A Research Report
On
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, BANGALORE560001
June 2005
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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
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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 PREVEEN N.P
Reg. No:03XQCM6074
Date: 17062005
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Research on the volatility of Indian Share Market w.r.t to economic factors: A
Review
Contents
Introduction, Scope and Methodology of the Review Process
o Introduction 2
o Problem Statement 4
o Theoretical Framework 5
o Review of literature 7
o Research Methodology 11
o Conceptual Definitions 13
o Criteria for selection and review of SENSEX constituents 15
Review of Research in Various Fields
o FII Inflows to India: Their Effect on Stock Market Liquidity
and Volatility. 17
o Inflation rate and its Effect on sock market Liquidity
and volatility. 26
o Foreign Exchange rate and its Effect on stock market
liquidity and volatility. 43
o Calculations of correlation coefficients between the
share prices of each companies and the economic factors
o Testing for Hypothesis 54
Findings 56
Conclusion 57
o In Conclusion
References 59
o Bibliography
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Abstract
This research is done in the field of Indian share markets taking into
account only three years data from Feb. 2002 to Feb 2005. The research includes
how the share prices of various selected companies vary w.r.t. to economic
factors. The research work includes the collection of data regarding the share
prices of the selected companies during the past three years and the SENSEX.
Simultaneously, I have searched through various Indian journals in our library,
located books listed in the library catalogue and traced through the list of
references provided in various research works. The main objective is to study how
share prices vary w.r.t economic factors and to enable the investors in exploring
the investment opportunities using the economic indicators.
Moreover, a large number of works are merely descriptive or prescriptive without
rigorous analysis. Certain areas such as arbitrage pricing theory, option pricing
theory, agency theory, and signaling theory are virtually unrehearsed in the Indian
context. Besides, very little theoretical work has been done by researchers in
India. However, with improved availability of databases and computing resources,
and with increasing global interest in Indian markets, we expect an explosion of
work in the near future.
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INTRODUCTION
Macroeconomic Indicators and Stock Prices  Indian Evidence
This paper attempts to study the relationship of stock returns with
macroeconomic variables in Indian context. The data consists of 36 months
from feb2002 to feb2005 comprising of three macro indicators. We have
considered 3 macro variables for the study: Exchange Rate, inflation rate, FII.
Background:
It is widely believed that stock market is related to macroeconomic fundamentals
of an economy, as companies that are listed for trading in stock exchanges are the
ones who contribute significantly to the economy's growth. The notion that
macroeconomic factors can drive the movement of stock prices is now widely
accepted. However, 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. 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, 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 longterm 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.
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
visàvis risk is high. The ongoing integration of international capital markets and
the repeated occurrence of large financial crises have raised the concern about the
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topic beyond academic circles.
The cointegration 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.
.
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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 fastgrowing 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. To study how share prices fluctuate w.r.t economic factors
2. 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.
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Theoretical Framework
Volatility: Definition and Measurement
In pure financial terms, volatility is defined as, 'the degree to which the priceof a
security, commodity, or market rises or falls within a shortterm 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, coefficient 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
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measured by a GARCH (1, 1) model. The, GARCH measure of volatility,
developed by Bollerslev (1989), is widely used to measure conditional volatility
i.e., volatility that is conditional upon variables other than the variable being
measured. 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.
The less known, but important measure of volatility is 'implied volatility'. 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. Arbitrageurs have used this fact to profit by
determining whether a security is improperly priced relative to its derivative
(Mullins, 2000).
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Review of Literature
In an early study, 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. Chen, Roll and Ross (1986) found that
economic variables like industrial production index, change in risk premium and
inflation have a systematic influence on stock return and showed the existence of a
long run equilibrium relationship. However, they also found that oil prices and
consumption did not have significant effect on stock prices. In another study,
Mukherjee and Naka (1995) found that Jam\pese stock prices are linked to money
supply, inflation, real economic activity, longterm government bond rate,
exchange rate and interest rate. In another study, Naka, Mukherjee and Tufte
(1999) found that in Indian market, industrial production is the largest determinant
of stock prices while inflation is the largest negative determinant. Lee (1992)
showed a positive Ii relationship between stock returns and the real economy in
US. Gjerde and Saettem , (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. Asian markets have been
studied by Fung and Lie (1990), Leigh (1997), Granger, Huang and Yang (1998),
Kwon and Shin (1999), Maysami and Koh(2000). In a study by Nath and Samanta,
(2003a), 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. In another study, 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 ARframework empirical
results do not point much impressive causal relationship between returns except in
some specific years. However, they found using Geweke's feedback measures
strong bidirectional as well as contemporaneous causal relationship between these
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markets.
From the existing literature, the linkage between macroeconomic variables and
stock prices have been established for major markets like US, Japan while for
other markets the same cannot be said for certainty.
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.
Paper Summary:
This paper relates that stock market declines have a wideranging effect on many
sectors of the economy; therefore, the health of the stock market is seen as an
indicator of the general economic health. The author points out that drops in the
stock market often translate into decreased net worth for both households and
businesses, thereby, decreasing consumer spending and confidence, which
damages the economy. The paper concludes that one of a number of solutions
proposed to help stimulate the US economy includes tax rate cuts.
From the Paper:
"Certainly, the stock market is only one of the factors that can impact the
economy. 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. Importantly, given America’s recent actions in Iraq, war can have a
significant economic impact as well. Economist Robert Genetski notes that there
are several important caveats on war's impact on the economy. He notes that
markets often soar in anticipation of a quick victory, but that if the "battle was to
be prolonged; any market rally would be quashed. This prediction bodes poorly
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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; the stock market has on the U.S. economy. It looks
at the effects of a declining stock market and a rising stock market. Also discussed
are to what extent the economy effects the stock market and how much the two are
intertwined. The paper also includes opinions and analyses from different experts
in economics, which help explain the relationship between the stock market and
the economy.
From the Paper:
Recent declines in the stock market have had a detrimental impact the economy
both in the United States and abroad. The stock market and the economy are
deeply intertwined. As such, stock market declines have a wideranging effect
on many sectors of the economy. Importantly, the health of the stock market is
seen as an indicator of the general economic health. Thus, any decline in the
stock market is often seen as a negative prediction for the economy. Drops in
the stock market often translate into decreased net worth for both households
and businesses, and thereby decrease consumer spending and confidence,
resulting damage to the economy."
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Paper 3: An analysis of free market economies as opposed to controlled
economies
Abstract
This paper discusses the concept of free market economies. The paper contends
that most economists argue that free market economies are superior to controlled
economies because free markets are more efficient; they encourage individual
responsibility for decisions; 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, using the most efficient means
of production. The paper explains that controlled economies, contrastingly, 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, forces the competitors to enhance the
efficiency of their production process, and drives the inefficient producers out of
the market. Another important feature of a free market economy is that income is
distributed largely through the operation of markets.
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Research Methodology:
Secondary Data:
Data collected was of BSESENSEX for the period From Feb 2002 to Feb.
2005 . The data would be collected from websites like “domainb.com”,
“economictimes.com”, bseindia.com”, Business newspaper, and journals.
