CHAPTER I

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

Industrialization is a broad impressive aspect and progression of economic

enlargement. Industrial growth depends on the establishment of capital. A stimulating
and reserved monetary market plays a vital role in the process of accumulating
investments and savings. Stock is an essential part of the financial market. The stock
market acts as an appliance for industrial development. The stock exchange imitates
fluctuating conditions of a nation's financial wellbeing, as the share price is motivated to
altering economic, social and political conditions. Throughout the stages of monetary
wealth, the share values in the stock market are inclined to grow. Equally, share prices
face ups and downs, and there is a financial termination purposely rejected as an outcome
of miseries. The strength of interchange at stock exchanges and the equivalent growth or
reduction in the share prices of securities imitate the stockholder's valuation of the
financial and commercial circumstances in a nation and performances as the indicator
that designates the extensive situations of the business.

As a result of the stock market’s importance, funds flow from less profitable to
more profitable initiatives, benefiting growth’s superior perspective. The economy’s
fiscal properties are thus improved to be paid. Stock prices are volatile; they change
every second in the stock market due to arcade demand and supply changes. Likewise,
more people want to trade their claim, and the price begins to fall. There are two phases
to identify the volatility of stock prices, they are bull phase and bear phase. In a bullish
market, share prices rise sharply, while in a bearish market, share prices fall sharply, and
these ups and downs determine the stock market’s performance.

The insignificance of the developing world’s financial sector is a public problem

afflicting the developing world’s economies. The financial industry plays an essential role in
monetary progress and expansion by allowing investments and directing funds from investors
to depositors. Volatility, which has a significant impact, affects the financial system
economic performance. Similarly, stock market volatility has several unfavorable implications.

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 One of the ways it affects an economy is through the belongings on consumer
spending, which are related to the prosperity effect (Campbell et al., 1994 and Poterba et
al., 1986). The wealth effect is related to the impression of stock market unpredictability
on customer spending. Increased wealth will increase consumer spending. A fall in the
stock market, on the other hand, will weaken the purchaser's confidence and thus drive
down consumer spending. Stock market volatility will have a direct impact on business
investment and economic growth. An increase in stock market volatility can be
interpreted as an increase in the risk of impartiality speculation, resulting in a shift and
the resources to be less risky assets. As a result, the strength of new companies tolerates
this consequence, as depositors will turn to the acquisition of blue-chip or growth stocks.
Though there is a general understanding of what constitutes stock market volatility and, to a
lesser extent, how to measure it, there is less agreement on the causes of stock market
volatility. Some economists look into the source of volatility, the new arrival and unexpected
information that changes the expected returns on a stock (Engle and Ng, 1993).

Thus, variations in market volatility would decently replicate the changes in an

indigenous or comprehensive economic environment. Another privilege like volatility is
caused mainly by changes in trading volume performs or outlines, determined by changes
in macroeconomic approaches, shifts in shareholder acceptance of threat, and enlarged
uncertainty. The stock market's progression is unpredictable; it forecasts and predicts the
path of economic growth. The structure of volatility can imply that "stockholders now
need to hold more stocks in their collection to achieve divergence" (Krainer 2002). As a
perception, volatility is modest and spontaneous; it deals with the variability or spreading
about a central tendency. In simple, to appreciate obviously -instability is a portion of
how far the current price of an asset departs from its past average prices. If the deviation
is higher, then the volatility will also be a greater one. At a vital level, volatility can
designate the strength of persuasion behind a price move. Despite its clear mental image
and quasi-standardized status in finance, captions make it difficult in analyzing the
volatility. The standard measure of volatility is financially exposure and plays a critical
role in measuring the risk/return transactions and has a significant role in asset allocation
decisions.

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 The instability of a country is an essential element in to cost of capital in
segmented capital markets. According to Peters (1994), stock prices and returns are
cyclical, defective in the short run, and variable stock return volatility checks financial
performance through customer costs (Garner, 1988). They trust that the fall in stock
prices would reduce consumer spending. In addition, a weakening in consumer
confidence could contribute to a further expenses reduction.

