IMPACT OF MONETARY VARIABLES

ON STOCK RETURN

BY- Tushar Arora

PRN - 15021021140

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TABLE OF CONTENT

Sl No. Topic Page No.

1. Preface 6

2. Acknowledgement 8

3. Introduction to the 9
Problem

4. Objective of the 27
Problem

5. Review of Literature 30

6. Formation of 36
Hypothesis

7. Methodology 38

8. Analysis and Findings 43

9. Conclusion 54

10. Limitations 56

11. Bibliography 57

PREFACE
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Literaturebthat provides empiricaldevidence about the long-term relationship
between stock returns and monetarygvariables in emerging markets is limited.
In those markets, unlike in mature ones, market participants and the availability
of information as well as its quality, change rapidlyhthrough time. Thegpurpose
of this study is to examine the long-termhrelationship between stockbreturns
and monetary variables in annemerging market through time by using the co-
integrationjtechnique. The database is set up at daily frequency of variables that
are customarily used by the financial media as determinants of stock
investments and the co-integration technique enables us to consider changes in
long-run steady-state properties of thefequilibrium relationship between the
non-stationary stock prices and monetary variables. The findings of this study
indicate that, overall results should not be used in formulating investment
strategies because they can be misleading in the sense that the variables that
explain stock prices might change through time. In the case of Indian Stock
Exchange, as the market became more mature, the influence of monetary
expansion and interest rates disappeared and foreign currency prices regained
their expected significance. This project investigates the effect of inflation
uncertainty and forex rates on the portfoliojbehaviour of households and the
equilibrium structure of capital market rates. The principal findings regarding
portfolio behaviour are firstly, in the presence of inflation uncertainty and
fluctuating forex rates, households will have an inflation-hedgingbdemand for
assets other than riskless nominal bonds, which will be directly proportional to
the covariance between the rate of inflation and the nominal rates of return on
these other assets.jSecondly anhasset is a perfect inflation hedge if andmonly if
its nominal return isnperfectlybcorrelated withnthe ratemofminflation. Thirdly
it can also be used to hedgefthe fluctuating forex ratesbas returns are directly
related to forex rates. Fourthly, examine how the fluctuations in t-bills affect
the demand of stocks in the capital market.

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This project attempts to examine the integration and efficiency of Indian stock
inflation and foreign exchange markets. The study employed Time series
ordinary least square regression,nVector Auto Regression techniquesfon
monthly data of stockvreturn and exchange rate returnvfor the period spanning
from January 2001 to December 2006. The major findingbof this study is as
follows. 50 stocks return’s of BSE100 and exchange rate are positivelyfrelated.
The policybimplication of this abovebresult of the positivevrelation between
stock return and exchange rate return for the foreign investors in India should
be further studied. Weak form of market efficiency hypothesis is also
corroborated for stock and foreign exchange markets.

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 INTRODUCTION TO
THE PROBLEM

INTRODUCTION

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Stock amarket returns largely depends on themSensex and the prevailingbeconomic
scenario of in the acountry and the aglobe as a whole. aThe economic factors ainclude
inflation, Forex, money supply, t-bills (91 days) etc.bwhich has an indirect effect on
the stockbmarket prices and thus returns. With the recentbslowdown in the USA, the
other monetarybvariables have had a huge impact on thebcapital market. The stock
market has awitnessed an overall decreasingbtrend in the recent apast and thus all
economic factors and its impact on astockbreturn becomes an aimportant study in
today’s scenario.

Hence I have taken a50 BSE100 stock andbanalysed its return with respect to
inflation, forex and Sensex and tried to find thebdependency of one the other. In other
wordsbI tied to analyze thebimpact of these marketbvariables on astock prices bband
its return.

aInflation and acapital market...

 India’s inflation, as ameasured by WPI, ajumped to a 13 year high of 11.05%,

in the week ended 7th June-08. CPI for the aIndustrial aWorkers (as at April-
08), is running bat ~8% and the bias aremains on the upside.

 Inflation is anotbrestricted to India or tobemerging markets nor tobcommodity

importing countries – it is a globalbphenomenon. Even countries like Russia
are awitnessing high inflation.