Tools:
Tool to be used is correlation analysis using coefficient of determination
and Ttest for hypothesis testing .
The Reason for choosing BSESENSEX comprising of 30 scrips from a
specified and nonspecified list, is because the index has established a place
amongst investors, chartists, technical analysts of the market, the newspapers and
all other concerned with the securities market. Moreover, 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.
1) FII: Any significant flow in FIIs to the equity market in these 36 months
would be considered for the study.
2) Inflation rates any significant changes (highest and lowest interest rates) for
every three months during period.
3) Foreign exchange rates for US $/ Re would be considered as majority of
Foreign exchange transaction takes place in US $. Any significant changes
(highest and lowest interest rates) for every three months during period.
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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.
Limitation of the study:
1. The study is restricted to BSE 30.
2. Only three years1st March 2002 to 28th Feb 2005 data will be taken
for the study.
3. Only Economic factors will be considered.
4. Due to time & resource constraints only four economic factors like
Government policies, Interest rates, Inflation rate and foreign
Exchange rates will be considered.
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Operational Definitions:
1) Wealth management:
Wealth management can be defined as a professional service, which is the
combination of financial/investment advice, accounting/tax services, and
legal/estate planning for a fee. In general, wealth management is more than just
investment advice as it can encompass all parts of a person's financial life.
The main function of wealth management includes maximizing the
Return on Investment (ROI) involved in various investments with minimum risks
to the investor.
2) High P/E:
P/E can be defined as a valuation ratio of a company's current share price
compared to its pershare earnings.
Calculated as:
P/E shows how much investors are willing to pay per rupee of earnings.
In general, a high P/E means high projected earnings in the future.
However, the P/E ratio actually doesn't tell us a whole lot by itself. It's usually
only useful to compare the P/E ratios of companies in the same industry, or to the
market in general, or against the company's own historical P/E.
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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.
An investment in the equity of any company is likely to be most profitable if the
economy is strong and prosperous. So, the expectation of the growth of the
economy is favorable for the stock market. 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. This process will also help to
point out industries and companies that should be avoided because they appear to
offer less attractive opportunities. As a principle, a strong and stable economy with
real growth is favorable for investment.
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Graph showing the SENSEX movement:
Sensex movement
8,000.00
7,000.00
6,000.00
month end close
5,000.00
4,000.00 Close
3,000.00
2,000.00
1,000.00
0.00
Au 2
Au 3
Au 04
M 2
M 3
M 4
05
No 2
No 3
No 4
Fe 2
Fe 3
Fe 4
0
0
0
0
0
0
v0
v0
v0

b
b
b
b
g
g
g
ay
ay
ay
Fe
month/year
The above graph shows the movement of SENSEX from February 2002 to
February 2005.As shown in the graph SENSEX has moved from 3562.31 in
February 2002 to 6713.86 in February 2005.
Criteria for Selection and Review of SENSEX Constituents
The scrip selection and review policy for BSE Indices is based on the objective of;
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• Improvement
• Transparency
• Simplicity
• QualificationCriteria:
The general guidelines for selection of constituent scrips in SENSEX are as
follows
• A. Quantitative Criteria:
1. Final Rank: The scrip should figure in the top 100 companies listed by Final
Rank. The final rank is arrived at by assigning 75% weight age to the rank on
the basis of sixmonth average full market capitalization and 25% weight age
to the liquidity rank based on sixmonth average daily turnover & sixmonth
average impact cost.
2. Trading Frequency: The scrip should have been traded on each and every
trading day for the last six months. Exceptions can be made for extreme
reasons like scrip suspension etc.
3. Market Capitalization Weightage: The weight of each scrip in SENSEX
based on sixmonth average FreeFloat market capitalization should be at least
0.5% of the Index.
4. Industry Representation: Scrip selection would take into account a balanced
representation of the listed companies in the universe of BSE. The index
companies should be leaders in their industry group.
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B. Qualitative Criteria:
Track Record:
In the opinion of the Committee, the company should have an acceptable track
record
Index Review Frequency:
The Index Committee meets every quarter to review all BSE indices. However,
every review meeting need not necessarily result in a change in the index
constituents. In case of a revision in the Index constituents, the announcement of
the incoming and outgoing scrips is made six weeks in advance of the actual
implementation of the revision of the Index.
While selecting scrip from SENSEX, only those scrips were taken for study,
which was there in SENSEX on Feb 2005, and also from the day they are included
in SENSEX from March 2002. (All the coefficient have been calculated)
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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). This paper examines two
consequencesliquidity (positive) and volatility (negative) in the past decade on
the Indian stock market(s). It finds that Foreign Institutional Investment (FII)
flows have enhanced liquidity of the Indian stock market. Stock market liquidity is
definitely higher postliberalization. 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). The paper uses EngelGranger test of cointegration to examine the
impact of FII inflows on the Indian stock markets.
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). 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. In fact, in the nineties, the stock
market boom in several emerging economies has coincided by the increase of
capital inflows to these countries (Levine, 1997). The stockmarket boom,
typically, does not last for the entire period of capital inflows. They usually start
with the initial surge in the capital inflows and end before the episode of capital
inflows completely subsides. This has been true in the emerging markets of Asia,
Latin America and Africa. However, 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). On the other hand, a
consistent stock market boom can dampen the level and rate of savings in the
country as agents move from a lowreturn deposit market to a highreturn stock
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market. Such shift in investor preference can be damaging in cases where the stock
market boom is led by capital inflows. Sudden stops or reversals in these flows
can leave the economy devoid of funds to sustain growth and development. This
has found to be true in Mexico and Argentina (Levine, 1997).
Given this fact, the consequences of such inflows on the stock market become an
important aspect of any study of capital inflows to a country. These papers briefly
examine the consequences and study two of these consequences viz., liquidity and
volatility in some depth in the case of India. This paper is divided into two
sections. Section 1 evaluates the impact of capital inflows on stock market
liquidity and Section 2 examines the impact on stock market volatility.
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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) = 0.979998
From the above table, while comparing the changes in the FII’s with the
changes in the BSE SENSEX Values, we get a correlation of 0.979998.
r2 = 0.9604, Now r2 * 100 = 96.04 %.
Therefore from the above, we can interpret that change in FII’s affects the
BSE SENSEX Values positively.96.04% of the time the predicted value is
correct.
Effect of Changes in FII’s on various companies listed below;
2) ACC Share price:
Correlation coefficient (r) = 0.762369
From the above table, while comparing the changes in the FII’s with the
changes in the ACC’s Share price, we get a correlation of 0.762369.
r2 = 0.5812, Now r2 * 100 = 58.12%.
Therefore from the above, we can interpret those changes in FII’s affects
the ACC’s Share price predicted are true by 58.12times. There is error of
around 40%.
3) Bajaj Auto Share price:
Correlation coefficient (r) = 0.725664306
From the above table, while comparing the changes in the FII’s with the
changes in the Bajaj Auto’s share price, we get a correlation of
0.725664306.
r2 = 0.5266, Now r2 * 100 = 52.66%.