Stock return volatility may also affect business investment spending (Gertler and
Hubbard, 1989). Investors may perceive a rise in stock market volatility as an increase in the
risk in equity investments. If so, investors may shift their funds to less risky assets. This
reaction would tend to raise the cost of funds to firms issuing stock. Moreover, small firms
and new firms might gravitate towards the purchase of stock in large well-known firms.

Further, risky stock return volatility could dislocate the financial system's horizontal
effect and lead to legislative changes. Strategies that work well with average return volatility
lead to regulatory changes. An organization dealing with the average return volatility may not
be able to deal with extreme price changes. Changes in market rules and guidelines may be
required to increase market resiliency in the face of increased volatility. The vibrant and
unpredictable stock markets allow in-depth studies to comprehend the outline of stock market
schedules. According to Fama (1981), the inclusive cluster of financial indicators stimulus
the stock market prices in any country. Duca (2007) argued that countries with better
economic growth have better stock market performance. If a country's economy is
implemented well and expected to increase, the market is regularly anticipated to reflect.
The stock market development resulted from economic indicators like interest rate, inflation
rate, Foreign Direct Investment (FDI), exchange rate and economic reforms. Hence it is a
noticeable growth of economics, and it plays a vital role in the stock market development in
both developing and developed economies.

On the other hand, numerous researchers have also demonstrated that the stock
market stages as an essential role in economic affluence, fostering capital information
and satisfying the economic growth of the country (Abor, Adjasi and Hayford, 2008;
Quayes, 2010; Pilinkus,2015). The dynamic associations between economic indicators
and stock prices have fascinated the consideration of economists, financial analysts,

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investors, academicians, practitioners and policymakers in forecasting Stock market
movements (Kwon and shin, 1999). As per the prevailing literature, it could be restricted
that exhaustive research has been showing for developed economies. Research on the
relationship between actual economic activity and the stock market in developing
countries is still ongoing. Therefore, this research aims to establish the stock returns and
volatility of selected stocks from NSE sectoral indices that have grown towards a
free-market economy since 1991. It is one of the fastest developing economies. In 2001,
India's GDP growth rate was around 4.8 percent, which increased gradually to
10.26 percent in 2010. Deliberating to the World Bank data, the GDP growth rate
diminished to 6.6 percent and 5.5 percent in 2011 and 2012, respectively, due to the poor
performance of the manufacturing and farm sectors, and now in the year 2019, the GDP
rate is decreased to 4.2 percent

During 2014, India's GDP growth recovered marginally to 7.5 percent from
6.4 percent in 2013. India's growth during 2015 was at 8.0 percent compared to China's
6.9 percent, making it the fastest-growing economy. In 2016, GDP decreased to
7.1 percent. Further decrease in GDP to 6.1 percent in the same year was found due to
demonetization as it slowed down the economic activity in cash reliant on sectors. And at
the latest in the year 2019, it is slowed down 4.2 percent. This fall was recorded as the
dreadful weekly relative value since February 2019. Hence, it is marked that the
significant economic reform (demonetization) has led to change in stock market
movements. Likewise, the stock market consistently reacts to changes in economic
indicators, which results in volatility. Therefore, it becomes authoritative to study the Impact
of select economic indicators and stock market indices in the Indian Context and the
volatility and Stock returns of the preferred stocks from Sectoral Indices of NSE in India.

1.2. STOCK MARKET

The Stock Market is related to markets and exchanges where consistent

purchasing, vending and issuing shares of publicly-held companies occur. Such monetary
activities are conducted through entrenched formal discussions or over-the-counter
marketplaces that operate under a defined set of guidelines. There can be multiple stock
trading locations in a country or a region, allowing connections in stock and other forms

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of securities. Numerous people need to acquire gainful achievements, would bidding to
arrive the stock market. It is an imperative source of concern finance, which gives
grander elasticity than deriving from banks. It is an intense approach to increase finance
for more investment. But then again, the effort in understanding the performance of
various stocks is the main hindrance in the observances of public society. The stock
market is a chief foundation for the companies to increase assets. It is a crucial market
that allows industries to trade clearly, benefits in growing their capital for allowance by
selling shares of ownership of the concern.

The effectiveness of the social atmosphere is biased by the worth of shares

movement, which is a significant component of the dynamic forces of the economic
cause. The stock market is commonly measured as the most relevant indicator of a
country's financial control and progress. RBI strongly displays the behaviour of the stock
market for amiable operative purposes of the monetary system.

