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1.0 INTRODUCTION
1.1 Background The Economy of India
The Economy of India is the tenth largest in the world by nominal GDP and the fourth largest by purchasing power parity (PPP. The country's per capita GDP (PPP) per capita is $3,608 (IMF, 129th) in 2010. Following strong economic reforms from the post-independence socialist economy, the country's economic growth progressed at a rapid pace, as free market principles were initiated in 1991 for international competition and foreign investment. Despite fast economic growth India continues to face massive income inequalities, high unemployment and malnutrition. The Indian money market is classified into the organized sector, comprising private, public and foreign owned commercial banks and cooperative banks, together known as scheduled banks, and the unorganized sector, which includes individual or family owned indigenous bankers or money lenders and non-banking financial companies. The unorganized sector and microcredit are still preferred over traditional banks in rural and sub-urban areas, especially for non-productive purposes, like ceremonies and short duration loans. Prime Minister Indira Gandhi nationalized 14 banks in 1969, followed by six others in 1980, and made it mandatory for banks to provide 40% of their net credit to priority sectors like agriculture, small-scale industry, retail trade, small businesses, etc. to ensure that the banks fulfill their social and developmental goals. Since then, the number of bank branches has increased from 8,260 in 1969 to 72,170 in 2007 and the population covered by a branch decreased from 63,800 to 15,000 during the same period. The total bank deposits increased from INR5, 910 crores (US$1.32 billion) in 197071 to INR3, 830,922 crores (US$854.3 billion) in 200809. Despite an increase of rural branches, from 1,860 or 22% of the total number of branches in

1969 to 30,590 or 42% in 2007, only 32,270 out of 500,000 villages are covered by a scheduled bank. India's gross domestic saving in 200607 as a percentage of GDP stood at a high 32.7%. More than half of personal savings are invested in physical assets such as land, houses, cattle, and gold. The public sector banks hold over 75% of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively. Since liberalization, the government has approved significant banking reforms. While some of these relate to nationalized banks, like encouraging mergers, reducing government interference and increasing profitability and competitiveness, other reforms have opened up the banking and insurance sectors to private and foreign players.

Stock Market
A stock market is a public entity for the trading of company stock (shares) and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately. The size of the world stock market is estimated at about $136.8 trillion at the start of October 2010. The total world derivatives market has been estimated at about $791 trillion face or nominal value, 11 times the size of the entire world economy. The value of the derivatives market, because it is stated in terms of notional values, cannot be directly compared to a stock or a fixed income security, which traditionally refers to an actual value. Moreover, the vast majority of derivatives 'cancel' each other out (i.e., a derivative 'bet' on an event occurring is offset by a comparable derivative 'bet' on the event not occurring). Many such relatively illiquid securities are valued as marked to model, rather than an actual market price.

The stocks are listed and traded on stock exchanges which are entities of a corporation or mutual organization specialized in the business of bringing buyers and sellers of the organizations to a listing of stocks and securities together. The largest stock market in the United States, by market capitalization, is the New York Stock Exchange (NYSE). Profit and loss are the two inseparable features of the stock market. But losses can be minimized and profits can be increased with the help of Technicals. Established in 1875, the Bombay Stock Exchange is Asia's first stock exchange. The stock market has become an essential market playing a vital role in economic prosperity that fostering capital formation and sustaining economic growth. Stock markets are more than a place to trade securities; they operate as a facilitator between savers and users of capital by means of pooling of funds, sharing risk, and transferring wealth. Stock markets are essential for economic growth as they insure the flow of resources to the most productive investment opportunities.

Stock prices change in stock markets on a daily basis. Moreover, during certain times of the year, it is easy to notice that stock prices appreciate every morning, and this may take place many times in one day for some stocks. This means that stock prices are determined by supply and demand forces. There is no foolproof system that indicates the exact movement of stock prices. However, the factors behind increases or decreases in the demand and/or supply of a particular stock could include company fundamentals, external factors, and market behavior.

Company fundamental factors influencing stock prices might include performance of the company, a change in board of directors, appointment of new management, and the creation of new assets, dividends, earnings, etc. External factors might include

government rules and regulations, inflation, and other economic conditions, investor behavior, market conditions, money supply, competition, uncontrolled natural or environmental circumstances directly affecting the production of the company, strikes, etc. Moreover, the behavior of market participants could be an important influencing factor of stock price.

Molodovsky (1995) discussed dividends as the hard core of stock value. The importance of dividends was originally emphasized in the work of Williams (1938). He states that the value of any asset equals the present value of all cash flows of the asset. Therefore, the current price of share of common stock is presented as follows:

Po = D1/ (1+k) + D2/ (1+k) 2 + +Dn/ (1+k) n

Where,

Po = the current stock price D = the expected cash dividend, n = the expected year in which the dividend payment is expected k = the required rate of return (discount rate)

This dividend discount model (DDM) is difficult to apply in practical terms, particularly over long horizons for firms that do not pay significant dividends. Alternative forms of stock prices valuation have emerged, such as the discounted cash flow (DCF) model, with the goal of improved practical implementation. This model is the most commonly used because of its direct link to the finance theories of Modigliani and Miller (1958). DCF analysis uses future free cash flow projections, cash flow available for distribution to a defined set of capital providers after all operating and investing needs of the firm are met, and discounts them (most often using the weighted average cost of capital WACC) to arrive at a present value:

Po = CF1/ (1+r) + CF2/ (1+r) 2 + + CFn/ (1+r) n

Where

CF= cash flow r = discount rate (WACC)

As far as the effect of inflation and interest rate on stock price is concerned, an increase in expected inflation rate is likely to lead to economic tightening policies that would have negative effect upon stock prices according to Maysami and Koh (2000). Additionally, in the cash flow

Valuation model, a rise in the rate of inflation increases the nominal risk free rate and raises the discount rate. According to DeFina (1991), the cash flows do not rise at the same rate as inflation, and the rise in discount rate leads to lower stock prices. On the other hand, changes in both short-term and long-term interest rates are expected to affect the discount rate in the same direction via their effect on the nominal risk-free rate as Mukherjee and Naka (1995) point out. Further, an increase in the rate of interest raises the opportunity cost of holding cash and is likely to lead to a substitution effect between stocks and other interest bearing securities (Maysami and Koh, 2000).

Stock markets in the world individually and collectively play a critical role in the most national economies. The markets perform a wide range of economic and political functions while offering trading, investment, speculation, hedging, and arbitrage opportunities. In addition they serve as a mechanism for price discovery and information dissemination while providing vehicles for raising finances for companies. Stock markets are used to implement privatization programs, and they often play an important role in the development of emerging economies (Lee, 1998)

the performance of a stock market of an economy is of interest to various parties including investors, capital markets, the stock exchange and government among others. Stock market performance is influenced by a number of factors key among them the activities of governments and the general performance of the economy. Economic activities do affect the performance of stock markets. Other factors that affect the stock markets performance include, availability of other investments assets, change in composition of investors, and markets sentiments among other factors (Mendelson, 1976).

Function and purpose

The stock market is one of the most important sources for companies to raise money. This allows businesses to be publicly traded, or raise additional capital for expansion by selling shares of ownership of the company in a public market. The liquidity that an exchange provides affords investors the ability to quickly and easily sell securities. This is an attractive feature of investing in stocks, compared to other less liquid investments such as real estate. History has shown that the price of shares and other assets is an important part of the dynamics of economic activity, and can influence or is an indicator of social mood. An economy where the stock market is on the rise is considered to be an up and coming economy. In fact, the stock market is often considered the primary indicator of a country's economic strength and development. Rising share prices, for instance, tend to be associated with increased business investment and vice versa. Share prices also affect the wealth of households and their consumption. Therefore, central banks tend to keep an eye on the control and behavior of the stock market and, in general, on the smooth operation of financial system functions. Financial stability is the raison dtre of central banks. Exchanges also act as the clearinghouse for each transaction, meaning that they collect and deliver the shares, and guarantee payment to the seller of a

security. This eliminates the risk to an individual buyer or seller that the counterparty could default on the transaction. The smooth functioning of all these activities facilitates economic growth in that lower costs and enterprise risks promote the production of goods and services as well as employment. In this way the financial system contributes to increased prosperity.

Relation of the stock market to the modern financial system

The financial system in most western countries has undergone a remarkable transformation. One feature of this development is disintermediation. A portion of the funds involved in saving and financing flows directly to the financial markets instead of being routed via the traditional bank lending and deposit operations. The general public's heightened interest in investing in the stock market, either directly or through mutual funds, has been an important component of this process. Statistics show that in recent decades shares have made up an increasingly large proportion of households' financial assets in many countries. In the 1970s, in Sweden, deposit accounts and other very liquid assets with little risk made up almost 60 percent of households' financial wealth, compared to less than 20 percent in the 2000s. The major part of this adjustment in financial portfolios has gone directly to shares but a good deal now takes the form of various kinds of institutional investment for groups of individuals, e.g., pension funds, mutual funds, hedge funds, insurance investment of premiums, etc. The trend towards forms of saving with a higher risk has been accentuated by new rules for most funds and insurance, permitting a higher proportion of shares to bonds. Similar tendencies are to be found in other industrialized countries. In all developed economic systems, such as the European Union, the United States, Japan and other developed nations, the trend has been the same: saving has moved away from traditional (government insured) bank deposits to more risky securities of one sort or another.