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Therefore from the above, we can interpret those changes in FII’s affects
the Bajaj Auto’s share price considerably.
4) Bharti Tele Share price:
Correlation coefficient (r) = 0.868579
From the above table, while comparing the changes in the FII’s with the
changes in the Bharti Tele Share price, we get a correlation of 0.868579.
r2 = 0.75443, Now r2 * 100 = 75.443%.
Therefore from the above, we can interpret that changes in FII’s affects the
Bharti Tele share price positively.
5). BHEL Share price:
Correlation coefficient (r) = 0.992611
From the above table, while comparing the changes in the FII’s with the
changes in the BHEL Share price, we get a correlation of 0.992611.
r2 = 0.9853, Now r2 * 100 = 98.53%.
Therefore from the above, we can interpret that FII’s and B HEL share price
are almost perfectly co related
6) CIPLA Share price:
Correlation coefficient (r) = 0.070323732
From the above table, while comparing the changes in the FII’s with the
changes in the Cipla Share price, we get a correlation of 0.070323732.
r2 = 0.00495, Now r2 * 100 = 0.495%.
Therefore the two factors are almost negatively correlated.
7) Dr. Reddy Share price:
Correlation coefficient (r) = 0.973186
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From the above table, while comparing the changes in the FII’s with the
changes in the Dr Reddy’s Share price, we get a correlation of 0.973186.
r2 = 0.9471, Now r2 * 100 = 94.71% .
Therefore from the above, we can interpret that change in FII’s affects the
Dr Reddy’s share price i, e..Positively correlated.
8) Grasim Share price:
Correlation coefficient (r) = 0.713656
From the above table, while comparing the changes in the FII’s with the
changes in the Grasim Share price, we get a correlation of 0.713656.
r2 = 0.5093, Now r2 * 100 = 50.93%.
Therefore from the above, we can interpret that the change in FII’s affects
the Grasim’s share price not very much.
9) GACL Share price:
Correlation coefficient (r) = 0.999976
From the above table, while comparing the changes in the FII’s with the
changes in the Hindalco’s Share price, we get a correlation of 0.999976.
r2 = 0.999952, Now r2 * 100 = 99.9952%.
Both have a perfect correlation.
10) HLL Share price:
Correlation coefficient (r) = 0.997634
From the above table, while comparing the changes in the FII’s with the
changes in the HLL’s Share price, we get a cor relation of 0.997634.
r2 = 0.99523, Now r2 * 100 = 99.523%.
Both have a perfect correlation
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11) HPCL Share price:
Correlation coefficient (r) = 0.72273
From the above table, while comparing the changes in the FII’s with the
changes in the HPCL Share price, we get a correlation of 0.72273.
r2 = 0.52234, Now r2 * 100 = 52.234%.
Predicted value is correct only up to 52.234%
12) Infosys Technologies Share price:
Correlation coefficient (r) = 0.253972
From the above table, while comparing the changes in the FII’s with the
changes in the Infosys Technologies Share price, we get a correlation of
0.253972.
r2 = 0.0645, Now r2 * 100 = 6.45%.
Negligible correlation
13) ITC Share price:
Correlation coefficient (r) = 0.976829
From the above table, while comparing the changes in the FII’s with the
changes in the ITC’s Share price, we get a correlation of 0.976829.
r2 = 0.9542, Now r2 * 100 = 95.42%.
Error prediction is only up to 3%
14) Ranbaxy Share price:
Correlation coefficient (r) = 0.979213
From the above table, while comparing the changes in the FII’s with the
changes in the cc Share price, we get a correlation of 0.979213.
r2 = 0.95886, Now r2 * 100 = 95.886%.
Error prediction is only up to 5%
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15) REL Share price:
Correlation coefficient (r) = 0.795997
From the above table, while comparing the changes in the FII’s with the
changes in the REL Share price, we get a correlation of 0.795997.
r2 = 0.6336, Now r2 * 100 = 63.36%.
Correlated up to a certain extent
16) RIL Share price:
Correlation coefficient (r) = 0.990304
From the above table, while comparing the changes in the FII’s with the
changes in the RIL Share price, we get a correlation of 0.990304.
r2 = 0.9807, Now r2 * 100 = 98.07%.
Positively correlated.
18) SBI Share price:
Correlation coefficient (r) = 0.999297
From the above table,
While comparing the changes in the FII’s with the changes in the SBI Share
price, we get a correlation of 0.999297.
r2 = 0.9986, Now r2 *
100 = 99.86%.
Perfect correlation
19) TATA Motors Share price:
Correlation coefficient (r) = 0.348353
From the above table, while comparing the changes in the FII’s with the
changes in the TATA Motors Share price, we get a correlation of 0.348353.
r2 = 0.12135, Now r2 * 100 = 12.135%.
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Only 12% of the time the predicted value is correct
20) TISCO Share price:
Correlation coefficient (r) = 0.245828
From the above table, while comparing the changes in the FII’s with the
changes in the TISCO Share price, we get a correlation of 0.245828.
r2 = 0.060431, Now r2 * 100 = 6.0431% .
Therefore from the above, we can interpret that changes in FII’s affects the
TISCO share price by 6.0431%. To illustrate, if FII’s invest more in the
BSE, then the TISCO Share price would decrease by 6.0431%.
21) ZEE TeleFilm Share price:
Correlation coefficient (r) = 0.914935
From the above table, while comparing the changes in the FII’s with the
changes in the ZEE TeleFilm Share price, we get a correlation of 0.914935.
r2 = 0.8371, Now r2 * 100 = 83.71% .
Therefore from the above, we can interpret that change in FII’s affects the
ZEE TeleFilm share price positively.
M P Birla Institute of Management
Inflation
This was written for Business India, and was carried in its July 19, 2004 issue
with the same title.
As someone once said with a dash of humor, `Inflation is when you pay fifteen
dollars for the ten dollar haircut you used to get for five dollars when you had
hair.' But the de
nt inflation makes in your investments is far from humorous. In
fact over the longterm the `damage' is significant enough to make the most
unflappable investor sit up and take notice. First, let's understand inflation a little
better. Simply speaking, an inflationary situation is where there is `too much
money chasing too few goods'. As products/services are scarce in relation to the
money available in the hands of buyers, prices of the products/services rise to
adjust for the larger quantum of money chasing them.
Let's understand this with the help of an example. Let's assume Rs 500 fetches you
1 gram of gold. Suppose there is a shortfall in the global supply of gold. The
obvious implication is that gold prices will rise to adjust for the sustained demand
at lower supply. This may sound complicated but it's a thumb rule of demand

supply  high demand combined with limited supply leads to higher prices. Let's
say gold prices rise by 10%. The revised rate of 1 gram of gold will be Rs 550.
However, in real terms (i.e. 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 0.91 gram
of gold for Rs 500. So the value of the rupee has eroded. In other words, the same
quantum has money now fetches you fewer goods. Now you know why that
haircut does not cost the same as it did even 2 years ago!
M P Birla Institute of Management
Another important implication linked to inflation is higher interest rates. When
prices in the system are in an upward spiral due to persistent demand, the central
bank of the country aims to reduce demand in the economy by raising the cost of
money.