Figure No. 1

Structure of Stock Market

Stock Market
Structure

SEBI FMC

Exchange Exchanges
Depositories Stock Brokers Investors
Equity Commodities

Zerodha, FII,'s, DII's,

NSE, BSE NSDL, CDSL Retail MCX, NCDEX
Sharekhan Investors

Source: www.sebi.org.in

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 The stock market is one of the probable paths to spend money for investors.
Despite its admiration and presence, financing in stock is often considered to be chancy.
An excellent investment assortment may outcome in enormous gains and offers
numerous compensations to the investors.

1.2.1. Benefits of Stock Market Investment

i. Exclusivity in Transactions

Involvement of stock exchange markets is resultantly trading to be an exclusive

activity. Only the brokers engaged in market transactions, however with the introduction of
exchanges and particularly online trading, it has become quite open to the general public.

ii. Ownership Stake in the Company

The shares listed in the market are either equity shares or preference shares
convertible to equity shares. These shares allow the shareholders to have an ownership
stake in the issuer company.

iii. Return on Investment

The majority of the listed shares are equity shares; their value is directly related to
the company's value. Thus, when a company is doing well, there is a substantial capital
appreciation in the company's shares, which provides good returns.

iv. Dividend Income

The companies also provide an annual income in the form of dividends to the
shareholders. Although in the case of equity shareholders, the amount may differ in the
company's profits that particular year, where there are no profits, they may not get any
dividend. In contrast, when there are huge profits, the bonuses may be a sizable amount.

v. Tax Benefits

 Long-term capital gains, i.e., investments held for more than 12 months, are taxed
at 10percents over Rs 1 Lakh only,

 Short-term capital gains, i.e., investments held for less than 12 months, are taxed
at 15 percent + 3 percent Cess, and

 Any capital loss can be offset or carried forward for up to 8 financial years.

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 1.2.2. Drawbacks of Stock Market Investment

i. Volatile Investments

The share market is highly volatile as numerous factors, such as government

policies, budget, sectoral events, company disclosure, change in company management,
are affected.

ii. High Brokerage and Low Margin

The market has become much more accessible. The brokers are still needed for
the smooth functioning of the market. The brokerage charge is high, leading to lower
profit margins, making the investment option less attractive.

iii. Time-Consuming

With the introduction of online trading, the act of trading securities itself has
become quick and straightforward, but registration, opening a Demat account, is a little
more time-consuming. However, since it is a one-time process, it can be ignored, but the
research and analysis required before making an informed investment are still dynamic.

iv. Impulsive Behavior

Investors constantly have to keep a sharp watch over price fluctuations of supply.
The price of stocks may rise and fall every second and investors may want to buy them
out of greed and sell them at a lower price out of fear. It means investors need to know
when to buy or sell stocks. Many new investors hold their inventories more than the time
they should, resulting from the loss or reduced profit. On the other hand, newcomers wait
for a stock price to fall more before purchasing the stock; waiting for more time can
increase the stock price, and they run out of the option to buy that stock at the right time
and expense. These price fluctuations can create tremendous emotional strain on investors.

1.3. NATIONAL STOCK EXCHANGE OF INDIA (NSE)

National Stock Exchange of India (NSE), propelled in 1993, is the country's prime
stock exchange, and in January 2020, it became the largest derivatives exchange by
dimensions in the world. The NSE multitudes India's leading equities benchmark, the S&P
and CNX NIFTY, is the domain's largest exchange for single-stock futures swapping on its
unified automated trading platform. It also offers forex futures dealing in dollar/₹.

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 Affording to the annual Futures Industry Association's survey of derivatives
exchanges in 2019, the National Stock Exchange of India was ranked as the world's
significant derivatives exchange by contract volume, just ahead of the CMR group.
In addition, the exchange was ranked number four globally by volume of trades in money
equities in the year 2020, where the data was conserved by the World Federation of
Exchanges (WFE). The NSE engaged its number one position by the book from the FIA
for a second sequential year in 2020 with a total trading volume of 8.85 billion contracts,
up 48.1percent from the previous year.