The stock market, individual investors, and financial risk

Riskier long-term saving requires that an individual possess the ability to manage the associated increased risks. Stock prices fluctuate widely, in marked contrast to the stability of (government insured) bank deposits or bonds. This is something that could affect not only the individual investor or household, but also the economy on a large scale. The following deals with some of the risks of the financial sector in general and the stock market in particular. This is certainly more important now that so many newcomers have entered the stock market, or have acquired other 'risky' investments (such as 'investment' property, i.e., real estate and collectables).

With each passing year, the noise level in the stock market rises. Television commentators, financial writers, analysts, and market strategists are all overtaking each other to get investors' attention. At the same time, individual investors, immersed in chat rooms and message boards, are exchanging questionable and often misleading tips. Yet, despite all this available information, investors find it increasingly difficult to profit. Stock prices skyrocket with little reason, then plummet just as quickly, and people who have turned to investing for their children's education and their own retirement become frightened. Sometimes there appears to be no rhyme or reason to the market, only folly.

This is a quote from the preface to a published biography about the long-term valueoriented stock investor Warren Buffett.[4] Buffett began his career with $100, and $105,000 from seven limited partners consisting of Buffett's family and friends. Over the years he has built himself a multi-billion-dollar fortune. The quote illustrates some of what has been happening in the stock market during the end of the 20th century and the beginning of the 21st century.

1.2 Statement of the Problem

A number of studies have been under taken establishing the relationship between the performance of stock exchange in the world and political activities in specific countries. Most of these studies were carried out in developed stock exchanges.

Studies on the effect of political activities on the performance of emerging capital markets are very important as more and more investors participate in these markets. The investors in emerging markets are local and the number of foreign investors continues to increase overtime. Developed economies such as the U.S. operate in different social, economic and political environments than those found in emerging markets.

1.3 OBJECTIVE OF STUDY

To know the basic terminology of stock market. To make the investor aware about the factors this may affect their investment. To get the knowledge of other markets such as commodity market and derivatives. To know the ups and downs of stock market of last two years. To forecast or predict the future trend of stock market which helps in investment. To know the effect of these fluctuation on the Indian economy.

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1.4 SCOPE OF STUDY

Factor affecting Indian stock market Effect on Indian economy Derivatives Debt Markets Stock exchange Commodity market Stock market Securities Day trading Technical Analysis Fundamental Analysis

1.5 LIMITATIONS

Limitations are the limiting lines that restrict the work in some way or other. In this research study also there were some limiting factors; some of them are as under:

1. Data Collection: The most important constraint in this study was data collection as Secondary data was selected for study. Secondary data means data that are already available i.e. they refer to the data which have already been collected and analyzed by someone else.

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2. Time Period:

Time period was one of the main factors as only one month was allotted and the topic covered in research has a wide scope. So, it was not possible to cover it in a short span of time.

3. Reliability: The data collected in research work was secondary data, so, this puts a question mark on the reliability of this data, which a very important factor of this study as conclusion has been derived from this secondary data only.

4. Accuracy: The facts and findings of the data cannot be accepted as accurate to some extent as firstly, secondary data was collected. Secondly, for doing descriptive research time needed to be more, because in short period you cannot cover each point accurately.

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2.0 LITERATURE REVIEW

2.1 The Role of the Stock Market
A large number of empirical studies have been conducted about the determinants of stock prices. In this section, some of these studies will be reviewed. However, most of these studies dealt with stock markets of developed countries.

The stock market is subject to a kaleidoscopic range of factors that influence its movement. Expectations remain key. Even if an economic report is negative, if it comes in better than expected, the market may well rise. In addition to focusing upon individual companies and earnings, investors generally key into a number of key economic factors reported on a weekly or monthly basis.

Factors affecting stock prices have been studied from different points of view. Several researchers examined the relationships between stock prices and selected factors which could be either internal or external. The results show a variety of findings depending on the scope of the study. Some of those factors could be common for all stock markets. However, it is difficult to generalize the results due to the various conditions that surround each stock market environment. Each market has, for example, its own rules and regulations, country of location, type of investors, and other factors that provides the basis of its uniqueness. Some studies have concluded that company fundamentals such as earning and valuation multiple are major factors that affect stock prices. Other indicated that inflation, economic conditions, investor behavior, the behavior of the market and liquidity, are the most influencing factors of stock prices. In addition, the effect of interrelated factors has been covered in some other studies. The following three sections deal with three types of studies: the first section is devoted to reviewing studies emphasizing internal factors (i.e., company fundamentals). The second section deals with studies

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emphasizing external factors. The third section discusses studies that have not emphasized internal or external factors.

The major role that the stock markets have played, and continues to play in many economies is that they promote a culture of thrift, or saving. The very fact that institutions exist where savers can safely invest their money and in addition earn a return, is an incentive to investors to consume less and save more. The growth of related financial services sector such as unit trusts investments clubs, pension and provident fund schemes have extensively contributed towards the deepening of the stock market. It should be appreciated that in as much as an economy can have savings, there is usually lack of established mechanisms for channeling those savings into activities that create wealth. Therefore encouraging a culture of saving in less developed financial markets may first track economic growth.

An efficient stock market sector will have the expertise, the institution and the means to prioritize access to capital by competing users so that an economy manages to realize maximum output at least cost. This is what economist refers to as the optimum production level. If an economy does not have efficient financial markets there is always the risk that scarce capital could be channeled to nonproductive investments as opposed to productive ones, leading to wastage of resources and economic decline (Lee, 1998).

The existence of stock markets promotes higher standards of accounting, resource management and transparency in the management of business. This is because financial markets encourage the separation of owners capital from managers of capital. This separation is important because people who have money may not have the best business ideas and people who have the best ideas may not have money to invest. The Stock Exchange thus becomes an important link. A private company in need of capital for expansion can therefore raise funds through the stock market. This arrangement benefits both those with excess funds and the company that raises

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funds because the manager of capital, who is the entrepreneur, is able to access capital to turn his idea into a reality, while the owners of capital, who are the shareholders, receive a return on their investment. Improving access to finance by providing the flexibility for customization is an important role of the stock market. This is made possible as the financial sector allows the different users of capital to raise capital in ways that is suited to meeting their specific needs. Established companies for example can raise short term finance through commercial paper; small companies can raise long term capital through selling shares; the government and even municipal councils can raise funds by floating various types of bonds and other debt instrument as an alternative to borrowing from the external market. Stock markets provide investors with an efficient mechanism to liquidate their investments. The very fact that investors are certain of the possibility of selling out what they hold as and when they want, is a major incentive for investment as it guarantees mobility of capital in the purchase of assets .The interactions of buyers and sellers in a stock market determine the price of traded assets ;or equivalently the required return that investors demand and is this feature of stock market that signals how funds in the economy should be allocated among financial assets (Fabozzi ,1995).

Reduction of the search and information costs of transaction at the stock market is key to facilitating growth of the market. Search costs presents explicit costs such as money spent to advertise, the desire to sell or purchase a financial asset, and implicit costs such as the value of the time spent in locating counter party. The presence of an organized stock market reduces search and information costs (Fabbozi 1995). Through the stock market companies can raise equity through initial public offers and secondary offers of rights issues and can further raise funds through the issue of debt.

Avenues for public floatation of private companies and government owned entities which in turn allow greater growth in case of the supply of assets available for long

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term investment are available at the stock market. This also leads to wealth redistribution from state and private companies to the investing public since they can share in the returns of the privatized entities. The establishment of an efficient stock market is therefore indispensable for any economy that is keen on using scarce capital resources to achieve economic growth.

2.2 Stock Market Economic Indicators

An economic indicator is in simple terms, the official statistical data of a certain economic factor that are published periodically by the government agencies, which an investor can use to gauge the economic situation. It allows investors to analyze the past and current situation and to project the future prospects of the economy. There are basic indicators that matter to investors in the stock market, namely inflation, gross domestic product (GDP), industrial production, FIIs and the labor market. * Inflation Inflation is important for all investments, simply because it determines the real rate of return that you get from your investment. For instance, if the inflation rate is 5 per cent and the nominal return is 8 per cent, this means that your real rate of return is 3 per cent as the 5 per cent has been eaten by inflation. Inflation's impact on the stock market is even more complicated. A company's profit will be affected by higher inflation. Its input cost will increase and the impact of the increase will depend on how much of the incremental cost the company is able to pass on to its consumers. The amount that the company will have to absorb will reduce its profits, assuming all else being equal. The stock market will suffer further negative impact if it is accompanied by increased interest rates as the bond market is seen as a cheaper investment vehicle compared

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to stocks. When this happens, investors will sell off their stocks to invest in bonds instead. The most commonly used indicator for the measurement of inflation is consumer price index (CPI). It consists of a basket of goods and services commonly purchased by consumers, such as food, housing, clothes, transportation, medical care and entertainment. The total value of this basket of goods and services will be compared with the value of the previous year and the percentage increase will be the inflation rate. On the other hand, where the value drops, it will be a deflation rate. A steady or decreasing trend will be favorable to the overall stock market performance. * Gross Domestic Product Another important indicator is the GDP measurement. It is the total value of goods and services produced in a country during the period being measured. When compared to the previous year's reading, the difference between these two readings indicates whether a country's economy is growing or contracting. GDP is usually published quarterly. When the GDP is positive, the overall stock market will react positively as there will be a boost in investor confidence, encouraging them to invest more in the stock market. This will in turn boost the performances of companies. When the GDP contracts, consumers tread cautiously and reduce their spending. This in turn will affect the performance of companies negatively, thus exerting more downward pressure on the stock market.