 Inflation in China hit an 11-year high inbApril before retreating to 7.7% in

May. With the recent increase in consumerbprices of petroleum products and
electricity, inflationnis set to rise once again.

 Euro zone inflation touchedm16yr high in May, UK inflation touched 10yr

high in May and necessitated a letter from the BoEbgovernor to the chancellor
of exchequer explaining steps taken to controlbinflation

 Apart from India, central banks in China, Brazil, Russia, South Africa and
Philippinesvhave tightenedbmonetary policy in response.

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  Bond yields are at thebhighest levels of the year and havebincreased ~90-
100bps in US and Euro zone and ~ 50bps in Japan from their lows in March.

Risk aversion has started to rise again...

A nation's capital market includes such financial institutions as banks, insurance

companies, and stock exchanges that channel long-termbinvestment funds to
commercial and industrial borrowers. Unlike the moneynmarket, on whichblending is
ordinarily short term, the capital market typically finances fixed investments like
those in buildings and machinery.

A developed capital market canbsolve thismproblembof paucitybof funds. For an

organized capital market can mobilizemandmpool together even the small and
scatteredmsavings and augment themavailability of investiblemfunds. While
themrapid growth of capitalmmarkets, the growth of joint stock business has in its

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turn encouraged the development ofmcapital markets. A developed capitalmmarket
provides a number ofmprofitable investmentmopportunities for small savers.

The Indian capital market has aundergone aremarkable changes in the post-
independence era. aCertain steps taken by the agovernment to place the market on a
strongmfooting and adevelop it to meet the growingmcapital requirements of fast
industrialization andmdevelopment of the economy havemsignificantly contributed to
the adevelopments thatmtook place in the Indianmcapital amarketmover the last five
decadesmor aso.

The aimportant facts that have acontributed to the adevelopment of the capital
marketing India are the following:

Legislative measures…

Laws like the acompanies act, the securities contract (Regulations) and the capital
issues (Control). Act empowered the government to regulate the activities of the
capital market with a view to assuring ahealthy trends in the market, aprotecting the
interests of the investors, efficient utilization of the resources, etc.

Establishment of development banks and expansion of the public sectors…

Starting with the am establishment of the IFCI, amnumber ofmdevelopment banks

have been established at manational and regional levels to provide financial and other
adevelopment assistance to the aentrepreneurs and aenterprises. These m institutions
today account for a large chunk of the industrial finance.

Growth of underwriting business…

There has been a aphenomenal growth in the underwriting business thanks mainly to
the public financial orporations and themcommercial banks. In the last one decade
the amount underwritten asmpercentage of total privatemcapital aissues offered to
public varied between 72 per cent and 97 per cent.

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Public confidence…

Impressive aperformance of certain largemcompanies encouraged public ainvestment

in industrial securities.

Increasing awareness of investment opportunities…

The improvement inmeducation andmcommunication has created more public

awareness about the investmentaopportunities in the business sector. The amarket for
industrialmsecurities has become broader.

Capital Market Reforms…

A number ofmmeasures have been taken to check abuses and tompromote healthy
development of the capitalmmarket.

There have been manymtimes in the past when strongmeconomicmperformance

propelledmhigher astockmprices. The 1920s, the 1950s and the 1980s are aclassic
examples. In themReagan years, stocks andmbonds ralliemsharply inmresponse to
higher economicmgrowth rates and jobmcreation.

In principle, themstock market should do well under a \conditions of strong economic

growthmandm lowm inflation.

Is Inflation A Legitimate Fear On Wall Street and the Markets?

Charles R. Nelson, an aeconomics professor at University of aWashington, has

studied the impact of price ainflation, as measured by the consumer a aprice index.
He’s formulated the following trading rule: “When aCPI inflation is on the rise, stay
out of stocks; when aCPI inflation is on the adecline, buy stocks.”