1.4. INFORMATION ABOUT INDICES

An index is used to give information about the price movements of products in the
financial, commodities or any other markets. Financial indexes are made to measure price
movements of stock, bonds, T-bills, and other forms of investments. Stock market
indexes need to capture the overall behaviour of equity markets. A stock market index is
created by selecting a group of stocks representing the whole market or a specified sector
or market segment. An index is calculated concerning a base period and a base index
value. Stock market indexes are helpful for a variety of reasons. They provide a historical
comparison of returns on money invested in the stock market against other forms of
investments such as gold or debt. They can be used as a standard against which to
compare the performance of an equity fund. The stock market will lead the overall
economy’s account or a particular sector of the economy. Stock indexes reflect highly up
to date information. Modern financial applications such as index funds, index futures, and
index options play an important role in financial investments and risk management.

Indices are classified under the following heads: Broad Market indices, Sectoral
Indices, Thematic Indices, Strategy Indices, Customized Indices, Fixed Income Indices,
and Blended Indices. In this study, the researcher study about the Sectoral Indices in
detail. Sectoral Indices summarizes and benchmarking the data for particular sectors or
industries. It allows the investors to track a stock against specific sectors. There are
15 Sectoral Indices, namely, NIFTY Auto Index, NIFTY Bank Index, NIFTY Consumer
Durable Index, NIFTY Financial Services Index, NIFTY Financial Services 25/50 Index,
NIFTY FMCG Index, NIFTY Health care Index, NIFTY IT index, NIFTY Media Index,

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NIFTY Metal Index, NIFTY Oil and gas Index, NIFTY Pharma Index, NIFTY Private
Bank Index, NIFTY PSU Bank Index and NIFTY Reality Index. Five are selected from
these 15 Sectoral Indices based on the percentage of traded value and share of market
representation. They are NIFTY Auto Index, NIFTY Banking Index, NIFTY FMCG
Index, NIFTY Information Technology Index and NIFTY Pharmaceutical Index.

Figure No. 2

Sectoral Indices Distribution of National Stock Exchange

Source: www.fineracy.com

 NIFTY Automobile Sectoral Indices

NIFTY Automobile Sectoral Indices is designed to reflect the behaviour and

performance of the Automobiles sectors, which includes manufacturers of cars and
motorcycles, heavy vehicles, auto ancillaries, tyres, etc. India has appeared as one of the
biggest and wildest mounting automobile markets globally, specifically strong in
subsectors like light passengers and commercial vehicles, two-wheelers and spare
components. Domestic automobiles production is increased by 2.36 percent CAGR
between financial years 2016-2020, with 26.36 million cars manufactured in the country

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in the financial Year 2020. Overall, domestic automobiles sales increased at 1.29 percent
CAGR between financial years 2016-2020. By seeing the two-wheelers, passenger
vehicles, and spares overall, automobile export reached 4.77 million vehicles in the
financial Year 2020, growing at a CAGR of 6.94 percent during 2016-2020.
Two-wheelers made up 73.9percent of the cars exported, followed by passenger vehicles
at 14.2 percent, three-wheelers at 10.5percent and commercial vehicles at 1.3 percent.
The Government also takes some initiatives and encourages foreign investment in the
Automobile Sector and has allowed 100percent foreign direct investment under the
automatic route. In Union Budget 2021-22, the Government introduced the voluntary
vehicle scrappage policy, likely to boost demand for new vehicles after removing old unfit
vehicles currently plying on the Indian roads. The union cabinet outlaid Rs.57,042 crores for
the automobiles and auto components sector in the production linked incentive scheme
under the department of heavy industries. The Government also aims to develop India as
a global manufacturing centre and a Research and Development (R and D) hub.