This could be as good a time as any what with the Wholesale Price Index (WPI)
breaching the 6% level. In his exclusive interview with Personalfn, Mr. Rakesh
Mohan (Deputy Governor  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. 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.
Nonetheless, the fact of the matter is whether you like/understand it or not, the
danger posed by inflation is real and present and as an investor you have to take
steps to safeguard your interests. You not only need to be careful about future
investments, you also need to review existing investments. In other words, you
need to bring a fresh perspective to your investments.
Riskaverse investors who traditionally shun risk and embrace the safety of
assured returns probably feel they are immune to inflation and its effects.
However, nothing could be further from the truth. If there is one class of investor
category who are completely exposed to the `menace' of inflation it's the risk
averse, bond/fixed deposit investor. As a matter of fact, the security and comfort
associated with assured return schemes comes at a price  inflation! Inflation eats
into the returns offered by assured return schemes like fixed deposits and small
savings schemes, thereby leaving investors with dismal real returns.
So how does the riskaverse investor counter this menace? There are 2 options at
his disposal.
M P Birla Institute of Management
Short term deposits and funds
Typically, in inflationary times you should not lock your money in longterm
bonds (like the RBI Bond for instance) and in fixed deposits with a longer tenure
(over 1Yr). This is because rising inflation is generally followed by rising interest
rates as explained earlier. 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'. However, fresh investors will clock a higher return on
their deposits/bonds. So when there is even a likelihood of rates on deposits/bonds
rising, choose shortterm 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.
By the same logic, shun longterm debt funds. Inflation is a damper on the price of
longer maturity bonds. These bonds are the worst hit when the debt market is in
the grip of inflation frenzy. Under inflationary conditions, bond prices fall and this
pulls down the net asset values (NAVs) of bond /gsec funds. So existing investors
see erosion in their debt fund NAVs. Again the way to counter this threat is to
stick to shortterm bond funds, which are relatively immune from the peril of
inflation.
Capital indexed bonds
These bonds compensate you for the rise in inflation (or the decline in the
purchasing power of the currency). As yet they do not have a presence in the
domestic debt market. 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.
M P Birla Institute of Management
Key features of the proposed Capital Indexed Bonds:
Offer inflationlinked returns on both the coupon rate (interest rate offered
by the instrument) and principal repayments as well. This would be
achieved by adjusting the principal amount in tune with changing inflation
rate.
Interest payments would be computed at a fixed rate on the adjusted
principal amount. For e.g. say the bond is issued at Rs 100 on June 1, 2004
with a fixed coupon of 3.00%. Six months henceforth when the first interest
payment is due, 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, the coupon rate will be
applied to this revised sum and interest payments made accordingly.
This is pretty much what the riskaverse investor has on his plate in inflationary
times. On the other hand, the risktaking investor has one more option to counter
inflation  equities.
Equities
It's no secret that no asset class evokes as much excitement as stocks/equities.
However, in our view this excitement is often misplaced. Stocks stimulate
unbridled enthusiasm and fervor for the wrong reasons. Investors take to stocks
because of their ability to clock exponential growth over a shorter time frame. For
the serious, risktaking investor stocks have a higher appeal  their ability to
effectively counter inflation and give superior real returns over the longterm vis
àvis any other asset class. This is a fact attested to by several studies.
M P Birla Institute of Management
Busting inflation
(Growth indicates avg. growth rate over a 15Yr time frame. Graph sourced
from HDFC Mutual Fund)
The yawning void between inflation and investment in equities is evident from the
above graph. Equally evident is the narrow gap between inflation and peer asset
classes  fixed deposits and gold.
However, stocks carry significant risk, especially if one is attempting to build
his/her own portfolio of stocks. For those who wish to minimize this risk,
diversified equity funds are an option.
In addition to the asset classes we have outlined, there are some other
unconventional, but effective, investment avenues to outpace inflation.
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
investments like shares and bonds. Investing in commodities therefore helps in
diversifying the risk element in your portfolio. We do not suggest that they will
most certainly do well, but in inflationary times, investors do find them holding up
well against the sharply eroding currency value. Moreover, gold can now be
deposited with institutions like the State Bank of India. While this will earn you a
very marginal interest, it will nevertheless take care of storage costs etc. 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).
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. The only deterrent here is
that the minimum amount you need to invest here is substantial and beyond the
reach of most investors. An alternative can be real estate mutual funds, which are
quite popular in international markets. If SEBI and AMFI have their way, this
could become a reality in the Indian context.
So while inflation is a concern there is no need for you to be a sitting duck every
time it rears its head. Fortunately for you, even an underdeveloped financial
market like India offers you enough interesting and rewarding opportunities to
make inflation seem like just another day at the office.
M P Birla Institute of Management
M P Birla Institute of Management
Effect of Inflation:
highlow Monthly inflaton
6
inflation in %
5 High
4 Low
0
may
july
January
February
May
July
January
February
May
July
January
February
august
August
August
october
September
November
December
September
November
December
september
november
december
October
October
march
April
june
March
April
June
March
April
June
2002 2003 2004 2005
Month/year
1)Effect of Changes in Inflation rate on BSE SENSEX Values:
Correlation coefficient (r) = 0.0626117
From the above table,
While comparing the changes in the inflation rate with the changes in the
BSE SENSEX values, we get a correlation of 0.0626117.
r2 = 0.00392, Now r2 * 100 = 0.392% .
Therefore we can interpret that changes in inflation rate have only 0.392%
effect on the BSE SENSEX values, which is quite minute.
2) ACC Share price:
Correlation coefficient (r) = 0.00021
M P Birla Institute of Management
From the above table, while comparing the changes in the inflation rate
with the changes in the ACC’s Share price, we get a correlation of 
0.00021.
r2 = 0.000000044, Now r2 * 100 = 0.0000044%.
Therefore we can interpret that changes in inflation rate have only
0.0000044% effect on the ACC’s Share price , which is quite minute.
3) Bajaj Auto Share price:
Correlation coefficient (r) = 0.08365
From the above table, while comparing the changes in the inflation rate
with the changes in the Bajaj Auto’s Share price get a correlation of
0.08365.
r2 = 0.00699, Now r2 * 100 = 0.699% .
Therefore we can interpret that changes in inflation rate have only 0.699%
effect on the Bajaj Auto’s Share price , which is quite minute.
4) Bharti Tele Share price:
Correlation coefficient (r) = 0.381008
From the above table, while comparing the changes in the inflation rate
with the changes in the Bharti Tele’s Share price, we get a correlation of
0.381008.
r2 = 0.1452, Now r2 * 100 = 14.52% .
Therefore from the above, we can interpret those changes in inflation rate
affects the Bharti Tele’s Share price value by 14.52%.
M P Birla Institute of Management
5) BHEL Share price:
Correlation coefficient (r) = 0.089626
From the above table, while comparing the changes in the inflation rate
with the changes in the BHEL Share price, we get a correlation of
0.089626.
r2 = 0.008033, Now r2 * 100 = 0.8033% .
Therefore we can interpret that changes in inflation rate have only 0.8033%
effect on the BHEL Share price, which is quite minute.