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The Gross Domestic Product (GDP) represents the productivity of workers and overall economic output, and is a compendium of all produced products and services. Market participants also closely watch the data on manufacturing activity, which reflects the economic yield within that sector. * Labour market The unemployment rate as a percentage of the total labour force will basically indicate the country's economic state. During an economic meltdown, most companies will either freeze hiring or in more severe cases downsize, by cutting costs and reducing capacity. When this happens, the unemployment rate will increase, which in turn, creates a negative impact on market sentiment. Unemployment remains among the largest single determinants of economic distress. High unemployment leads to lower consumer spending, which results in lower corporate profits with a negative stock market impact. Conversely, low unemployment generally reflects economic prosperity and, in conjunction with other factors, can positively affect the stock market. On Thursday mornings, the government releases the figure on weekly unemployment claims, while reporting the monthly employment numbers on the first Friday of the month. Investors closely watch these figures for signs as to the health of the labor market. * Industrial Production This report shows the change in the production of factories, mines and utilities within a nation. It also reports their 'capacity utilizations', the degree to which the capacity of each of these factories is being used. It is ideal for a nation to see an increase of production while being at its maximum or near maximum capacity utilization. Traders using this indicator are usually concerned with utility production, which can be extremely volatile since the utilities industry, and in turn the trading of and demand

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for energy, is heavily affected by changes in weather. Significant revisions between reports can be caused by weather changes, which in turn, can cause volatility in the nation's currency. * FIIs The growth of institutional investors in the market is having its own advantages as well as its own share of problems on the brighter side almost always purchase stocks on the basis of fundamentals. And this means that it is essential to have information to evaluate, so research becomes important and this leads to increasing demands on companies to become more transparent and more disclosures. This will lead to reduction in information asymmetries that plagued the Indian markets for quite a while. Also, the increasing presence of this class of investors leads to reform of securities trading and transaction systems, nurturing of securities brokers, and liquid markets. On the flip side the increase of foreign investors in particular will bring a very welcome inflow of foreign capital, but there are always some dangers if certain limits are exceeded. Firstly, the foreign capital is free and unpredictable and is always on the lookout of profits. Flls frequently move investments, and those swings can be expected to bring severe price fluctuations resulting in increasing volatility. Here we analyze the comparative trend of Sensex and FII, how it affected the market, Here the grey curve shows Sensex indices and black curve shows the FII cash flow, Here we can see how FII cash inflows increases the market indices and cash outflows decreases the Indian stock market indices:

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This is the way FII is supplementing volatility in Indian market. This is what is happening in current scenario. Also, increased investment from overseas may shift control of domestic firms to foreign hands. This showed us how the Indian market is interdependent on global markets like U.S., Europe and other Asian markets. This was the same as happen in current scenario, U.S. and other market meltdown slotted in direct impact on Indian market. The FII are taking out the money and the impact is shown on current Indian markets. By understanding the economic indicators, you should be able to gauge the current state of economy and more importantly, the direction in which its headed. Pooling this knowledge together with the detailed research on the companies that you are interested in, you should be well equipped to make sound investment decisions. Bear in mind that when the economy slows down and the market is on a downward trend, it is not necessarily bad as this could be your golden opportunity to spot some good stocks at a bargain that are worth buying. The prices of stocks around the world do not move together in an exact manner. This is because the economic systems in which stock markets are located have dissimilar environments in terms of taxation, industrial growth, political stability and monetary policies among other factors.

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Stock markets may experience a general increase in price level referred to as a bull market or general decrease in price level referred to as bear market. Stagnant prices or sudden big price movements downward is referred to as stock market crash. Among the main measures of stock market performance include; stock market indexing, market capitalization and stock turnover. Stock market indexing is one of the most widely used measures of stock performance. Investors hold portfolios of many assets but it is cumbersome to follow progress on each security in the portfolio. Thus it is prudent to observe the entire market under the notion that their portfolio moved in the same direction as the

aggregate market. The market index such as the NSE index is used to observe total returns for an aggregate market and these computed returns are to judge performance of individual portfolios. The assumption is that randomly selecting a large number of stocks from the total market should enable the investor to generate a rate of return comparable to the market (Simiyu, 1992).

Market capitalization is another measure of stock market performance .This measure is used to measure market movements by measuring the total value of stock in a particular stock market by aggregating the market value of the quoted stocks. Changes in market capitalization occur due to fluctuations in share prices or issuance of new share prices or issuance of new shares and bonus issues. This implies that high activity at the stock market may signal more investments in the stock markets. Market turnover indicates inflows and outflows in the stock market and is based on the actively traded shares. A change occurs due to the actively traded shares and to fluctuations in share prices or number of shares traded in a given day (Otuke 2006).

Among the determinants of stock market performance include, performance of the economy, monetary policies, fiscal policies, inflation, availability of substitute investments, change of investor preferences and market sentiments. Activities of

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government and general performance of the economy influence stock market activity and therefore the performance of stock markets. Monetary and fiscal measures enacted by various agencies of national governments influence the aggregate economies of those countries. The resulting economic conditions influence all industries and companies in an economy positively or negatively which in turn affect the performance of stock markets (Reilly 1997).

Fiscal policy incentives such as tax cuts can encourage spending, where as additional taxes on income, petroleum products, cigarettes, and alcoholic beverages discourage spending. Increase or decrease in government spending also influence the general economic activity by triggering multiplier effect (Stieglitz 1993). Monetary policy has implications to the economy. A restrictive monetary policy reduces the supply of funds for working capital and expansion of business. Alternatively a restrictive monetary policy may lead to increased interests rates thus increasing the cost of capital which makes it more expensive for individuals to finance home mortgage and purchase of durable goods (Mendelson 1976).

Inflation affects the performance of stock markets as it causes differences between real and nominal interests rates thus changing the spending and saving behavior of consumers and corporations. Unexpected changes in the rate of inflation make it difficult for firms to plan, which inhibits growth and innovations .Beyond the impact of the domestic economy, differential inflation and interest rate influence the trade balance between countries and exchange rate of currencies (Reilly, 1997). Events such as war, political upheavals within or outside a country ,or international monetary devaluation produces changes in the business environment that lead to uncertainties and earnings expectations of investors therefore increasing the risk premium of investors (Mendelson 1976).

Availability of other investments other than shares traded on the stock market affect the stock market performance. Stock markets compete for investments with other

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assets in an economy such as corporate bonds, governments bonds, treasury bills, real estate and foreign equity among others. Changes in investor composition also affect stock market performance .As supply and demand for security change overtime, different types of investors are attracted to the market. If the risk preferences of the investors are not as those of current investors the required rate of return tend to shift .Accordingly price relationship will change quite independently of any modification in earnings expectations. Participation by institutional investors at Nairobi Stock Exchange influences pricing and returns generated at the stock market (Reilly, 1997). Market sentiment also referred to as the psychology of market participants affect stock market performance. Market sentiment is often subjective, biased, and obstinate .The uncertain mass reaction of individuals to developments affecting the stock market is one of the factors that handicaps stock market forecasting .A mild stock market flurry caused by a spurt in business activity may generate a wave of buying enthusiasm that raises prices to blossom levels.

2.3 The Indian Stock Market

2.3.1 The Historical Perspective

The Bombay Stock Exchange (BSE) is known as the oldest exchange in Asia. It traces its history to the 1850s, when stockbrokers would gather under banyan trees in front of Mumbais Town Hall. The location of these meetings changed many times, as the number of brokers constantly increased. The group eventually moved to Dalal Street in 1874 and in 1875 became an official organization known as The Native Share & Stock Brokers Association. In 1956, the BSE became the first stock exchange to be recognized by the Indian Government under the Securities Contracts Regulation Act.

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The Bombay Stock Exchange developed the BSE Sensex in 1986, giving the BSE a means to measure overall performance of the exchange. In 2000 the BSE used this index to open its derivatives market, trading Sensex futures contracts. The development of Sensex options along with equity derivatives followed in 2001 and 2002, expanding the BSEs trading platform.

Historically an open-cry floor trading exchange, the Bombay Stock Exchange switched to an electronic trading system in 1995. It took the exchange only fifty days to make this transition.

Capital market reforms in India and the launch of the Securities and Exchange Board of India (SEBI) accelerated the integration of the second Indian stock exchange called the National Stock Exchange (NSE) in 1992. After a few years of operations, the NSE has become the largest stock exchange in India.

Three segments of the NSE trading platform were established one after another. The Wholesale Debt Market (WDM) commenced operations in June 1994 and the Capital Market (CM) segment was opened at the end of 1994. Finally, the Futures and Options segment began operating in 2000. Today the NSE takes the 14th position in the top 40 futures exchanges in the world.

