L&T Share price.15)Infosys Technologies Share price: Correlation coefficient (r) = -0.26218 From the above table.06874. 17) L&T Share price: Correlation coefficient (r) = 0.375067. Now r2 * 100 = 14. Therefore we can interpret that changes in Re-$ exchange rate have only 0.14068. While comparing the changes in the Re-$ exchange rate with the changes in the ITC’s Share price.031124. Therefore from the above. While comparing the changes in the Re-$ exchange rate with the changes in the Infosys Technologies share price.

Therefore from the above. we get a correlation of 0. While comparing the changes in the Re-$ exchange rate with the changes in the ONGC Share price.186 %. r2 = 0. we get a correlation of 0.38% . we get a correlation of 0. While comparing the changes in the Re-$ exchange rate with the changes in the Ranbaxy Share price.088% .511726.068% 18)Maruti Udyog Share price: Correlation coefficient (r) = 0. then the L&T Share price would increase by 14.029608 From the above table. 19) ONGC Share price: Correlation coefficient (r) = 0. 20) Ranbaxy Share price: Correlation coefficient (r) = -0. r2 = 0.186 % . r2 = 0.088% effect on the MarutiUdyog Share price. which is quite minute. Therefore we can interpret that changes in Re-$ exchange rate have only 0.26186.511726 From the above table.0038.if the Re strengthens against the dollar. M P Birla Institute of Management . we can interpret those changes in Re-$ exchange rate affects the ONGC Share price value by 26. Now r2 * 100 = 26.06164 From the above table. Now r2 * 100 = 0.00088. Now r2 * 100 = 0. While comparing the changes in the Re-$ exchange rate with the changes in the MarutiUdyog Share price.06164.029608.

36477 From the above table. we can interpret those changes in Re-$ exchange rate affects the RIL Share price value by 2. while comparing the changes in the Re-$ exchange rate with the changes in the REL Share price. Now r2 * 100 = 2.18013 From the above table. 23) Satyam Share price: Correlation coefficient (r) = -0.186572. r2 = 0.186572 From the above table. we get a correlation of 0.38% effect on the Ranbaxy Share price.245%.31 %.35% . Now r2 * 100 = 13. we can interpret those changes in Re-$ exchange rate affects the REL Share price value by 13.35%. 22) RIL Share price: Correlation coefficient (r) = 0. M P Birla Institute of Management . Therefore from the above.18013. Now r2 * 100 = 3. which is quite minute. While comparing the changes in the Re-$ exchange rate with the changes in the Satyam Share price.Therefore we can interpret those changes in Re-$ exchange rate have only 0. While comparing the changes in the Re-$ exchange rate with the changes in the RIL Share price. we get a correlation of 0. we can interpret those changes in Re-$ exchange rate affects the Satyam’s Share price value by 3.245% .36477.0235.1331. r2 = 0.31 % . r2 = 0.03245. 21) REL Share price: Correlation coefficient (r) = -0. Therefore from the above. we get a correlation of 0. Therefore from the above.

26) TATA Power Share price: Correlation coefficient (r) = 0. While comparing the changes in the Re-$ exchange rate with the changes in the BSE SENSEX values. r2 = 0. we get a correlation of 0.0115% effect on the SBI Share price.24) SBI Share price: Correlation coefficient (r) = -0.0115 % .674% . 25) TATA Motors Share price: Correlation coefficient (r) = 0. Therefore we can interpret that changes in Re-$ exchange rate have only 0. we get a correlation of 0.674%. While comparing the changes in the Re-$ exchange rate with the changes in the TATA Motors Share price. Now r2 * 100 = 0. Now r2 * 100 = 28. r2 = 0.535483 From the above table. Therefore from the above.271% .535483.112718.28674. which is quite minute. we can interpret those changes in Re-$ exchange rate affects the TATA Motors Share price value by 1. M P Birla Institute of Management . Now r2 * 100 = 1.000115. Therefore from the above.01073 From the above table.271%. r2 =0.112718 From the above table.01073. we get a correlation of 0.01271. we can interpret those changes in Re-$ exchange rate affects the TATA Power Share price value by 28. While comparing the changes in the Re-$ exchange rate with the changes in the SBI Share price.

768 %.08768.768 %. Therefore from the above.296115.27) TISCO Share Price: Correlation coefficient (r) = 0. Now r2 * 100 = 8. To illustrate.00521. we can interpret that changes in Re-$ exchange rate affects the TISCO Share price value by 8. r2 = 0.296115 From the above table. Therefore we can interpret that changes in Re-$ exchange rate have only 0.768 % .521% .3436 M P Birla Institute of Management .07215 From the above table.521% effect on the Wipro share price. Now r2 * 100 = 0. if the Re strengthens against the dollar. While comparing the changes in the Re-$ exchange rate with the changes in the Wipro Share price. 28) Wipro Share price: Correlation coefficient (r) = -0. we get a correlation of 0. r2 = 0.07215. 29) ZEE TeleFilm Share price: Correlation coefficient (r) = -0. While comparing the changes in the Re-$ exchange rate with the changes in the TISCO Share price. then the TISCO Share price would increase by 8. we get a correlation of 0. which is quite minute.

if the Re strengthens against the dollar. Therefore from the above.81%. then the ZEE TeleFilm Share price would decrease by 11.81%.81% . While comparing the changes in the Re-$ exchange rate with the changes in the ZEE TeleFilm Share price.From the above table. we get a correlation of -0. Now r2 * 100 = 11. To illustrate.3436. r2 = 0. we can interpret that changes in Re-$ exchange rate affects the ZEE TeleFilm Share price value by 11.1181. M P Birla Institute of Management .