The chart below shows the CPI inflation index since 2000:

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Foreign Exchange rate (forex rate)

The aforeign exchange (currency, forex or FX) market is where currency atrading
takes place. FX transactions typically ainvolve one party purchasing a quantity of one
currency in exchange for paying a quantity of aanother. The FX market is one of the
largest and amost liquid financial markets in the world, and aincludes trading between
large banks, central banks,mcurrencymspeculators, corporations,mgovernments, and
other institutions. The averagemdaily volume in the global forex and related amarkets
is continuously growing.mTraditional turnover was reported to be aover US$ 3.2
trillion in April 2007 by themBank for InternationalmSettlement. Sincemthen, the
market has acontinued to grow. According to Euro money’smannual FX Poll,
volumesmgrew a further 41% between 2007 and 2008.

The foreignmexchange market is unique abecause of

 its trading volumes,

 the extreme liquidity of the market,

 the large number of, and variety of, traders in the market,

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  its geographical dispersion,

 its long trading hours: 24 hours a day except on weekends (from 5pm
EST on Sunday until 4pm EST Friday),

 The variety of factors that affect exchange rates.

 the low margins of profit compared with other markets of fixed income
(but profits can be high due to very large trading volumes)

 the use of leverage

Main foreign exchange market turnover, 1988 - 2007, measured in billions of USD.

As such, it has been referred to as the amarket closest to the ideal perfect
acompetition, notwithstanding market manipulation by acentral banks. According to
the Bank formInternationalmSettlements, average dailymturnover in globalmforeign
exchange markets ismestimated atm$3.98 trillion. aTrading in themworld's main

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financial markets aaccounted for $3.21 trillion of this. Thismapproximately $3.21
trillion in main foreign exchangemmarket turnover was broken down as follows:

 $1.005 trillion in spot transactions

 $362 billion in outright forwards

 $1.714 trillion in forex swaps

 $129 billion estimated gaps in reporting

Of the $3.98 trillion daily globalmturnover, trading inmLondon accounted

formaround $1.36 trillion, or 34.1% of the total, making London by far the global
center for foreign exchange.mIn second and third placesmrespectively, trading in
aNew Yorkmaccounted for 16.6%, and aTokyomaccounted for 6.0%. Inmaddition to
"traditional" turnover, $2.1 trillion wasmtraded inmderivatives. aExchange-traded
forex futures contracts were mintroduced in 1972 at the ChicagomMercantile
Exchange and are actively traded relative to amost other futuresmcontracts. Forex
afutures volume has grown rapidly in arecent years, and accounts for about 7% of the
atotal foreign exchange market volume,maccording to ThemWall Street Journal
aEurope (5/5/06, p. 20).

Treasury bills (or T-bills)

Treasury bills (T-bills) are emerging as themgovernment’s apreferredminstrument

with bulk of the governmentmborrowing taking placemthrough thismshort-term
paper. aThis has led bankers tombelieve that the governmentmexpects interestmrates
to fall in the future, enabling it to borrow acheaper then.

Over the past few months, the amarket has been flooded with an aunprecedented
quantity of T-bills. Butmdespite the oversupply, banks, primarymdealers andmmutual
funds are af alling over each other to buy T-bills as athey are flush with funds.

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“The governmentmcanmborrow (to meet the fiscal deficit) throughmlong dated
securities (bonds) or aT-bills,” says ICICI SecuritiesmPrimarymDealership MD and
CEO B Prasanna. “By mrestricting the amount raised through abonds, it is sending
out a signal that interestmrates are acoming down,” Mr Prasanna said.

Treasury bills (or T-bills) mature in onemyear or less. Likemzero-coupon bonds,

they do not pay interestmprior to maturity; instead they are sold at a discount of the
apar value to create ampositive yield tommaturity. Many regardmTreasury bills as the
aleast risky investmentmavailable to U.S. investors.