In 1996, the National Stock Exchange of India launched S&P CNX Nifty and CNX Junior Indices that make up 100 most liquid stocks in India. CNX Nifty is a diversified index of 50 stocks from 25 different economy sectors. The Indices are owned and managed by India Index Services and Products Ltd (IISL) that has a consulting and licensing agreement with Standard & Poors.

In 1998, the National Stock Exchange of India launched its web-site and was the first exchange in India that started trading stock on the Internet in 2000. The NSE has also proved its leadership in the Indian financial market by gaining many awards such as

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Best IT Usage Award by Computer Society in India (in 1996 and 1997) and CHIP Web Award by CHIP magazine (1999).

2.3.2 The Hours of Operation

Session
Beginning of the day session
pre-open trading session Trading Session Position Transfer Session Closing Session Option Exercise Session Margin Session Query Session End of Day Session

Timing
8:00 - 9:00 9:00 - 9:15 9:15 - 15:30 15:30 - 15:50 15:50 - 16:05 16:05 - 16:35 16:35 - 16:50 16:50 - 17:35 17:30

2.3.3. National Stock Exchange of India Market Segments

Currently, NSE has the following major segments of the capital market:

Equity Futures and Options Retail Debt Market Wholesale Debt Market Currency futures Mutual Fund Stocks lending and borrowing

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August 2008 Currency derivatives were introduced in India with the launch of Currency Futures in USD INR by NSE. Currently it has also launched currency futures in EURO, POUND & YEN. Interest Rate Futures was introduced for the first time in India by NSE on 31 August 2009, exactly after one year of the launch of Currency Futures. NSE became the first stock exchange to get approval for Interest rate futures as recommended by SEBI-RBI committee, on 31 August 2009, a futures contract based on 7% 10 Year GOI bond (NOTIONAL) was launched with quarterly maturities.

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3. 0 RESEARCH OBJECTIVES & METHODOLOGY

Research

Research is defined as human activity based on intellectual application in the investigation of matter. The primary purpose for applied research is discovering, interpreting, and the development of methods and systems for the advancement of human knowledge on a wide variety of scientific matters of our world and the universe. Research can use the scientific method, but need not do so. Scientific research relies on the application of the scientific method, a harnessing of curiosity. This research provides scientific information and theories for the explanation of the nature and the properties of the world around us. It makes practical applications possible. Scientific research is funded by public authorities, by charitable organizations and by private groups, including many companies. Scientific research can be subdivided into different classifications according to their academic and application disciplines. In this project the research type used is descriptive because this research is the most commonly used and the basic reason for carrying out descriptive research is to identify the cause of something that is happening. For instance, this research could be used in order to find out what age group is buying a particular brand of cola, whether a companys market share differs between geographical regions or to discover how many competitors a company has in their marketplace. However, if the research is to return useful results, whoever is conducting the research must comply with strict research requirements in order to obtain the most accurate figures/results possible.

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DESCRIPTIVE RESEARCH

Descriptive research is used to obtain information concerning the current status of the phenomena to describe "what exists" with respect to variables or conditions in a situation. The methods involved range from the survey which describes the status quo, the correlation study which investigates the relationship between variables, to developmental studies which seek to determine changes over time. Descriptive research can be of two types:

I. Quantitative descriptive research emphasizes on what is, and makes use of quantitative methods to describe, record, analyze and interpret the present conditions.

ii. Qualitative descriptive research also emphasizes on what is, but makes use of nonquantitative research methods in describing the conditions of the present.

Current state of Indian Economy

OVERVIEW OF THE ECONOMY

The Indian economy, after exhibiting strong growth during the second quarter of 2008- 09, has experienced moderation in the wake of the global economic slowdown. There has been significant slowdown in the capital expenditure. The government estimated that economy would expand at 7.1% in FY 09, the slowest pace in six years and below the previous year's 9%, as the global slowdown cuts back demand and hurts key sectors. The main focus of the government during this period was to tame inflation along side sustaining growth. This fiscal saw two stimulus packages and the third one seems likely to be on its way.

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GDP Growth
The Central Statistical Organization (CSO) has released the revised estimates for GDP for 2010-11. Alongside, it also released the quarterly estimates for GDP for the fourth quarter of 2010-11. According to the latest numbers made available by CSO, Indias GDP at factor cost at constant prices registered an increase of 8.5 percent in the year 2010-11. This revised estimate of 8.5 percent growth for GDP in 2010-11 is only a shade below the advance estimates that had pegged GDP growth for 2010- 11 at 8.6 percent. This slight dip in overall GDP growth can be attributed to weaker performance in sectors such as mining and quarrying, manufacturing, trade, hotels, transport and communication and financing, insurance, real estate and business services than anticipated earlier. In case of the agriculture and allied activities sector, we find that the revised estimates have pegged growth in 2010-11 at 6.6 percent, which is much higher compared to the advance estimates that had put growth at 5.4 percent. In this context it is important to note that the third advance estimates of crop production released by the Ministry of Agriculture have shown a significant upward revision as compared to second advance estimates in the production of wheat [84.27 million tonnes from 81.47 million tonnes], pulses [17.29 million tonnes from 16.51 million tonnes], oilseeds [302.51 lakh tonnes from 278.48 lakh tonnes] and sugarcane [340.54 million tonnes from 336.70 million tonnes]. These revisions are responsible for lifting the GDP growth rate for agriculture and allied activities sector. Another sector where we see a substantial upward revision in growth rate between the advance and revised estimates is the community, social and personal services sector. While in its advance estimate, CSO had indicated a growth of 5.7 percent for this sector, in the revised estimates this figure has been moved up to 7.0 percent. This revision comes on the back of a larger increase in total expenditure of the central government than anticipated earlier.

The moderation in the expected pace of expansion of the mining and manufacturing sectors can be related to certain adverse policy developments as

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well as hardening of the interest rates in the economy. Further, as performance of the financing, insurance, real estate and business services sector is closely related to performance of the manufacturing sector, this sector too has seen a slippage in growth between advance and revised estimates.

Moving on to the quarterly estimates for GDP growth for the fourth quarter of 201011, we see that although the economys performance is still decent at 7.8 percent, an unmistakable downward trend is visible. Quarterly growth estimates show that GDP growth has come down from 9.3 percent in Q1, 2010-11 to 8.9 percent in Q2, 2010-11 to 8.3 percent in Q3, 2010-11 and further down to 7.8 percent in Q4, 201011.

Amongst sectors, the ones that have seen a considerable erosion of growth momentum over the last one year are mining and quarrying and manufacturing. While in case of the former, the growth figures have come down from 7.1 percent in Q1, 2010-11 to 1.7 percent in Q4, 2010-11, in case of the latter, growth has moderated from 12.7 percent in Q1, 2010-11 to 5.5 percent in Q4, 2010-11. The performance of the agriculture and allied activities sector in the fourth quarter has been particularly strong at 7.5 percent. The other sectors that have registered strong growth in Q4, 2010-11 are electricity, gas and water supply *7.8 percent+, construction *8.2 percent+, trade, hotels, transport and communication *9.3 percent+ and financing, insurance, real estate and business services *9.0 percent+.

A look at quarterly GDP figures by expenditure class shows that growth in private final consumption expenditure is maintained at a robust 8 percent even in the fourth quarter of the fiscal 2010-11. However, what is worrisome is the trend in the growth numbers for gross fixed capital formation, which shows that year on year growth, has tapered from 17.4 percent in Q1, 2010-11 to just about 0.4 percent in Q4, 201011. This is a clear indication of weakness in the investment activity level in the economy and does not bode well for growth in the current year.

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With regard to GDP growth in the year 2011-12, it was noted even in our earlier report that the initial guidance provided by Ministry of Finance of 9 percent growth is looking increasingly difficult to achieve. With time even the government has come around this view and growth projection for the year 2011-12 has been lowered to 8 to 8.5 percent.

It is interesting to note that in FICCIs most recent Economic Outlook Survey, results of which were released in May 2011, the median forecast for GDP growth in the current year comes to 8 percent. The inputs and projections provided by various participating economists in this survey

show that while the agriculture and allied activities sector is projected to grow by 3.7 percent this year, industry and services sector are poised to grow by 8 percent and 9.2 percent respectively.

The key risks to growth in India in the current year are the negative impact of continuous tightening of monetary policy by RBI and a slowdown in global growth due to high international oil prices. Further, although the Indian Meteorological Department has projected a normal monsoon this year, we will have to wait for more updates to get a clearer picture on the spatial distribution of the monsoon.

Industrial Production
The Central Statistical Organization (CSO) has revised the base year for the industrial production data series from 1993-94 to 2004-05. The new series also incorporates a much larger set of items2 that reflect the contemporary production activity in the country and is expected to offer a better gauge of the countrys industrial activity. The weighting diagram of the three major sectors under two digit level indices and four different goods sectors under use based classification has also changed to

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capture the changing structure of economy effectively. The new set of weights that would now be followed is given in the following table.