6) Cipla Share price:
Correlation coefficient (r) = 0.055085
From the above table, while comparing the changes in the inflation rate
with the changes in the Cipla Share price, we get a correlation of 0.055085.
r2 = 0.003034, Now r2 * 100 = 0.3034% .
Therefore we can interpret that changes in inflation rate have only 0.3034%
effect on the Cipla Share price, which is quite minute.
7)Dr Reddy Share price:
Correlation coefficient (r) = 0.01984
From the above table, while comparing the changes in the inflation rate
with the changes in the Dr Reddy’s Share p rice, we get a correlation of
0.01984.
r2 = 0.000394, Now r2 * 100 = 0.0394% .
Therefore we can interpret that changes in inflation rate have only 0.0394%
effect on the Dr Reddy’s Share price , which is quite minute.
M P Birla Institute of Management
8) GACL Share price:
Correlation coefficient (r) = 0.05093
From the above table, while comparing the changes in the inflation rate
with the changes in the GACL Share price, we get a correlation of 
0.05093.
r2 = 0.0026, Now r2 * 100 = 2.6% .
Therefore from the above, we can interpret that changes in inflation rate
affects the GACL Share price value by 2.6%.
9) Grasim Share price:
Correlation coefficient (r) = 0.28345
From the above table, while comparing the changes in the inflation rate
with the changes in the Grasim Share price, we get a correlation of 0.28345.
r2 = 0.08034, Now r2 * 100 = 8.034% .
Therefore from the above, we can interpret that changes in inflation rate
affects the Grasim Share price value by 8.034%.
Negligible correlation.
10)HDFC Bank Share price:
Correlation coefficient (r) = 0.120155
From the above table, while comparing the changes in the inflation rate
with the changes in the HDFC Bank’s Share price, we get a correlation of
0.120155.
r2 = 0.0144, Now r2 * 100 = 1.44% .
Therefore we can interpret that changes in inflation rate have only 1.44%
effect on the HDFC Bank’s Share price , which is quite minute.
M P Birla Institute of Management
11) Hero Honda Motors Share price:
Correlation coefficient (r) = 0.06263
From the above table, while comparing the changes in the inflation rate
with the changes in the Hero Honda Motors Share price, we get a
correlation of 0.06263.
r2 = 0.00392, Now r2 * 100 = 0.392% .
Therefore we can interpret that changes in inflation rate have only 0.392%
effect on the Hero Honda Motors Share price, which is quite minute.
12) Hindalco Share price:
Correlation coefficient (r) = 0.203978
From the above table, while comparing the changes in the inflation rate
with the changes in the Hindalco’s S hare price, we get a correlation of
0.203978.
r2 = 0.0416, Now r2 * 100 = 4.16%.
Therefore from the above, we can interpret that the changes in inflation rate
affects the Hindalco’s Share price value by 4.16%.
Negligible correlation.
13) HLL Share price:
Correlation coefficient (r) = 0.064153
From the above table, while comparing the changes in the inflation rate
with the changes in the HLL’s Share price, we get a correlation of
0.064153.
r2 = 0.00412, Now r2 * 100 = 0.412% .
Therefore we can interpret that changes in inflation rate have only 0.412%
effect on the HLL’s Share price , which is quite minute.
M P Birla Institute of Management
14) HPCL Share price:
Correlation coefficient (r) = 0.167722
From the above table, while comparing the changes in the inflation rate
with the changes in the HPCL Share price, we get a correlation of
0.167722.
r2 = 0.02813, Now r2 * 100 = 2.813% .
Therefore from the above, we can interpret that changes in inflation rate
affects the HPCL Share price value by 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, we get a correlation of
0.118833.
r2 = 0.01412, Now r2 * 100 = 1.412% .
Therefore from the above, we can interpret those changes in inflation rate
affects the ICICI Bank’s Share price value by 1.412%.
16) Infosys Technologies Share price:
Correlation coefficient (r) = 0.067
From the above table, while comparing the changes in the inflation rate
with the changes in the Infosys Technologies Share price, we get a
correlation of 0.067.
r2 = 0.00449, Now r2 * 100 = 0.449% .
M P Birla Institute of Management
Therefore we can interpret that changes in inflation rate have only 0.449%
effect on the Infosys Technologies Share price, which is quite minute.
17) ITC Share price:
Correlation coefficient (r) = 0.11398
From the above table, while comparing the changes in the inflation rate
with the changes in the ITC’s Share price, we get a correlation of 0.11398.
r2 = 0.01299, Now r2 * 100 = 1.299% .
Therefore from the above, we can interpret those changes in inflation rate
affects the ICICI Bank’s Share price value by 1.412%. To illustrate, if
inflation increases, then the ICICI Bank’s Share price would decrease by
1.412%.
18) L&T Share price:
Correlation coefficient (r) = 0.189582
From the above table, while comparing the changes in the inflation rate
with the changes in the L&T Share price, we get a correlation of 0.189582.
r2 = 0.03594, Now r2 * 100 = 3.594% .
Therefore from the above, we can interpret that changes in inflation rate
affects the L&T Share price value by 3.594%. To illustrate, if inflation
increases, then the L&T Share price would increase by 3.594%.
19) Maruti Udyog Share price:
Correlation coefficient (r) = 0.048375
From the above table, while comparing the changes in the inflation rate
with the changes in the MarutiUdyog Share price, we get a correlation of
0.048375.
r2 = 0.00234, Now r2 * 100 = 0.234% .
Therefore we can interpret that changes in inflation rate have only 0.234%
effect on the MarutiUdyog Share price, which is quite minute.
M P Birla Institute of Management
20)Ranbaxy Share price:
Correlation coefficient (r) = 0.013216
From the above table, while comparing the changes in the inflation rate
with the changes in the Ranbaxy share price, we get a correlation of
0.013216.
r2 = 0.000175, Now r2 * 100 = 0.0175% .
Therefore we can interpret that changes in inflation rate have only 0.0175%
effect on the Ranbaxy share price, which is quite minute
21) RELShare price:
Correlation coefficient (r) = 0.09502
From the above table, while comparing the changes in the inflation rate
with the changes in the REL Share price, we get a correlation of 0.09502.
r2 = 0.00903, Now r2 * 100 = 0.903% .
Therefore we can interpret that changes in inflation rate have only 0.903%
effect on the REL Share price, which is quite minute.
22) RIL Share price:
Correlation coefficient (r) = 0.076568
From the above table, while comparing the changes in the inflation rate
with the changes in the RIL Share price, we get a correlation of 0.076568.
r2 = 0.005863, Now r2 * 100 = 0.5863% .
Therefore we can interpret that changes in inflation rate have only 0.5863%
effect on the RIL Share price, which is quite minute.
M P Birla Institute of Management
23) Satyam Share price:
Correlation coefficient (r) = 0.054975
From the above table, while comparing the changes in the inflation rate
with the changes in the Satyam Share price, we get a correlation of
0.054975.
r2 = 0.003022, Now r2 * 100 = 0.3022% .