Figure No. 3

Nifty Automobile Sectoral Indices Distribution

Source: www.fineracy.com

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 NIFTY Banking Sectoral Indices

NIFTY Banking Sectoral Indices comprised of the most liquid and large
capitalized Indian Banking Stocks. It provides investors and market intermediaries with a
benchmark that captures the capital market performance of Indian banks. According to
the Reserve Bank of India (RBI), India's banking sector is sufficiently exploited and
structured. The financial and economic circumstances in the country are far-off grander
than any other country in the world. Credit, market and liquidity risk studies recommend
that Indian banks are robust and have mounted the universal downturn well. The Indian
banking system consists of 12 public sector banks, 22 private sector banks, 46 foreign
banks, 56 regional rural banks, 1485 urban cooperative banks and 96,000 rural
cooperative banks. In addition to cooperative credit institutions, as of November 2020, the
total number of ATMs in India increased to 209,282. During the financial year 2016-2020,
bank credit grew at a CAGR of 3.57 percent as of the financial year 2020, total credit
extended surged to US$ 1,698.97 billion. During the financial year 2016-2020, deposits
grew at a CAGR of 13.93 percent and reached US$1.93 trillion by the financial year
2020. Some government initiatives are as per the Union Budget 2021-22, and the
Government will disinvest IDBI bank and privatize two public sector banks.
The Government smoothly carried out consolidation, reducing the number of public
sector banks by eight. As of September 2018, the Government of India made the Pradhan
Mantri Jan Dhan Yojana Scheme an open-ended scheme and added more incentives.
The Government of India also planned to inject Rs.42, 000 crores in public sector banks
by March. Some of the significant achievements of the Government in the banking sector
are according to RBI, India's foreign exchange reserve reached US$574.82 billion as of
November 27, 2020. For improving the infrastructure in villages, 204,000 sales terminals
have been sanctioned from the financial inclusion fund by National Bank for Agriculture
and Rural Development (NABARD). The number of transactions through immediate
payment service increased to 346.55 million in volume and amounted to Rs.2.88 trillion
in value in January 2021.

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 Figure No. 4

Nifty Banking Sectoral Indices Distribution

Source: www.fineracy.com

 NIFTY FMCG Sectoral Indices

The Fast-Moving Consumer Goods (FMCG) sector is India's fourth more

significant sector, with household and personal care accounting for 50 percent of FMCG
sales in India. Growing awareness, more accessible access and changing lifestyles have
been the key growth drivers for the sector. The retail market in India is estimated to reach
US$1.1 trillion by 2020 from US$ 840 billion in 2017, with modern trade expected to
grow at 20-25 percent per annum, which is likely to boost the revenue of FMCG
companies. Payment of the FMCG sector reached Rs.3.4 lakh crore (US$ 52.75 billion)
in the financial year 2018 and is estimated to reach US$ 103.7 billion in 2020.
From October 2020 to December 2020, the FMCG market rose 7.1 percent, driven by
food items, health, hygiene and rural areas. Some of the Government initiatives to
promote the FMCG Sector in India are the Government of India has approved 100
percent FDI in cash and carry segment and in single-brand retail and 51 percent FDI in
multi-brand retail. The government has drafted a new consumer protection bill
specializing in setting up an extensive mechanism to ensure simple, speedy, accessible,
affordable and timely delivery of justice. The Goods and Services Tax (GST) is
beneficial for the FMCG industry as many of the FMCG products such as soap,
toothpaste and hair oil now come under the 18 percent tax bracket against the previous rate of

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23-24 percent. Also, GST on food products and hygiene products has been reduced to
0-5 percent and 12-18 percent, respectively. GST is expected to transform logistics in the
FMCG sector into a modern and efficient model as all significant corporations are
remodeling their operations into more considerable logistics and warehousing.

Figure No. 5

Nifty FMCG Sectoral Indices Distribution

Source: www.fineracy.com

 NIFTY Information Technology Sectoral Indices

The global sourcing market in India continues to grow at a higher pace than the
Information Technology industry. India is the leading sourcing destination across the
world, accounting for approximately 55percent market share of the US$ 200-250 billion
global services sourcing business in 2019-2020. The Information Technology industry
accounted for 8percent of India's GDP in 2020. Exports from the Indian Information
Technology industry are expected to increase by 1.9 percent to reach US$ 150 billion in
the financial year 2021. In 2020, the Information Technology Industry recorded 138,000
new hires. The market size of the Information Technology industry's revenue is estimated
at US$194 billion in the financial year 2021, an increase of 2.3 percent. The domestic
income of the Information Technology industry is estimated at US$ 45 billion, and export
revenue is estimated at US$ 150 billion in the financial year 2021. The Indian software