Comparison of weights assigned in the Old and New series of IIP Indices Sectors Old series 1993-94 Base Year Two-digit level Indices Mining Manufacturing Electricity General Index Use- based Index Basic goods Capital goods Intermediate goods Consumer goods Durables Non durables General Index 35.57 9.26 26.51 28.66 5.37 23.3 100 45.68 8.83 15.69 29.81 8.46 21.35 100 10.47 79.36 10.17 100.00 14.16 75.53 10.32 100.00 New series 2004-05 Base Year

Source CSO, MOSPI, Govt. of India

As the above table shows, in the new series, while the weight of the mining sector has gone up that of the manufacturing sector has gone down. Amongst the use based segments, while basic goods have seen their weight go up substantially, intermediate goods have seen a reduction in the weight assigned for construction of the index. Even before data as per the new series for industrial production was brought out by CSO, economic analysts had predicted that data as per the new series

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would provide an upward bias to growth as it would incorporate new fast growing sectors of the economy. The new numbers have confirmed this and we see a substantial change in growth performance in 2010-11 when we compare the results of the new series with the results based on the old series. It is also interesting to note that the adverse impact on industrial production in the period following the global slowdown is also accentuated as per the new series and this is reflected in the numbers for 2009-10.

As the data given in the next table shows, overall industrial production [as per the new series] registered a growth of 8.2 percent in 2010-11. And this is much better than the 5.3 percent growth clocked in 2009-10. Further, a good part of industrial growth in 2010-11 was driven by the manufacturing sector, which recorded a growth of 8.9 percent compared to a growth of 4.8 percent in 2009-10. The other two sectors, mining and manufacturing, however saw their performance going down in 2010-11 compared to 2009-10. Coming to the use-based classification, we see that all sectors, barring consumer durables, saw an improvement in performance in 201011 over 2009-10. And among the sectors that saw an improvement in performance, the capital goods sector stands out as its growth improved from 1 percent in 200910 to 15 percent in 2010-11.

As mentioned earlier, these numbers, based on the new industrial production series, reflect a much different and improved performance compared to results based on the old series.

In fact, in FICCIs most recent Business Confidence Survey, members of corporate India had indicated the following five point strategy for the authorities to revitalize industrial and economic growth in the country Lower interest rates, particularly the cost of credit to SMEs. Fasten the pace of implementation of infrastructure projects.

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Check the incessant rise in price of industrial inputs and raw materials. Continue with incentives offered to exporters. Maintain fiscal discipline.

Core Sector

The composition of the core sector has also undergone a change with two new segments being added to the existing list of six industries. These two new segments are fertilizers and natural gas and with the addition of these segments the combined weight of core sector in IIP has increased from 27 percent to 37.9 percent. As part of this revision, weights of the existing sectors have also seen some change and base year has also been revised to 2004-05. The new expanded list of sectors that now make up the core sector along with the weights attached is presented in the following table.

Segments of the Core Sector Segment Overall Index Coal Crude Oil Natural Gas Refinery Products Fertilizers Steel Cement Electricity Weight in the old series 26.68 3.22 4.17 nil 2 nil 5.13 1.99 10.17 Weight in the new series 37.9 4.38 5.21 1.71 5.94 1.25 6.68 2.41 10.32

Source Office of Economic Adviser, MOC&I, Govt of India

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If we look at the numbers for the core sector as per the new series, we see that this sector registered a growth of 5.7 percent during the year 2010-11. This growth was lower than the growth of 6.6 percent that was posted in the year 2009-10. At the disaggregated level, the sectors that saw a weaker performance in the year 2010-11 vis--vis 2009-10 are coal, natural gas, fertilizers, cement and electricity. The remaining sectors namely crude oil, refinery products and steel saw an improvement in performance in 2010-11 over 2009-10.

With developments in the Middle East and North Africa region showing no signs of a let up and with OPEC in its last meeting deciding not to hike the overall quota for oil production, oil prices are likely to remain firm in the near term. This will continue to put pressure on Indias overall oil import bill. As regards non-oil imports, while a slowdown in the domestic economy could lead to some moderation in the non-oil import bill, any large respite here can be ruled as prices of commodities other than oil are also firming up. Another point to take note of is the likely increase in imports of LNG in 2011 due to shortfall in RILs KG D6 block. This too would lead to an increase in Indias import bill as imported gas is nearly 3 times as costly compared to gas supplied by Reliance. With exports likely to come under pressure and imports showing little signs of easing in the coming months, the trade balance in 2011-12 could widen.

Foreign Investments

Data on total foreign investment flows into the country shows that in 2010-11, foreign investment flows into India saw a dip of about 17 percent over the previous year. Further, when we look at the two main components of foreign investment, namely foreign direct investment and portfolio investment, we see that the dip is largely on account of a slowdown seen in case of FDI. As the table below shows, FDI flows into India in 2009-10 were to the tune of US$ 37.7 billion and in 2010-11 this

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figure came down to US$ 27 billion. Portfolio flows, which were to the tune of US$ 32.4 billion in 2009-10, saw a marginal dip to about US$ 31.5 billion in 2010-11.

FICCIs interaction with economists, policy experts and analysts shows that the emergence of other competing economies, particularly in the Asian region, could be one of the factors that lie behind this slowdown in FDI flows towards India. While this proposition requires further research, economists and policy experts concur with the view that there are tangible factors linked to India which could also be responsible for making foreign investors a little wary for committing more funds. And amongst these domestic factors, two issues stand out. First is the state of the macro-economy, which is far from comfortable. With inflation remaining stubbornly high, growth slowing down due to aggressive monetary tightening by RBI and the government throwing limited light on how the fiscal deficit target of 4.6 percent for the current year would be achieved, investors may have been prompted to get into a wait and watch mode before the domestic situation improves.

Second set comprises factors such as environment sensitive policies being pursued with respect to certain sectors, slow movement on resolving the land acquisition problem and issues of governance and corruption that have been grabbing headlines and showing the country in poor light. As all of these issues have a bearing on the perception and confidence level of foreign investors, these may have limited FDI inflows into the country. In this context, it may be reiterated that completion of the much awaited FDI policy reforms in sectors such as insurance, defense and multibrand retail would also give a boost to overall FDI flows into the country. Coming to portfolio investments, as already mentioned, in 2010-11 portfolio flows totaled US$ 31.5 billion and were only a tad below US$ 32.4 billion received in the previous year. FIIs, which form a major component of portfolio investments, were to the tune of US$ 29.4 billion in 2010-11 and saw little change from the figure for the previous year which was US$ 29 billion. While portfolio flows stood higher than FDI flows last

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year, the outlook for funds flows on portfolio account going ahead is also not too encouraging. Given continuous monetary policy tightening by the central bank, interest rates are on an upswing. This coupled with rising prices of raw materials is likely to have an adverse impact on the profit margins of firms across sectors

in the year ahead. As this would constrain the capacity of firms to distribute dividends, FIIs are likely to take a conservative view on India and Indian companies as they do their return on investment calculations. Signs of this are already emerging as in a recent survey [June 2011] conducted by the Bank of America Merrill Lynch amongst global fund managers, India was placed amongst the least favorite equity market by Asia-Pacific investors.

Additionally, with the RBI contemplating tightening of rules relating to exit of foreign investors and private equity funds who put their money in Indian firms, investors sentiments are expected to further weaken. The re-emergence and intensification of the sovereign debt crisis in Europe and the expected halt of quantitative easing policy in the US by the end of June 2011 are also downside factors for portfolio flows for emerging markets including India. It may be mentioned that the Finance Minister of India, Pranab Mukherjee, tried to allay fears of fund managers and foreign institutions investors focused on India at recent conference. He urged FIIs to be optimistic about Indian growth story and to take a long term view on its performance rather getting disturbed with the short term developments and statistics. As a measure of assurance, the Finance Minister told fund managers that the government would continue to take investor friendly policies and has already started the next generation financial sector reforms such as widening and deepening of the Indian securities markets, liberalizing the policy on foreign capital flows, strengthening the regulatory and other institutional architecture and reducing transaction cost in the securities markets.

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These announcements however did little to reduce concerns amongst fund managers, who are looking for better management of the macro-economy and forward movement on crucial economic reforms.

Forex Reserves

Indias foreign exchange reserves increased as we moved ahead in fiscal 2010-11. As data given in the table below shows, while in April 2010, Indias foreign exchange reserves totaled US$ 279.6 billion, in September 2010 this figure had increased to US$ 292.9 billion. Most recent numbers show that the countrys foreign exchange reserves have shot up further crossing the US$ 300 billion mark. With this level of reserves, India is amongst the ten largest holders of foreign exchange reserves in the world. Foreign Exchange Reserves in US$ Million Forex Reserves Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 Source Reserve Bank of India 279,633 273,544 275,710 284,183 283,142 292,870 297,956 292,389 297,334 299,224 301,592 305,486 313,671

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The increasing size of our foreign exchange reserves has drawn attention of the policymakers. As mentioned in our previous report, just some time back, Dr. Kaushik Basu, Chief Economic Advisor, Ministry of Finance, had raised the question of India to consider having a Sovereign Wealth Fund. In more recent times, a few independent analysts have opined that a part of these huge reserves be deployed to import commodities which are or could be in short supply in the economy. This last suggestion was made in context of managing the stubbornly high inflation by bridging the demand supply mismatch.