Therefore we can interpret that changes in inflation rate have only 0.3022%
effect on the Satyam Share price, which is quite minute.
24) SBI Share price:
Correlation coefficient (r) = 0.175731
From the above table, while comparing the changes in the inflation rate
with the changes in the SBI Share price, we get a correlation of 0.175731.
r2 = 0.03088, Now r2 * 100 = 3.088% .
Therefore from the above, we can interpret that changes in inflation rate
affects the SBI Share price value by 3.088%.
Negligible correlation.
25) TATA Motors Share price:
Correlation coefficient (r) = 0.0215
From the above table, while comparing the changes in the inflation rate
with the changes in the TATA Motors Share price, we get a correlation of 
0.0215.
r2 = 0.0004622, Now r2 * 100 = 0.04622% .
Therefore we can interpret that changes in inflation rate have only
0.04622% effect on the TATA Motors Share price, which is quite minute.
26) TATA Power Share price:
M P Birla Institute of Management
Correlation coefficient (r) = 0.218562
From the above table, while comparing the changes in the inflation rate
with the changes in the TATA Power Share price, we get a correlation of
0.218562.
r2 = 0.04777, Now r2 * 100 = 4.777% .
Therefore from the above, we can interpret that changes in inflation rate
affects the TATA Power Share price value by 4.777%.
27) TISCO Share price:
Correlation coefficient (r) = 0.03945
From the above table, While comparing the changes in the inflation rate
with the changes in the TISCO Share price, we get a correlation of 
0.03945.
r2 = 0.001556, Now r2 * 100 = 0.1556% .
Therefore we can interpret that changes in inflation rate have only 0.1556%
effect on the TISCO Share price, which is quite minute.
28) Wipro ltd Share price:
Correlation coefficient (r) = 0.178484
From the above table, While comparing the changes in the inflation rate
with the changes in the Wipro Ltd Share price, we get a correlation of
0.178484.
r2 = 0.03185, Now r2 * 100 = 3.185% .
Therefore from the above, we can interpret that changes in inflation rate
affects the Wipro Ltd Share price value by 3.185%.
M P Birla Institute of Management
29) ONGC share price:
Correlation coefficient (r) = 0.043729
From the above table, While comparing the changes in the inflation rate
with the changes in the ONGC Share price, we get a correlation of
0.043729.
r2 = 0.0019122, Now r2 * 100 = 0.19122% .
Therefore we can interpret that changes in inflation rate have only
0.19122% effect on the ONGC Share price, which is quite minute.
30) ZEE TeleFilm Share price:
Correlation coefficient (r) = 0.0694
From the above table, While comparing the changes in the inflation rate
with the changes in the ZEE TeleFilm Share price, we get a correlation of 
0.0694.
r2 = 0.004816, Now r2 * 100 = 0.4816% .
Therefore we can interpret that changes in inflation rate have only 0.4816%
effect on the ZEE TeleFilm Share price, which is quite minute.
M P Birla Institute of Management
Analysis of the influence of Re$ exchange rate on share price:
The volume of international transactions has grown enormously over the past 50
years .Exports of goods and services by the U.S. now total more than 10% of the
GDP.
Currencies must be bought and sold because the U.S.dollar is not acceptable
means of payment in many other countries. 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 highlow in last 36 months
50
49
48
47
46
high
re/$
45
low
44
43
42
41
40
J
J
J
J
J
J
J
N
D
N
D
N
D
O
O
F
F
M
M
M
M
M
M
A
A
S
A
S
A
S
2003 2004 2005
month/year
The above graph shows the movement of Re$ from March 2002 to
February 2005. Re has strengthened from 49.06 in March 2002 to 43.4 in February
2005.
M P Birla Institute of Management
Re$ Exchange Rate:
1) Effect of Changes in Re$ Exchange Rate on BSE SENSEX Values:
Correlation coefficient (r) = 0.001581
From the above table, While comparing the changes in the Re$ exchange
rate with the changes in the BSE SENSEX values, we get a correlation of
0.001581.
r2 = 0.0000025, Now r2 * 100 = 0.00025 % .
Therefore we can interpret that the change in Re$ exchange rate have only
0.00025 % effect on the BSE SENSEX values, which is quite minute.
2) ACCShare price:
Correlation coefficient (r) = 0.319779
From the above table, While comparing the changes in the Re$ exchange
rate with the changes in the BSE SENSEX values, we get a correlation of
0.319779.
r2 = 0.10226, Now r2 * 100 = 10.226 % .
Therefore from the above, we can interpret that the changes in Re$
exchange rate affects the ACC share price value negligibly.
3) Bajaj Auto Share price:
Correlation coefficient (r) = 0.42681
From the above table, While comparing the changes in the Re$ exchange
rate with the changes Bajaj Auto’s Share price , we get a correlation of 
0.42681.
r2 = 0.1822, Now r2 * 100 = 18.22 % .
Negligible correlation.
4) Bharti Tele Share Price:
M P Birla Institute of Management
Correlation coefficient (r) = 0.13832
From the above table, While comparing the changes in the Re$ exchange
rate with the changes in the BSE SENSEX values, we get a correlation of 
0.13832.
r2 = 0.01913, Now r2 * 100 = 1.913 % .
Therefore from the above, we can interpret those changes in Re$ exchange
rate affects the Bharti Tele’s share price value by 1.913%.
Negligible correlation.
5)BHEL Share price:
Correlation coefficient (r) = 0.26874
From the above table, While comparing the changes in the Re$ exchange
rate with the changes in the BHEL Share price, we get a correlation of
0.26874.
r2 =0.0722, Now r2 * 100 =7.22 % .
Therefore from the above, we can interpret those changes in Re$ exchange
rate affects the BHEL share price value by 7.22 %. To illustrate, if the Re
strengthens against the dollar, then the BHEL share price would increase by
7.22%
6) Cipla Share price:
Correlation coefficient (r) = 0.025112
From the above table, While comparing the changes in the Re$ exchange
rate with the changes in the BSE SENSEX values, we get a correlation of
0.025112.
r2 = 0.000631, Now r2 * 100 = 0.0631% .
Therefore we can interpret those changes in Re$ exchange rate has only
0.0631% effects on the Cipla Share price, which is quite minute.
M P Birla Institute of Management
7) Dr. Reddy Share price:
Correlation coefficient (r) = 0.126081
From the above table, While comparing the changes in the Re$ exchange
rate with the changes in the BSE SENSEX values, we get a correlation of
0.126081.
r2 = 0.0159, Now r2 * 100 = 1.59% .
Therefore from the above, we can interpret those changes in Re$
exchange rate affects the Dr Reddy’s share price value by 1.59%.
8) Grasim Share price:
Correlation coefficient (r) = 0.103485
From the above table, While comparing the changes in the Re$ exchange
rate with the changes in the Grasim Share price, we get a correlation of
0.103485.
r2 = 0.1071, Now r2 * 100 = 10.71 % .
Therefore from the above, we can interpret those changes in Re$ exchange
rate affects the Grasim’s share price value by 10.71 %.