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product industry is expected to reach US$ 100 billion by 2025. Indian companies are
focusing to invest internationally to expand their global footprint and enhance their global
delivery centres. Some of the significant developments in the Indian Information
Technology sectors are as follows in 2021 March. Tech Mahindra announced a
partnership with a UK based robotic process orchestration solutions company. Some of
the major initiatives taken by the Government to promote the IT sector in India are as
follows India's Ministry of Home Affairs and the National Critical Information
Infrastructure Protection Centre are working on a new national strategy to strengthen the
country's cybersecurity amid allegations that Chinese intrusions may have affected
operations at a critical stock exchange and supply of electricity in Mumbai. In Budget
2021, Government allocated Rs.53, 108 crores to the Information Technology and
telecom sector. Department of Telecom, Government of India and Ministry of
communications, Government of Japan signed an MOU to enhance cooperation in 5G
technologies, telecom security and submarine optical fibre cable system. In 2020, the
Government released “simplified other service provided” guidelines to improve the ease
of doing business in the Information Technology industry, Business Process Outsourcing
(BPO) and Information Technology enabled services.

Figure No. 6

Nifty Information Technology Sector Distribution

Source: www.fineracy.com

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 NIFTY Pharmaceutical Sectoral Indices

India is the largest provider of generic drugs globally. Indian Pharmaceutical sector
supplies over 50 percent of generic demand in the US and 25 percent of all medicine in
the UK. Globally, India ranks third in terms of pharmaceutical production by volume and
14th by value. The domestic pharmaceutical industry includes a network of 3000 drug
companies and 10,500 manufacturing units. India enjoys an important position in the
global pharmaceutical sector. Presently, over 80percent of the antiretroviral drugs used
globally to combat AIDS (Acquired Immune Deficiency Syndrome) is supplied by Indian
pharmaceutical firms. India’s domestic pharmaceutical market is estimated at US$41
billion in 2021 and likely to reach US$ 65 billion by 2024 and further expand to reach
US$120-130 billion by 2030. According to the Indian Economic survey 2021, the market
size is expected to grow in three multiples in the next decade.

The Indian biotechnology industry was valued at US$ 64 billion in 2019 and is
expected to reach US$ 150 billion by 2025. India’s drugs and pharmaceuticals exports
stood at US$ 22.15 billion in the financial year 2021 till February. With the recent
development in the pharmaceutical industry in February 2021, Aurobindo Pharma
announced plans to produce solar power from two open-access projects of NVNR power
and infra in Hyderabad. The company will acquire 26percent share capital in both
companies with a US$ 1.5 million investment. The acquisition is expected to be completed
by the end of March 2021. In February 2021, the Telangana government partnered with
Cytiva to open a fast track lab to strengthen the biopharma industry of the state.

Some of the initiatives taken by the Government to promote the pharmaceutical

sector in India are as follows. In February 2021, Glenmark Pharmaceuticals Limited
launched SUTIB (Sunitinib), a generic version of sunitinib oral capsules, to treat Kidney
cancer in India. In February 2021, Natco Pharma launched Brivaracetam for the treatment
of epilepsy in India. In 2021 February, the Russian Ministry of Health allowed Glenmark
Pharmaceutical to market its novel fixed-dose combination nasal spray in Russia.
To achieve self-reliance and minimize import dependency in the country’s essential bulk
drugs, the Department of Pharmaceuticals initiated a PLS Scheme to promote domestic
manufacturing by setting up greenfield plants with minimum domestic value addition in

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four separate “Target Segments” with a cumulative outlay of Rs.6,940 crores from the
financial year 2021 to the financial year 2030. Under Union Budget 2021-22, the
Ministry of Health and Family Welfare has been allocated Rs.73, 932 crores, and the
Department of Health Research has been allocated Rs.2, 662 crores. The Government
gave Rs. 37, 130 crores to the national health mission. PM Aatmanirbhar Swasth Bharat
Yojana was allocated Rs.64, 180 crores over six years. The Ministry of Ayush was
allocated Rs.2, 970 crores, up from Rs.2, 122 crores.