Exchange Rate
Most recent trends in the movement of the INR vis--vis major vehicle currencies show that the Indian Rupee has depreciated against all the major global currencies. As the data given in the table below shows, the Rupee depreciated against the US$ by 1.2 percent between April 2011 and May 2011. During the same time period, while the value of the Rupee went down against the Pound Sterling by 1 percent, Rupees depreciation against the Japanese Yen was of a much larger magnitude 3.8 percent. Against the Euro too we saw the Rupee becoming a little weak and depreciating by about 0.4 percent between April 2011 and May 2011.

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Rupees per unit of foreign currency (Yearly/monthly average basis) USD Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 MOM growth in May 2011 Source-Reserve Bank of India 1.2 1 3.8 0.4 44.4995 45.7865 46.5443 46.8373 46.5679 46.0616 44.4583 45.0183 45.1568 45.3934 45.4538 44.9895 44.3681 44.9048 Pound sterling 68.2384 67.1747 68.6952 71.515 72.9736 71.6578 70.3381 71.8498 70.4635 71.5394 73.2921 72.7033 72.7215 73.431 Japanese Yen 0.4763 0.4969 0.5122 0.5343 0.5465 0.5454 0.5428 0.5457 0.5425 0.5496 0.5503 0.5502 0.5334 0.5535 Euro 59.6648 57.6553 56.9016 59.7636 59.97 60.0592 61.7153 61.4981 59.6652 60.5178 62.0904 63.0314 64.2269 64.4829

One of the factors that affect the competitiveness of Indias exports vis--vis exports from other countries is the relative movement in the national exchange rates. In the following table, we provide the movement in the national currencies of select countries vis--vis the US$. The data shows that between April 2011 and May 2011, majority of the currencies analyzed have depreciated against the US$. The only exception is the Indonesian Rupiah, which has appreciated against the US$ over the

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same time period. The Malaysian Ringgit did not see any movement against the US$ during the period under study.

Regarding the outlook for the Indian Rupee against the US$ in the months ahead, the majority view amongst analysts and currency strategists is one of depreciation. This bearish view with regard to the Indian Rupee is based on two factors. First is the likely deterioration in the current account due to moderation in exports, continuous rise in imports and a possible slowdown in invisible receipts. Second is the expected slowdown in funds flows into India. While FDI flows into the Indian market are already on a slowdown mode, FII flows too are showing signs of anxiety over the evolving macro-economic situation with inflation remaining high and growth slowing down.

Money and Banking

Data on money supply growth shows that broad money (M3) registered a growth of 15.9 percent in the year 2010-11. This growth was only a tad lower when compared to a growth of 16.9 percent registered in the year 2009-10. However, it is important to note that growth in money supply in 2010-11 was considerably weak when compared to the growth of nominal GDP that stood at 19.1 percent. Money supply growth in

2010-11 was driven by growth seen in bank credit to the commercial sector [20.6 percent]. The other important component of money supply, net foreign exchange of assets of the banking sector, registered a moderate growth of just about 7.4 percent in 2010-11.

Latest numbers available show that year on year growth in money supply in the period up to May 21, 2011 was 16.8 percent. Growth in the corresponding period

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[up to May 22, 2010] in the previous year was 15.1 percent. Amongst sources of money supply, while bank credit to the commercial sector registered a growth of 21.3 percent in the period up to May 21, 2011, net bank credit to the government went up by 17.9 percent. Net foreign exchange assets of the banking sector registered a growth of 7.6 percent during the same time period.

The tightness in the loanable funds market however is expected to ease in the months ahead. And this is on account of both an expected slowdown in the credit growth rate and an improvement in the deposit growth rate.

With RBI continuing with its tight monetary policy stance, interest rates in the economy have been going up and have reached a stage where these have started hurting both investment and consumption demand. Already many corporate have indicated that it is becoming difficult to fund investment plans at current interest rates. Also, with demand for automobiles, commercial vehicles and realty moderating, one can expect credit growth to taper off in the coming months.

As regards deposits, in the year 2010-11 we saw that deposit growth was weak in the first half of the year and then it started going up as banks increased the card rates. Data available for the current year shows that the uptick in deposit growth continues and with deposit rates expected to remain at current levels and the outlook for the equity market being not too encouraging, banks should see greater mobilization of deposits.

Fiscal Situation

The provisional data for fiscal indicators of the central government for the year 2010-11 was released by the Controller General of Accounts during the first week of June 2011. These provisional estimates for various fiscal variables show a definite

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improvement over the revised estimates (RE), with a more than anticipated rise in revenue collection and reduction in expenditure during 2010-11. The striking feature of the new estimate is the reduction in fiscal deficit number compared to the revised estimate given during presentation of the union budget. This depicts the comfortable fiscal position the country enjoyed in the previous fiscal. A look at receipt trends of the central government shows that the total receipts increased by almost 37 percent in 2010-11 over 2009 10. While revenue receipts, the major chunk under the receipts head, increased by 38.7 percent, non- debt capital receipts, the other component, showed only a marginal increase of 7 percent during 2010-11 over the previous year. Again, within revenue receipts, though non- tax revenue contributed less than tax revenue in absolute terms, the former showed a growth rate of a whopping 90.5 percent. This was due to the huge amount of money government raised through auction of 3G and BWA spectrum.

Coming next to the trend in expenditure of central government, it may be noted that the total expenditure has grown by 17 percent in 2010-11 over 2009-10, much less than the 37 percent growth in receipts. Within overall expenditure, while the plan expenditure grew at 24.4 percent, non-plan expenditure showed an increase of 13.9 percent. Excellent tax collection, buoyant non tax revenue and an effective cut down on expenditure growth helped the government to bring down the fiscal deficit for the year 2010-11 to 4.7 percent a figure much lower than the revised estimate of 5.1 percent announced by the finance minister in his 2011-12 budget speech. This is again much lower than the

budget estimate (BE) of 5.5 percent announced during the 2010-11 budget speech. The revenue deficit for the fiscal 2010-11 is 3.1 percent and the primary deficit for the same year is 1.7 percent. These are lower than the revised estimate of 3.4 percent and 2 percent respectively.

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However, possibilities of higher receipts in 2011-12 look increasingly ambitious. All the main components under the receipts head - tax, non-tax and non-debt capital receipt - may show a moderation in the current fiscal. With no major tax changes announced in the budget for 2011-12, the government was banking on strong growth in the economy and industry, good corporate performance and a rise in wages and salaries to translate into high growth in tax collections. Now that there are clear indications of an economic and industrial slowdown and fiscal strains building up in the corporate sector, even senior government functionaries have started doubting the feasibility of sticking to the budgeted targets for revenues.

Union Finance Minister, Mr. Pranab Mukherjee, shared these concerns recently while addressing senior officials of the Central Board of Excise and Customs (CBEC). He warned that the task of meeting the revenue target is very challenging and will require sustained and strategic efforts

throughout the financial year. Further, CBEC Chairman, SD Majumdar, also hinted that they will have to see if a midcourse revision in revenue targets is required. Earlier, Finance Secretary, Sunil Mitra had indicated that amidst slowdown in tax collections, the Finance Ministry may go slow on disbursal of pending income tax refunds. While this is the case with tax collections, governments other revenue raising sources like auction of the remaining 3G spectrum and disinvestment of select PSUs may also not fetch anticipated revenues as there may not be enough takers given the tough market conditions.

On the expenditure front, government has estimated a very small increase of 3.4 percent in its overall expenditure for the year 2011-12. In all probability this estimate will be exceeded in the current year mainly because of expenditures under the heads of MGNREGA, food, petroleum and fertilizer subsidy. While increased wage rate will

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push up the MGNREGA expenditure, international price of oil and fertilizer will push up petroleum and fertilizer subsidy. Also, the food subsidy bill will see a rise with the introduction of Food Security Bill and the associated high cost that would have to be incurred for collecting and storing much larger amounts of food grains. Considering this mismatch in revenue expenditures, some analysts fear that the fiscal deficit this year may eventually go up to anywhere between 6 to 7 percent. The only way to rectify the expected dent in revenue collections is to improve efficiency in tax collections. The tax departments of the government should leverage information technology tools and evolve a process wherein refunds become automatic. Further, steps should be taken to widen the tax base in the country. Today, just about 3 percent of the people in the country file tax returns. Efforts of the government should be geared towards increasing this base of tax payers and curbing tax evasion. This would automatically lead to a jump in tax revenues. Further, the government should go ahead with reforms like decontrolling diesel and LPG prices to augment revenue.

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4.0 ABSTRACTS & FACT FINDINGS

ASIAN MARKETS
Asian markets were trading firm. China's Shanghai Composite was up 0.11% or 2.99 points at 2,768.88. Hong Kong's Hang Seng gained 1.32% or 289.89 points at 22,277.18. Japan's Nikkei rose 0.86% or 86.17 points at 10,096.56. Singapore's Straits Times advanced 0.86% or 26.87 points at 3,165.38. South Korea's Seoul Composite surged 0.56% or 12.06 points at 2,157.10. Taiwan's Taiwan Weighted added 0.45% or 39.10 points at 8,756.24.

Credit Rating Agency Standard & Poor's Has Downgraded America

Washington, Aug 6 (IANS) : For the first time in history, credit rating agency Standard & Poor's has downgraded America's top notch credit rating, stripping the world's largest economy of its prized AAA status. 'We have lowered our long-term sovereign credit rating on the United States of America to 'AA+' from 'AAA,'' S&P said Friday in a stunning blow to the country, that has enjoyed the top rating for 70 years, and its political leadership.