9)HDFC Ltd Share price:
Correlation coefficient (r) = 0.20533
From the above table, While comparing the changes in the Re$ exchange
rate with the changes in the HDFC Ltd Share price, we get a correlation of 
0.20533.
r2 = 0.0422, Now r2 * 100 = 4.22 % .
M P Birla Institute of Management
Therefore from the above, we can interpret those changes in Re$ exchange
rate affects the HDFC Ltd Share price value by 4.22 %. To illustrate, if the
Re strengthens against the dollar, then the HDFC Ltd Share price would
decrease by 4.22 %.
10) Hero Honda Motor Share price:
Correlation coefficient (r) = 0.13852
From the above table, While comparing the changes in the Re$ exchange
rate with the changes in the Hero Honda Motor’s share price, we get a
correlation of 0.13852.
r2 = 0.0199, Now r2 * 100 = 1.99 % .
Therefore from the above, we can interpret that changes in Re$ exchange
rate affects the Hero Honda Motor’s share price value by 1.99.
11) Hindalco Share price:
Correlation coefficient (r) = 0.02895
From the above table, While comparing the changes in the Re$ exchange
rate with the changes in the Hindalco’s share price, we get a correlation of 
0.02895.
r2 = 0.00084, Now r2 * 100 = 0.084 % .
Therefore we can interpret those changes in Re$ exchange rate has only
0.084 % effect on the Hindalco’s share price, which is quite minute.
12) HLL Share price:
Correlation coefficient (r) = 0.017593
M P Birla Institute of Management
From the above table, While comparing the changes in the Re$ exchange
rate with the changes in the HLL’s Share price, we get a correlation of
0.017593.
r2 = 0.00031, Now r2 * 100 = 0.031 % .
Therefore we can interpret those changes in Re$ exchange rate has only
0.031 % effect on the HLL’s Share price , which is quite minute.
13) HPCL Share price:
Correlation coefficient (r) = 0.247765
From the above table, While comparing the changes in the Re$ exchange
rate with the changes in the HPCL Share price, we get a correlation of
0.247765.
r2 = 0.06139 Now r2 * 100 = 6.139 % .
Therefore from the above, we can interpret that changes in Re$ exchange
rate affects the HPCL Share price value by 6.139 % .To illustrate, if the Re
strengthens against the dollar, then the HPCL Share price would increase
by 6.139 %
14) ICICI Bank Share price:
Correlation coefficient (r) = 0.0712
From the above table, While comparing the changes in the Re$ exchange
rate with the changes in the ICICI Bank Share price, we get a correlation of
0.0712.
r2 = 0.0051, Now r2 * 100 = 0.51 % .
Therefore we can interpret those changes in Re$ exchange rates have only
0.51 % effect on the ICICI Bank Share price, which is quite minute.
M P Birla Institute of Management
15)Infosys Technologies Share price:
Correlation coefficient (r) = 0.26218
From the above table, While comparing the changes in the Re$ exchange
rate with the changes in the Infosys Technologies share price, we get a
correlation of 0.26218.
r2 = 0.06874, Now r2 * 100 = 6.874% .
Therefore from the above, we can interpret that changes in Re$ exchange
rate affects the Infosys Technologies share price value by 6.874%.To
illustrate, if the Re strengthens against the dollar, then the Infosys
Technologies share price would decrease by 6.874%
16) ITC Share price:
Correlation coefficient (r) = 0.031124
From the above table, While comparing the changes in the Re$ exchange
rate with the changes in the ITC’s Share price, we get a correlation of
0.031124.
r2 = 0.00097, Now r2 * 100 = 0.097% .
Therefore we can interpret that changes in Re$ exchange rate have only
0.097% effect on the ITC’s Share price, which is quite minute.
17) L&T Share price:
Correlation coefficient (r) = 0.375067
From the above table, While comparing the changes in the Re$ exchange
rate with the changes in the L&T Share price, we get a correlation of
0.375067.
r2 =0.14068, Now r2 * 100 = 14.068% .
Therefore from the above, we can interpret that changes in Re$
exchange rate affects the L&T Share price value by 14.068%. To illustrate,
M P Birla Institute of Management
if the Re strengthens against the dollar, then the L&T Share price would
increase by 14.068%
18)Maruti Udyog Share price:
Correlation coefficient (r) = 0.029608
From the above table, While comparing the changes in the Re$ exchange
rate with the changes in the MarutiUdyog Share price, we get a correlation
of 0.029608.
r2 = 0.00088, Now r2 * 100 = 0.088% .
Therefore we can interpret that changes in Re$ exchange rate have only
0.088% effect on the MarutiUdyog Share price, which is quite minute.
19) ONGC Share price:
Correlation coefficient (r) = 0.511726
From the above table, While comparing the changes in the Re$ exchange
rate with the changes in the ONGC Share price, we get a correlation of
0.511726.
r2 = 0.26186, Now r2 * 100 = 26.186 % .
Therefore from the above, we can interpret those changes in Re$ exchange
rate affects the ONGC Share price value by 26.186 %.
20) Ranbaxy Share price:
Correlation coefficient (r) = 0.06164
From the above table, While comparing the changes in the Re$ exchange
rate with the changes in the Ranbaxy Share price, we get a correlation of 
0.06164.
r2 = 0.0038, Now r2 * 100 = 0.38% .
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Therefore we can interpret those changes in Re$ exchange rate have only
0.38% effect on the Ranbaxy Share price, which is quite minute.
21) REL Share price:
Correlation coefficient (r) = 0.36477
From the above table, while comparing the changes in the Re$ exchange
rate with the changes in the REL Share price, we get a correlation of 
0.36477.
r2 = 0.1331, Now r2 * 100 = 13.31 % .
Therefore from the above, we can interpret those changes in Re$ exchange
rate affects the REL Share price value by 13.31 %.
22) RIL Share price:
Correlation coefficient (r) = 0.186572
From the above table, While comparing the changes in the Re$ exchange
rate with the changes in the RIL Share price, we get a correlation of
0.186572.
r2 = 0.0235, Now r2 * 100 = 2.35% .
Therefore from the above, we can interpret those changes in Re$ exchange
rate affects the RIL Share price value by 2.35%.
23) Satyam Share price:
Correlation coefficient (r) = 0.18013
From the above table, While comparing the changes in the Re$ exchange
rate with the changes in the Satyam Share price, we get a correlation of 
0.18013.
r2 = 0.03245, Now r2 * 100 = 3.245% .
Therefore from the above, we can interpret those changes in Re$ exchange
rate affects the Satyam’s Share price value by 3.245%.
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24) SBI Share price:
Correlation coefficient (r) = 0.01073
From the above table, While comparing the changes in the Re$ exchange
rate with the changes in the SBI Share price, we get a correlation of 
0.01073.
r2 = 0.000115, Now r2 * 100 = 0.0115 % .
Therefore we can interpret that changes in Re$ exchange rate have only
0.0115% effect on the SBI Share price, which is quite minute.
25) TATA Motors Share price:
Correlation coefficient (r) = 0.112718
From the above table, While comparing the changes in the Re$ exchange
rate with the changes in the TATA Motors Share price, we get a correlation
of 0.112718.
r2 =0.01271, Now r2 * 100 = 1.271% .