Figure No. 7

Nifty Pharmaceutical Sector Distribution

Source: www.fineracy.com

1.5. STATEMENT OF THE PROBLEM

A financial sector enhancement begins the core of the new economic strategy
initiated in India in the early 1990s. As a result, the Indian Stock Market has pragmatic
metamorphic substitution from overcast to a developing stock market in the worldwide
field. Enhanced market observation, trading mechanism, and introduction of new
financial instruments have made it an interior of global investors' desirability. Improved
market surveillance, trading mechanism, the introduction of a screen-based trading
depository system, derivative instruments, and rolling settlements have changed the stock
market's every complexion. The market has witnessed a substantial increase in the

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number of listed companies, greater belief in the need for resource organization, the
remarkable increase in the number of brokers and investors are some of the developments
that have taken place in Indian stock markets. In such an emerging market, investment
analysts, institutional investors, fund managers and other market players uninterruptedly
search for venture policies that can outstrip the demand.

Financial segments show a crucial role of investment in enhancing commercial

growth. Economic sectors play an essential role in mobilizing resources. Financial stability
is necessary for promoting investment. Financial institutions and markets efficiency can
mobilize savings, provide liquidity and allocate assets in a financial stability situation.
The financial sector's rising role in the efficient distribution of resources at reasonable
prices could suggestively enrich the competence of our economy functions. If fiscal
markets work well, will they direct the resources to their most prolific uses? Risks will be
more precisely priced and tolerated by those who have an appetite for absorbing risks.
In both quantity and quality, actual economic activity with higher reserves would grow
with macroeconomic reliability and fewer financial uncertainties. A constant financial
system simplifies the well-organized communication of monetary policy initiatives.

The Indian stock market is unpredictable. Volatility signifies a threat and is a

substance of distress for anyone dealing with money or advancing in the stock market or
other financial instruments. Stockholders interpret a rise in stock market volatility as an
increase in the risk of equity investment, and consequently, they shift their funds to less
risky assets. Hence, volatility has become progressively substantial for financial
practitioners, market participants, retail investors, regulators and researchers. This study
is critical regarding how much risk an investor can bear for its healthy return. The study
is appropriate to get an idea about the investment's bearing and configuration, whether an
investment is beneficial or not in respect of its expected returns.

The stock market influenced business investment and economic growth through
several channels-changes in the local or global economic and political environment influence
the share price movements. The problems of return and volatility have become increasingly
important to the Indian investors, regulators, brokers, policymakers, dealers and researchers
with the increase in the FIIs investments. This proposed study attempts to analyze the returns

17
and volatility. From an investor's point of view, the study's consequence may be massively
valuable in taking decisions for investment in the stock market and particularly for the better
assortment of stock derivatives for which the investment would be more profitable.

The present study examines the Determinants of price volatility and stock returns
of select companies from Sectoral Indices in NSE. The study also focused on
macroeconomic indicators on CNX NIFTY and the select Sectoral Indices of NSE,
namely NIFTY Automobile Sectoral Indices, NIFTY Banking NIFTY Fast Moving
Consumer Goods Sectoral Indices, NIFTY Information Technology Sectoral Indices and
NIFTY Pharmaceutical Sectoral Indices. The main aim of identifying the impact of
macroeconomic indicators of Sectoral Indices of Stock Exchange may help the investors
make investment decisions on select Sectoral Indices of NSE.

1.6. RESEARCH QUESTIONS

In this background, the study has raised the following research questions:

 Q1: Can the stock market volatility be predicted by analyzing the stock prices of
selected companies from Sectoral Indices? ,

 Q2: Do the selected economic indicators and stock market indices have a causal
relationship, and what is the direction of the causality? ,

 Q3: Are the stock returns affected by the economic indicators and the stock market's
performance? and

 Q4: Do selected companies from Sectoral Indices forecast the volatility by

analyzing the stock prices?

1.7. OBJECTIVES OF THE STUDY

Based on the research questions, the objectives of the study have been framed as
follows:

i. To analyze the volatility of stock prices of select companies from Sectoral Indices
in NSE,

ii. To anticipate the price movement of select companies stock from Sectoral Indices
in NSE,

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 iii. To study the impact of Sectoral Indices on the price of select companies,

iv. To understand the relationship between the macroeconomic indicators and

selected Sectoral Indices, and

v. To identify the determinants of price volatility and stock returns of select

companies from Sectoral Indices in NSE.