In July, S&P, one of the three major agencies that assign grades the credit of companies and governments, placed the US rating on 'CreditWatch with negative implications' as the debt ceiling debate devolved into partisan bickering. To avoid a downgrade, S&P said the US needed to not only raise the debt ceiling, but also develop a 'credible' plan to reduce the federal debt by at least $4 trillion over the next decade. Earlier this week, Congress instead passed a plan to reduce the debt by at least $2.1 trillion.

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In its report Friday, S&P ruled that the US fell short: 'The downgrade reflects our opinion that the ... plan that Congress and the Administration recently agreed to falls short of what, in our view, would be necessary to stabilize the government's medium-term debt dynamics.' S&P also cited dysfunctional policymaking in Washington as a factor in the downgrade. 'The effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges.' The other rating agencies, Moody's and Fitch, have said they have no immediate plan to downgrade the US credit rating, giving the government more time to make progress on debt reduction. The split verdict limits the impact of the S&P downgrade as many consequences would be set off only by a reduction by two agencies, the New York Times said. But the lowering of the country's rating could rattle confidence and raise borrowing costs for the government and consumers, impeding the already fragile recovery, it said. The announcement by S& P came after a week of turmoil on Wall Street not seen since the days of the financial crisis. After plunging around 5 percent Thursday, stocks bounced up and down Friday and closed relatively flat.

The European Central Bank stepped into bond markets

(Reuters) - The European Central Bank stepped into bond markets on Monday, backing up a pledge to support Spain and Italy with the aim of averting financial meltdown in the euro zone, while the G7 and G20 offered soothing words to investors shaken by a historic downgrade of the U.S. debt rating. Spanish and Italian bond yields fell as traders said the ECB was broadening its bondbuying program to include debt issued by the bloc's third- and fourth-biggest economies, in the latest effort to staunch Europe's sovereign debt crisis. "They're doing 20 to 25 million (euro) clips and they're spreading it around the market," said a trader. "We expect them to do billions today." Equity markets that had been in headlong retreat in Asia turned positive in Europe as G20 finance chiefs and central bankers pledged to take all necessary measures to support financial stability, growth and liquidity.

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"It does seem that policymakers globally are swinging into action," said Shane Oliver, head of investment strategy at AMP Capital Investors, one of Australia's biggest fund managers. "A move to now start buying Italian bonds could be very positive in helping to calm fears about a further escalation of European debt problems," said Oliver, speaking before the ECB made its move in the markets. "Speculators will now have to think twice about selling or shorting Italian and Spanish bonds knowing the ECB will be acting against them." Spreads of Italian and Spanish bonds over German debt narrowed sharply, credit default swaps fell and Spanish and Italian stocks jumped more than 3 percent. The euro also extended gains. It marked a reversal of mood from the fear that had gripped Asian markets earlier in the day, when similar pledges in a G7 statement had failed to calm investors who drove safe haven gold to a record atop $1,715 an ounce, while share markets were again colored red. Investors also turned their attention to what the Federal Reserve might say at its policy meeting on Tuesday, fuelling speculation it might soon have to consider a third round of quantitative easing to resuscitate the world's richest economy.

COUNTING ON ECB, FED

After a rare Sunday night conference call, the ECB welcomed announcements by Italy and Spain of new deficit cutting measures and economic reforms as well as a FrancoGerman pledge that the euro zone's rescue fund will take responsibility for bondbuying once it is operational, probably in October. "The Euro system will intervene very significantly on markets and respond in a significant and cohesive way," a monetary source said. The central bank had been reluctant to step up its buying of distressed debt, fearing it would be seen as a blank check to spendthrift governments. Since the program began in May last year it has bought just 80 billion Euros of bonds, while Italy and Spain alone issue around 600 billion a year. Dealers said it would take a pledge to buy several hundred billion Euros of debt to get ahead of contagion fears.

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At the same time the G7 -- the United States, Britain, Canada, France, Germany, Italy and Japan -- said it would take joint action if needed in foreign exchange markets because "disorderly movements ... have adverse effects for economic and financial stability." The G20 communiqu followed shortly after European markets opened. The Japanese intervened to restrain their currency last week while the Swiss National Bank surprised with a new round of easing as it fought a rapidly rising franc. Pressure is now growing on the Fed to try further easing -- dubbed QE3 by the market -- though few expect anything dramatic as early as Tuesday's policy meeting. "We are probably a little bit closer. But I don't think we're there yet," said Nomura's chief global economist Paul Sheard. "I think the Fed would have to get a little bit more concerned that financial markets were spinning out of control before accepting with QE3."

CHINA NOT HAPPY

None of which was enough to reassure Washington's single biggest creditor, China. "It must be understood that if the U.S., Europe and other advanced economies fail to shoulder their responsibilities and continue their incessant messing around over selfish interests, this will seriously impede stable development of the global economy," said a commentary in the People's Daily newspaper, the mouthpiece of China's ruling Communist party. China holds well over a trillion dollars worth of U.S. government paper and was thus not pleased when Standard & Poor's cut the U.S. debt rating to AA-plus from AAA -a move that also angered Treasury Secretary Timothy Geithner. In an interview on NBC and CNBC television, Geithner said the rating agency "has shown really terrible judgment" and claimed its downgrade meant nothing and wouldn't affect investors' faith in U.S. debt. Japanese Finance Minister Yoshihiko Noda put a brave face on it on Monday, saying that market trust in the dollar and U.S. Treasuries has not wavered and indicated Tokyo's readiness to maintain its massive holdings of U.S. government bonds.

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Wall Street drops as economic, European worries weigh

US stocks sank on Thursday as data fuelled worries the economy was weakening and bank shares tumbled on fears the European financial crisis could spread havoc to other parts of the world. The losses extended a slide in stocks that began in late July, with the S&P 500 now off 15.7% from its April 29 highs, as economic worries both here and abroad have caused investors to exit risky assets. Factory activity in the US Mid-Atlantic region as surveyed by the Philadelphia Federal Reserve Bank plummeted in August, falling to the lowest level since March 2009. Bank shares contributed to the market's slide. While a Federal Reserve official said the Fed scrutinizes US banks and the American units of European banks equally, a Wall Street Journal report said regulators are questioning the US units of Europe's lenders more closely. In the broad selloff, sectors associated with growth were also hit hard. Top drags on the Dow included shares of IBM, down 4.8% at USD 163.25 and United Technologies, down 5.3% at USD 68.21. On the NASDAQ, shares of Oracle fell 7.8% to USD 25.34. "Europe is dealing with an escalating fiscal crisis," said Robert Van Batenburg, head of equity research at Louis Capital in New York. "In the United States the momentum is slip-sliding. You've got a lot of corporations that also came out with very worrisome comments that by the end of the quarter things really started to slow down." The Dow Jones industrial average was down 419.63 points, or 3.68%, at 10,990.58. The Standard & Poor's 500 Index was down 53.24 points, or 4.46%, at 1,140.65. The NASDAQ Composite Index was down 131.05 points, or 5.22%, at 2,380.43. As the Dow fell more than 520 points early in the session, US Treasury debt prices soared and spot gold rallied to a record USD 1,825.29 an ounce, evidence investors were headed for safer assets. Traders were on the defensive, paying more for protection as US stocks tumbled on disappointing economic data and renewed bank worries. The CBOE Volatility Index, Wall Street's favorite pulse of investor sentiment, rose 29.4% to 40.87.

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"This jump in the VIX has caught people off guard and they are now scrambling for protection," said option Monster analyst Chris McKhann. Although risk perceptions rose Thursday, Wall Street's "fear gauge" is still below the 15-month high set at the close of trading on August 8. Puts on the SPDR S&P Trust were active, with more than two trading for every call. The fund fell 3.8% to USD 115.01. In SPY options, the soon-to-expire August out-of-the money USD 110 puts were among the most popular as 77,566 contracts traded. The August USD 115 SPY strike was the busiest, with 178,500 contracts traded, Trade Alert data showed. Among banks, Citigroup Inc was off 7.7% at USD 27.54 and Morgan Stanley was down 6.4% at USD 15.92.Shares of luxury retailer Tiffany & Co dropped 7.4% to USD 59.52. Economists at Morgan Stanley lowered the outlook for global growth and said the United States and euro zone are "dangerously close to recession."

India can have third largest GDP by 2025: PRIME MINISTER

Kolkata, Aug 22 (IANS) India could have the world's third largest GDP by 2025 if the country maintained its present growth rate, Prime Minister Manmohan Singh said Monday while conceding that the target of nine percent growth for the next five years was 'very ambitious' given the current state of the global economy. Addressing the golden jubilee celebrations of the Indian Institute of ManagementCalcutta, the prime minister cautioned that while the 'rosy future' was within the nation's reach, it was not an assured outcome. Manmohan Singh, who is regarded as the architect of India's economic reforms for having initiated them as finance minister between 1991 and 1996, said the reforms programme had courted controversy in the early years but all regimes at the centre had carried them forward. 'There have been differences of emphasis but the direction has remained the same. Most state governments have also acted in the same spirit. 'Because of our gradualist approach, it took time for the economic reforms to have an impact. However, it is now clear that their impact has been remarkable.'

