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Relationship between Indian capital market, crude oil, Gold market & mutual fund & FII flow
Submitted by: ABHISHEK SINGH PARIHAR AVINASH KUMAR SINGH CHANDRABHUSHAN SINHA
Submitted to: Prof. MONIKA MITTAL
a crisis of any kind will create panic among foreign investors as well. we can say that FII invest in Indian capital market.1) Relationship between Capital Market and FII A major development in our country post 1991 has been liberalization of the financial sector. The importance of foreign capital in the context of a developing economy. It will lift the market up as they will be investing in large numbers. 2 . India has also been consistently gaining prominence in various international forums. This is because levels of income are lower in comparison to other developed countries. Developing nations borrow money. FIIs are tracked so closely. “Net buyers” implies that foreign investors poured more money into the stock market than they took out. and simultaneously propel the country to a higher growth trajectory. FII is used to denote an investor. which is generally seen as a positive development as far as our economy is concerned. and regaining their trust and confidence in our economy will entail another mammoth task! So finally to conclude. which in turn means savings and investments are also lower. People see headlines such as “FIIs remained net buyers”. and that is precisely why the government has been so keen on liberalizing the external financial sector since 1991. and when they withdraw their investment Sensex falls. However. If one foreign investor has had a good experience investing in our country. Our country today has one of the most prominent and followed stock exchanges in the world. So basically there is a positive relationship between capital market and FII. Further. who invests money in the financial markets of a country different from the one in which that investor is incorporated. It would not be prudent to drive away foreign investors from investing in our country. Developing countries like India are generally capital scarce. it builds up our reputation in the international community. and encourages more foreign investors to invest in our economy. Countries can thus invest this borrowed money in various social and physical infrastructures earn a return on them which helps them pay off their debt. especially that of capital markets.
until the "crowd" begins to become bullish. As the dollar falls in value. then gold drops quickly. It has traditionally been seen as a very conservative investment due to its relative scarcity. As the price of all commodities rise. Thus crude oil is preferred slightly more than gold in the short run because of the better liquidity. Crude Oil is much more volatile.S. when things are "good" it falls. then investors seek Crude Oil rather than dollars as a place to stash cash for the short term.2) Relationship between crude oil and Gold Prices Gold appears to have its own "logic" and mystique. Crude Oil futures are not less liquid than gold (they can be converted into cash quicker in most instances than gold can). but it tends to be a very accurate reflector of short term fear about the economy in general. too. 3 . Gold is not as tightly aligned with Crude Oil except in a general sense. then gold tends to rise. Gold tends to be held longer term. When things are "bad" the price of gold rises. But the price of Crude Oil right now is being driven largely by the decline in the value of the U. It tends to be counter-cyclical against the Dow Jones Industrial Average. Dollar.
3) Relationship between Mutual fund and Indian capital market The cash flows into mutual funds have generally been strongly correlated with market Returns and this relationship reflects the momentum trading or feedback trading Hypothesis (Davidson and Dutia (1989). Under this scenario. (1991) and Warther. If mutual fund investors are well informed their trades will be a signal to buy stocks and the market in this case will not be responding to fund flows because of price pressure. and Zheng (1999)). 1986). Some studies (Warther (1995). Remelona et al. mutual fund flows and stock returns have a high positive correlation as cited in literature.. which in turn leads to a further change in Security returns. 1986. The hypothesis suggests that a shock to security Returns leads to a change in mutual inflows. Though. (1990). (1993). (1995)) suggests that if mutual fund investors possess information or if they trade in the same direction as another group of investors who possess information. The results show the evidence that security returns are useful to predict flows into aggressive growth funds but not into income funds. Warther (1995). Delong et al. then their trades will reveal or be associated with new information. but rather react efficiently to new information. It is often stated that mutual fund flows cause security returns to rise and Fall and one possible reason attributed for this is the “price pressure hypothesis” (Harris). (1997)) have failed to find evidence that mutual fund flows are 4 . and this causes share prices to increase while the “information revelation” hypothesis (Lee et al. Hendricks et al. However. if mutual fund investors are unsophisticated and have a poor track record (noise traders). then the signal would be to Sell stocks. it does not necessarily mean that the former causes the latter and vice versa Potter (1996) in his study used Granger causality tests to examine the lead–lag relationship between returns and fund flows for several categories of equity funds. Price pressure theory suggests that increased inflows into equity mutual funds stimulate a greater demand by individuals to hold stock. Shleifer.
Gold has not yet lost its prime importance as a hedge against loss of wealth in times of crises. The gold investing habits of Indians strongly ingrained in the Indian Social Psyche. Infect. gold has provided an effective hedge. guided by the individual sentiments. In 2008. In 2008 when the market was suffering from bearish phase Worldwide. while the stock market declined from 2000 to 2003 and then again in 2008 (Fig. Gold Price Volatility and Stock Market Returns in India 50 albeit at a slower pace. The reason for holding gold is. 4) Relationship between Indian capital market and Gold prices Gold prices have been on an uptick since 2000. However. displaying the ability of the yellow metal to protect one's portfolios at the time of a dip. in India stocks do not seem to be perceived as an alternative to gold. to a large extent. during each of the two prolonged bear phases (lasting at least a year) over the past decade.3). At the same time gold continues to forge ahead. So far since March 2009 in India signs of recovery in the stock markets have emerged. gold prices spiked as panic spread across global markets. this paper proceeds to investigate the direction of causality between domestic gold prices and stock market returns in India 5 . In India gold has been held by individuals for years and have passed hands of many generations. It is with this backdrop. the equity culture in India is not as developed as in some other parts of the world. were moving in opposite directions. In addition.affected by lagged security prices and security prices in one period are affected by mutual fund flows in previous periods. the two assets prices – equity and gold.
not to mention the decline in value of the US dollar as a factor in money stability. Indian capital Market. It would be better if India had substantial investor base of its own. Mutual funds. 6 . Crude Oil prices and Gold prices Indian Capital market Crude Oil Prices Foreign Institutional Investors Mutual Funds Gold Market The Indian Equity Market is somewhat enhanced by the inflow of foreign institutional investors that. while capitalizing Indian businesses may at the same time be destabilizing to the economy because of the sometimes abrupt inflow and outflow of (mainly) dollars.Analysis of the relationship between FII.
inflation and deflation.T exports. the gold prices increase. Suppose because of the increase in the FII.S and FII reduces and Capital market in India falls. Indian stock market goes up. It makes cost of equipments and machinery imported cheaper. Dollar is weak at the moment. This is one important factor that drives up the Oil price. This is a kind of wealth protection measure to hedge against currency devaluation. When dollar is strong. when dollar starts to weaken during times of economic uncertainty. As Indian rupee is appreciated and value of dollar starts declining As weak dollar against rupee helps imports when Industry is going for expansion more Capex Investments. 7 . investors tend to trade in dollar in U. It will automatically increase the returns on mutual funds there by there is a positive co relationship between FII Indian stock exchange and Mutual funds The Major reason why FII invest in India is fallen value of dollars. Not good for I. and a weak Dollar means that more value is attached to other stronger currencies. a stronger Euro is able to buy more Oil for the same amount of Euros when the Dollar is weakening. more and more investors shift their investments to gold for safety. Gold has a long history of being used as a currency around the world and is still considered to be a safe heaven for investments whenever there are signs of economic downturn. As the dollar weakens. This s because gold is denominated in US Dollars but widely used in global markets and by central banks of foreign countries. In other words. However. A weak Dollar pushes the crude oil prices up because Oil has a Dollar value in the international markets.
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