1.8. HYPOTHESES OF THE STUDY

i. H01: Sectoral Indices do not influence the price of select companies.

ii. H02: There is no association between the macroeconomic indicators and selected
Sectoral Indices.

iii. H03: There is no significant difference in price volatility of select companies from
Sectoral Indices in NSE.

1.9. SCOPE OF THE STUDY

Numerous investigators broadly consider the stock market in different perceptions.

Sector-Wise indexing is the contemporary modernization in the stock exchange market,
which delivers beneficial insights concerning the sector. The index value is predictable
from the topmost execution companies in different sectors. Regarding the investment
point of view, one has to put massive effort to comprehend the unique state of the
specific stock, and the detailed index data cannot be accompanied by sector performance.
Due to the Hi-tech advancement, the stock exchanges deal with numerous understandings
to customers or investors. Sector-Wise indexing is very beneficial when a recession
happens in a particular sector.

Further, an individual company performance can be directly accompanying its

sector index. The present study observes the affiliation between stock market volatility
and expected returns in the context of the Indian Stock Market. The study also
concentrated with Macroeconomic indicators on CNX NIFTY and the select Sectoral
Indices of NSE, namely NIFTY Automobile Sectoral Indices, NIFTY Banking Sectoral
Indices, NIFTY FMCG Sectoral Indices, NIFTY Information Technology Sectoral
Indices and NIFTY Pharmaceutical Sectoral Indices. The impact of macroeconomic

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indicators of Sectoral Indices of Stock Exchange is to help the investors to make
investment decisions on select Sectoral Indices of NSE.

1.10. OPERATIONAL DEFINITION

The several operational definitions used in this study are as follows

i. Market Capitalization: Market capitalization refers to the total dollar market

value of a company’s outstanding shares of stock commonly referred to as a
market cap. It is calculated by multiplying the total number of a company’s
outstanding shares by the current price of one share.

ii. Trading Value: Trading value means if the common stock is traded on a national
securities exchange, the market price of the common stock on the applicable
(calculated based on the average closing price during the preceding 20 day trading
period).

iii. Closing Price: A closing price for a stock is the price at the end of a trading day.
It is a familiar figure watched by investors, financial institutions and other
organizations making decisions about the stock and the company.

iv. Opening Price: The opening price is the price at which a security first trades
upon the opening of an exchange on a trading day. The price of the first trade for
any listed stock is its daily opening price.

v. Volatility: Volatility is a statistical measure of the dispersion of returns for a

given security or market index.

vi. Regression: Regression is a statistical method used in finance, investing and

other disciplines that attempt to determine the strength and character of the
relationship between one dependent variable and a series of other variables.

vii. Macroeconomic Variables: Macroeconomic variables are indicators or main

signposts signalling the current trends in the economy. Like all experts, the
Government, to do a good job of macro-managing the economy, must study,
analyse and understand the major variables that determine the current behaviour
of the macroeconomy.

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1.11. LIMITATIONS OF THE STUDY

i. The present study is constrained to five Sectoral Indices and ten companies from
each Sectoral Indices of the National Stock Exchange in India. More sectors and
companies would be considered for further research in future,

ii. The study is based on monthly closing prices; however, the work could be done
by using daily closing prices,

iii. The research study is constructed on secondary data and has its restrictions,

iv. The statistical data for the assessment is for ten years only, and

v. The study results may differ from another similar study with the same data set
using different tools and interpretations.

1.12. CHAPTER SCHEME

Chapter 1: This chapter presents the Introduction of the Study, Statement of the
Problem, Research questions, Objectives of the Study, Hypotheses, Scope of the Study,
Operational Definitions, Limitations of the Study and Chapter Scheme.

Chapter 2: This chapter reviews various kinds of literature related to studies on the
Indian Stock Market, Studies related to Volatility and Studies associated with
Macroeconomic Variables.

Chapter 3: This chapter outlines the research methodology followed in this thesis.

Chapter 4: This chapter presents data analysis using statistical tools concerning the
objectives considered in this thesis.

Chapter 5: This chapter presents with the summary of findings, suggestions and conclusion.

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