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'If we can continue to grow at this rate, we are well positioned to be the country with the third largest GDP in the world by 2025.' He referred to the nine percent growth target fixed for the 12th Five Year Plan (2012-17), and said: 'Since we have already achieved about 8.2 percent in the 11th plan period, it may seem that a transition to 9 percent growth is not difficult.' 'However, it is in fact a very ambitious target given the current global economic situation, which is full of uncertainties about the prospects in industrialized countries and their implications for global capital markets,' he added.

A downgrade of US sovereign debt coupled with fears of another bout of recession in the world's largest economy and in Europe has sent shivers down the spines of investors across global stock markets and the likelihood of a demand slowdown is gaining strength. 'Our own economy has also slowed down compared to last year, and this year's growth may be around eight percent or a little more, at best,' said Manmohan Singh, alluding to the effects of the crisis. 'Despite this sobering environment, we should aim at nine percent growth. This is because we are not planning for today, or even for the rest of this year. We are planning for the five year period from 2012-13 to 2016-17.' Referring to the high growth trajectory of Asian countries like Japan and South Korea in the past, and China's fast-paced economic expansion in the last two decades, the prime minister said India too could grow at a rapid rate provided it could scale up infrastructure and bring out wide-spread reforms. 'India is now capable of repeating the performance of this group of Asian countries. But we must remember that it will not happen automatically, by simply proceeding on a business as usual basis. There are many difficult challenges we must overcome to achieve the transition to nine percent growth.'

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5.0 QUESTIONNAIRE
1. Name: 2. Age: 3. Occupation a. Service Business b. Student Other

4. Are you investing in Equity market? a. Yes b. No

5. What percentage of your investment is invested in equity market? a. Less than 25% c. 51-75% b. 25-50% d. More than 75%

6. From how long you are investing in equity market? a. Less than 1 year c. 2 to 3 years b.1 to 2 year/s d. More than 3 years

7. Why do you invest in equity market? a. For quick short term gain b. For high long term gain

8. What attracts you towards equity market? a. High return c. Dividend b. Speculation d. Liquidity of invested fund

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9. What is the purpose of investment? a. To meet the cost of Inflation b. To earn return on idle resources c. To generate a specified sum of money for a specific goal in life d. To make a provision for an uncertain future

10. How much is your total investment annually? a. < 5000 c. 10000 - 25000 b. 5000 10000 d. 25000 50000

11. How much of investment for equity? a. < 25% c. 50% - 75% b. 25% - 50% d. 75% - 100%

12. Generally which is the holding period of equity? a. Intraday b. Delivery

13. In which sector you invest most? a. IT d. Banking b. Pharmacy e. Petroleum c. Telecom f. Others

14. What will be the future of equity market in India as per you? a. Bullish b. Bearish c. Cant say

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6.0 CONCLUSION & RECOMMENDATIONS

For the financial markets model and for the two groups of the sample, the results indicate that the coefficient value of EPS was as expected, positive and statistically significant at 1 percent level, the hypothesis of the positive and significant relationship between the level of stock price and earnings per share is confirmed. The results also indicate that EPS was the most influencing factor on the stock prices. Furthermore, the results of the three models report the positive relationship between stock price and money supply and GDP, although the significant level was not the same in the three models. However, the results of the three models reveal negative relationship between stock price and consumer price index (inflation) and interest rate which is consistent with most of previous studies. The findings indicate a strong positive impact of EPS on the stock prices. This provides decision makers ( i.e., portfolio managers and investors) with information about future stock prices. Accordingly, companies should give more attention in their policies and strategies to those factors influencing EPS, which according to the results of this study represents the most influencing factor and might be considered the main factor for business survival and success. Decision makers should support studies either by supporting research centers or by direct support to the researchers and postgraduate students. The positive impact of money supply is another factor that the decision makers should pay close attention to. More specifically, they should pay attention to changes in the money supply and the sensitivity of stock prices to these changes. The same can be said in the case of GDP, which also affects stock prices. Decision makers also should be more concerned about the changes in inflation as measured by changes in CPI. In the findings of this study and other similar studies, inflation has an inverse relationship with stock prices. The findings of this study could contribute, with other studies, to establishing a data base for the stock market industry to assess market performance, continuously monitor and improve its behavior, and detect any undesired phenomena.

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As the stock market is an emerging market, further studies need to be conducted to gain a better understanding of the market behavior and assist investors, portfolios managers, and companies to make rational decisions. Research in this area should include market efficiency, reaction to the announcement of events, P/E ratio and stock market returns, and the impact on Indian stock market prices of regional and international stock markets. Finally, it is recommended that the monetary authorities monitor the stock market behavior while setting policy as the results show that the stock price is affected by money supply, interest rate, and consumer price index. The performance of the market appears to be strongly linked to the political events and political regime prevailing

Through this research we can conclude that: Stock market fluctuates by the external environment. Stock market is all about future prediction. Stock market is very sensitive market. It is based on high risk and high return.

Comparatively stock market is less risky than the other market and generates more money for the economy One who have good knowledge in stock market, may survive in the market and generates profits or good return whether the market is down Investors should not invest on the basis of rumors they must observe the market condition or trends Indian economy and then invest If they want to generate good return.

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REFERENCES

http://rbi.org.in/home.aspx http://www.reuters.com/ http://www.moneycontrol.com/stocksmarketsindia/ http://www.nseindia.com/content/circulars/ncfm13815.htm Equity Research Notes of NCFM Capital Markets Dealers Module notes of NCFM CFA notes www.wikipedia.org

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RESPONSE SHEET
Response Sheet No: 1 Name: Sujatha K Salve ID NO: IIPM/FW/09-11/MUM/FIN/164

Questionnaire: Impact of Economic Factors on Stock Market Date when the Guide was consulted: 4th July 2011 The outcome of the discussion: The method has a very good scope to increase understand the market.

The Progress of the Thesis: An introduction about the Stock market at the start of the thesis. Some articles by the great writers who have excellence in this industry are followed.

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RESPONSE SHEET
Response Sheet No: 2 Name: Sujatha K Salve ID NO: IIPM/FW/09-11/MUM/FIN/164 Questionnaire: I have completed my data collection and showed it to Mr.Bhavik Shah. We had a discussion regarding data analysis, like; 1. How the question with the weightage should be analyzed. 2. There were few people who were hesitating in answering the questionnaire, which was also discussed by us. 3. How to go about the data analysis. Date when the Guide was consulted: 22nd July 2011 The outcome of the discussion: After discussions the data analysis procedure and also how to analyze few particular questions Sir also said that not to include the people category in the questionnaire which were not agreeing to be a part of this research as its against some companies policies.

The Progress of the Thesis: My data collection is over and also approved by the external guide. He has told me to go for data analysis and at the same time is also working on the introductory part of my thesis.

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RESPONSE SHEET
Response Sheet No: 3

Name: Sujatha K Salve ID NO: IIPM/FW/09-11/MUM/FIN/164 Questionnaire: I have finished data analysis and presented them to the external guide. We also had discussions toward the introductory part like the overview of Stock Market & Indian Economy Date when the Guide was consulted: 1st August 2011 The outcome of the discussion: The external guide, Mr.Bhavik Shah provided me with some insights on the Stock markets as he is an experienced player in the same market. The Progress of the Thesis: Currently finished with data analysis and also approved by the external guide.

Also done with the introductory part of the thesis.

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RESPONSE SHEET
Response Sheet No: 4 Name: Sujatha K Salve ID NO: IIPM/FW/09-11/MUM/FIN/164 Questionnaire: introduction and Literature part of the thesis is over which I have shown to the external guide. In this meeting we discussed the key economic factor that affects the stock markets. Date when the Guide was consulted: 4th August 2011 The outcome of the discussion: We reached to an understanding of the different economic factors. Recommendations and conclusions for the data analyzed.

The Progress of the Thesis: My Introduction, Literature Review and Data Analysis part is over now and now I will be proceeding with the Conclusions and Recommendations.

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RESPONSE SHEET
Response Sheet No: 5 Name: Sujatha K Salve ID NO: IIPM/FW/09-11/MUM/FIN/164 Questionnaire: I have finished with the conclusions and recommendations part which was shown to external guide. Date when the Guide was consulted: 14th August 2011 The outcome of the discussion: The method has a very good scope to increase understand the market.

The Progress of the Thesis: I have prepared the Conclusion and the recommendation part. Now I will be doing formatting, editing and some initial things such as preparation of signatory page, abstract, etc.

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RESPONSE SHEET
Response Sheet No: 6 Name: Sujatha K Salve ID NO: IIPM/FW/09-11/MUM/FIN/164 Questionnaire: I have completed the editing and preparation of Abstract, signatory page, table of contents, etc of the Preliminaries. In this time of meeting with the external guide, I showed my final draft of thesis and got his approval with his signature on the signatory page.

Date when the Guide was consulted: 27th August 2011 The outcome of the discussion: External Guide Mr.Bhavik Shah approved my thesis for the submission as well as signed it too. The Progress of the Thesis: All the formalities relating to editing and formatting the thesis are over. I have given the hard copies for binding and embossing which will be submitted in some days.