Therefore from the above, we can interpret those changes in Re$ exchange
rate affects the TATA Motors Share price value by 1.271%.
26) TATA Power Share price:
Correlation coefficient (r) = 0.535483
From the above table, While comparing the changes in the Re$ exchange
rate with the changes in the BSE SENSEX values, we get a correlation of
0.535483.
r2 = 0.28674, Now r2 * 100 = 28.674% .
Therefore from the above, we can interpret those changes in Re$ exchange
rate affects the TATA Power Share price value by 28.674%.
M P Birla Institute of Management
27) TISCO Share Price:
Correlation coefficient (r) = 0.296115
From the above table, While comparing the changes in the Re$ exchange
rate with the changes in the TISCO Share price, we get a correlation of
0.296115.
r2 = 0.08768, Now r2 * 100 = 8.768 % .
Therefore from the above, we can interpret that changes in Re$ exchange
rate affects the TISCO Share price value by 8.768 %. To illustrate, if the Re
strengthens against the dollar, then the TISCO Share price would increase
by 8.768 %.
28) Wipro Share price:
Correlation coefficient (r) = 0.07215
From the above table, While comparing the changes in the Re$ exchange
rate with the changes in the Wipro Share price, we get a correlation of 
0.07215.
r2 = 0.00521, Now r2 * 100 = 0.521% .
Therefore we can interpret that changes in Re$ exchange rate have only
0.521% effect on the Wipro share price, which is quite minute.
29) ZEE TeleFilm Share price:
Correlation coefficient (r) = 0.3436
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From the above table, While comparing the changes in the Re$ exchange
rate with the changes in the ZEE TeleFilm Share price, we get a correlation
of 0.3436.
r2 = 0.1181, Now r2 * 100 = 11.81% .
Therefore from the above, we can interpret that changes in Re$ exchange
rate affects the ZEE TeleFilm Share price value by 11.81%. To illustrate, if
the Re strengthens against the dollar, then the ZEE TeleFilm Share price
would decrease by 11.81%.
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Hypothesis Testing
1) Financial Institutional Investors
Adjusted R Standard error
Model R R square square of estimate
1 .980 .960 .921 2.09910336
Predictors: (Constant), % change
TTest Co efficients
Unstandardized Standardized significance
Coefficients Coefficients t
Model B Std.error Beta
1 (Constant) 7.099 1.218 5.829 .108
% change 4.449E02 .009 .980 4.924 .128
a Dependent Variable: % change
Result: t is significant in case of FII. They affect the share prices positively.
2) Inflation
Predictors: (Constant), % change
Adjusted R Standard error
Model R R square square of estimate
1 .063 .004 .041 3.62882
TTest Co efficients
Unstandardized Standardized significance
Coefficients Coefficients t
Model B Std.error Beta
1 (Constant) 9.910E02 .744 .133 .895
% change 3.843E02 .131 .063 .294 .771
a Dependent Variable: % change
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3) Exchange rate
Adjusted R Standard error
Model R R square square of estimate
1 .002 .000 .045 1.03620
Predictors: (Constant), % change
TTest Co efficients
Unstandardized Standardized significance
Coefficients Coefficients t
Model B Std.error Beta
1 (Constant) 0343 .213 1.608 .122
% change 2.735E03 .369 .002 .007 .994
Results: In the above two cases they are insignificant and have negligible
influence on share prices
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FINDINGS:
1) Effect of changes of Rupee$ exchange rate on BSE SENSEX value is very
minute. So we can say that Rupee$ Exchange rate hardly effects SENSEX.
It is interesting that few scrips of SENSEX like ACC, BAJAJ, GRASIM,
INFOSYS, L&T, ONGC, REL, TATA Power, and ZEE Tele Films are affected
positively or negatively more than 10% of Correlation of Determination (R2).
Affect on other Scrips is Negligible. 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. So
we can say that Inflation rate hardly affects SENSEX.
It is interesting that only scrip of SENSEX that is BHARATI TELE is
affected more than 10% of Correlation of Determination (R2). Affect on other
Scrips is Negligible.
3) Effect of changes of FII Flow in share market and its influence on BSE
SENSEX value is very affective. Its affects on almost all scrips of SENSEX are
very high.
4)The internal domestic economy is stable and consistent.
5) Incase of foreign exchange markets, they are relatively consistent and do not
make much impact on Indian stock market.
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6) Since the rupee is relatively cheaper there is no organic link between India
stock market and stock market elsewhere.
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Based on the analysis and interpretations we can conclude that:
The present study examines the causal relationship between Net FII investments,
inflation and foreign exchange and the Indian stock market represented by market
capitalization of BSE. During the past three years there have been several ups and
downs in the Indian stock market and Foreign portfolio investment patterns,
consequent upon several changes affecting the Indian economy, like the
technology slowdown, Ketan Parekh scam, September 11 attack on WTC, to name
a few. There have been attempts to find the determinants and impacts of FII
investment in India. By using monthly data from Feb 2002 to Feb 2005, we tried
to capture the cause effect nature of FII, inflation and foreign exchange and Stock
market. There is evidence of causality from BSE market capitalization and NSE
market capitalization to net FII investment. The study infers that when market
capitalization (the product of total trading volumes and prices of shares) is high,
FIIs are more attracted for investing' (they buy heavily). The reverse happens (FI
Is
sell heavily) when market capitalization is low. While there is causation from
current month, two month and three month lag market capitalization of both BSE
and NSE, no causation was found from the one month lag values to net FII
investment. We have also found significant impact of net investment on market
capitalization or Indian stock exchanges. When FII s are net buyers, prices and
trading volume both go up thereby increasing the market capitalization. On the
other hand heavy selling by FIIs brings down the market capitalization by reduced
trading volume and/or share prices. 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. 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.
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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.
2) Rupee$ Exchange rate and Inflation Rate don’t affect share prices. So this
factors need not to be considers while making any investment in shares.
3) FII affects the share market the most. So close examination of the FII
investments should be tracked while making investments.
4) If FII starts selling shares it is better to exit and vice versa, more investment
into the market can be entertained.
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BIBLIOGRAPHY
1) ICFAI journal of Applied Finance
Articles
a) Macroeconomic Indicators and Stock Prices  Indian Evidence
Golaka C Nath and Dr. Y V Reddy
b) FII Inflows to India: Their Effect on Stock Market Liquidity and
Volatility
 Manisha Joshi and Chiranjit Mukhopadhyay
c) Stock market reaction of announcement of policy changes.
Munmum Mohanthy
d) Causal Relationship between Foreign Institutional Investment and Indian
Stock Market
 SubarnaDey and Bishnupriya Mishra
e) Key determinants of stock prices in India.
Subir Sen and Rajkumar Ray
f) Security analysis and portfolio management (Module I to X)
 IGNOU
Websites
• www.moneycontrol.com
• www.bseindia.com
• www.nseindia.com
• www.indiainfoline.com
• www.karvy.com
• www.domainb.com
• www.investopedia.com
National dailies
• Business Lines
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• Business Standard
Economic Time
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