041 R Standard error of estimate 3.error 1.Hypothesis Testing 1) Financial Institutional Investors Adjusted square .829 4.771 t significance R .efficients Unstandardized Coefficients Model 1 (Constant) % change B 7.960 Predictors: (Constant).128 t significance a Dependent Variable: % change Result: t.131 .error .218 . They affect the share prices positively.004 Adjusted square -.133 .449E-02 Std.009 .09910336 Model 1 R .108 .895 .980 Standardized Coefficients Beta 5.980 R square .099 4.is significant in case of FII.62882 a Dependent Variable: % change M P Birla Institute of Management .924 .910E-02 3. % change Model 1 T-Test Co. 2) Inflation Predictors: (Constant).063 R square .744 . % change T-Test Co.921 R Standard error of estimate 2.efficients Unstandardized Coefficients Model 1 (Constant) % change B -9.294 .843E-02 Std.063 Standardized Coefficients Beta -.

000 Adjusted square -.122 .efficients Unstandardized Coefficients Model 1 (Constant) % change B -0343 2.002 Standardized Coefficients Beta -1.3) Exchange rate Model 1 R . % change T-Test Co.735E-03 Std.03620 Predictors: (Constant).002 R square .994 t significance Results: In the above two cases they are insignificant and have negligible influence on share prices M P Birla Institute of Management .213 .045 R Standard error of estimate 1.369 .error .007 .608 .

4)The internal domestic economy is stable and consistent. TATA Power. and ZEE Tele Films are affected positively or negatively more than 10% of Correlation of Determination (R2). 3) Effect of changes of FII Flow in share market and its influence on BSE SENSEX value is very affective. INFOSYS. REL. Affect on other Scrips is Negligible. 5) Incase of foreign exchange markets. It is interesting that only scrip of SENSEX that is BHARATI TELE is affected more than 10% of Correlation of Determination (R2). GRASIM. Affect on other Scrips is Negligible. BAJAJ. Its affects on almost all scrips of SENSEX are very high. Even Hypothesis calculated in this purpose explains that rupee -$ exchange rates don’t affect BSE SENSEX 2) Effect of changes of Inflation rate on BSE SENSEX value is very minute. L&T. they are relatively consistent and do not make much impact on Indian stock market. It is interesting that few scrips of SENSEX like ACC.FINDINGS: 1) Effect of changes of Rupee-$ exchange rate on BSE SENSEX value is very minute. ONGC. So we can say that Rupee-$ Exchange rate hardly effects SENSEX. M P Birla Institute of Management . So we can say that Inflation rate hardly affects SENSEX.

6) Since the rupee is relatively cheaper there is no organic link between India stock market and stock market elsewhere. M P Birla Institute of Management .

FIIs are more attracted for investing' (they buy heavily). When FII s are net buyers. September 11 attack on WTC. On the other hand heavy selling by FIIs brings down the market capitalization by reduced trading volume and/or share prices. The study found causation from FII net inflow to market capitalization of BSE as well as from BSE to FII net inflows as was found by Chakrabarti (2001) and Kumar(200l) using different methodology. There is evidence of causality from BSE market capitalization and NSE market capitalization to net FII investment. M P Birla Institute of Management . inflation and foreign exchange and Stock market. The study infers that when market capitalization (the product of total trading volumes and prices of shares) is high. consequent upon several changes affecting the Indian economy. like the technology slowdown. we tried to capture the cause effect nature of FII. The reverse happens (FI Is sell heavily) when market capitalization is low. inflation and foreign exchange and the Indian stock market represented by market capitalization of BSE.Based on the analysis and interpretations we can conclude that: The present study examines the causal relationship between Net FII investments. While there is causation from current month. prices and trading volume both go up thereby increasing the market capitalization. By using monthly data from Feb 2002 to Feb 2005. two month and three month lag market capitalization of both BSE and NSE. During the past three years there have been several ups and downs in the Indian stock market and Foreign portfolio investment patterns. We have also found significant impact of net investment on market capitalization or Indian stock exchanges. Ketan Parekh scam. There have been attempts to find the determinants and impacts of FII investment in India. to name a few. no causation was found from the one month lag values to net FII investment. However. it is found that the current month's FII investment pattern has a significant impact on the current month's NSE and BSE market capitalization but past investment by FIIs does not have any significant impact.

2) Rupee-$ Exchange rate and Inflation Rate don’t affect share prices.Based on the Findings we can recommend that 1) It is recommend that since the FII have a considerable positive affect on share prices the government should encourage their investment which in turn boosts the economy. So this factors need not to be considers while making any investment in shares. M P Birla Institute of Management . So close examination of the FII investments should be tracked while making investments. 3) FII affects the share market the most. 4) If FII starts selling shares it is better to exit and vice versa. more investment into the market can be entertained.

-Munmum Mohanthy d) Causal Relationship between Foreign Institutional Investment and Indian Stock Market .com www.karvy.Manisha Joshi and Chiranjit Mukhopadhyay c) Stock market reaction of announcement of policy changes.com www.SubarnaDey and Bishnupriya Mishra e) Key determinants of stock prices in India.nseindia.bseindia. -Subir Sen and Rajkumar Ray f) Security analysis and portfolio management (Module I to X) Websites • • • • • • • www.com www. Y V Reddy b) FII Inflows to India: Their Effect on Stock Market Liquidity and Volatility .domain-b.com www.com .com www.investopedia.indiainfoline.moneycontrol.com www.Indian Evidence -Golaka C Nath and Dr.IGNOU National dailies • Business Lines M P Birla Institute of Management .BIBLIOGRAPHY 1) ICFAI journal of Applied Finance Articlesa) Macroeconomic Indicators and Stock Prices .

• Business Standard Economic Time M P Birla Institute of Management .

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