Regular weekly T-billsmaremcommonly issuedmwith maturitymdates of 28 days (or

4 weeks, about a month), 91 days (or 13 weeks, about 3 months), 182 days (or 26
weeks, about 6 months), and 364 days (or 52 weeks, about 1 year).
Treasurymbillsmare soldmby single pricemauctions heldmweekly. aOffering amounts
for 13-week and 26-week bills are aannounced eachmThursday for auction,musually
at 1:00 pm, onmthe following Mondaymand settlement, or aissuance,mon Thursday.
Offering amounts for 4-week bills aremannounced onmMonday for auction the next
day, Tuesday, usually at 1:00 pm,mand issuance onmThursday. aOffering amounts for
52-week bills are announced every afourth Thursdaymfor auction the next aTuesday,
usually at 1:00 pm, and issuance onmThursday. aPurchase orders at Treasury aDirect
must be entered before 11:30 on the aMonday of the auction. aThe minimum purchase
- effective April 7, 2008 - is $100. (This amount formerly had been $1,000.) Mature
aT-bills are also aredeemed on each Thursday. aBanks and financial ainstitutions,
especially primary dealers, are the largest purchasers of T-bills.

Like othermsecurities, individualmissues of T-bills aremidentifiedmwith amunique

CUSIP number. The 13-week bill issuedmthreemmonths after a 26-week bill is
considered a re-openingmof the 26-week bill andmis givenmthe samemCUSIP
number.mThe 4-week bill issued two monthsmafter that andmmaturing on themsame
day is also a considered a re-opening of the 26-week bill and shares the samemCUSIP
number.mFor example,mthe 26-week billmissued onmMarch 22, 2007,
andmmaturing on September 20, 2007, has the same CUSIP number (912795A27)mas
the 13-week billmissued on June 21, 2007, and maturingmon September 20, 2007,

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and as the 4-week billmissued onmAugust 23, 2007 thatmmatures onmSeptember 20,
2007.

Duringmperiods whenmTreasury cashmbalances aremparticularly low, themTreasury

may sell cash management bills (or CMBs). These are sold at amdiscountmand by
auction just like weekly Treasury bills. They differ inmthat they aremirregular in
amount, term (often less than 21 days), and day of the week for auction, issuance, and
maturity. When CMBs mature on the same day as a regular weekly bill, usually
Thursday, they are said to be on-cycle. The CMB is considered another reopening of
the bill and has the same CUSIP. When CMBs mature on any other day, they are off-
cycle and have a different CUSIP number.

Treasury bills aremquoted formpurchasemand salemin the secondary market on

anmannualizedmpercentagemyield tommaturity, or basis.

Withmthemadvent ofmTreasurymDirect, individuals canmnowmpurchase T-Bills

online and have funds withdrawn from and depositedmdirectly tomtheir
personalmbank accountmandmearn higher interestmrates on their savings.

Money Supply

There ismsubstantial empiricalmevidence that foundman influence of money supply

on stock returns.mIncreased nominal moneymsupply leads to a portfoliomrebalancing
toward other real assets.mThismupwardmreallocation results in upwardmpressure aon
stock prices. Therefore,mstock returnsmrespond tomunanticipated changesmin
nominal money supply.

On the othermhand, purely anominalmincreases in moneymsupply may lead to great

inflation uncertainty, and could have an maverse consequence on the stock amarket.
Hence, money growth could be egarded as a leading indicator of future inflation,
which in turn affects stock returns. aFurthermore, increase in money supply leads to a
falling in real interest rates.mMoreover, firms are faced with lower adiscount rates
against future cash flows,mand also respond to increasing incomemby adjusting their

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investments so as to mgenerate greater sales and mprofits resulting in higher future
cash flowsmand highermstock prices.

The abovemeconomic rationale supporting the linkagembetween stockmreturns and

money supply, ismsufficient tomincludemmoney supply as a relevantmeconomic
force that can aimpactmstock returns. In themanalysis M0 is used as the monetary
aggregate (deflated by the retail price index) not outmof any strongmbelief in a
aparticularmformmofmtransmissionmmechanism but because the M0 series is the
longest lasting,mreasonably consistent,mand most timelymreported money supply
series.

Unanticipated Sectoral Dividend Yield:

Dividend Yields help to apredict the stockmreturns in a variety of datasets at both the
company and aggregated level in US data6 . If mdividend yield matter they are also
expected to matter at the aindustry level. Dividendmyield may be high when
abusiness is under depressed and individual adiscount rates high.

Higher expectedmreturns aremrequired onmstocks are requiredmon stocksmto

apersuade agentsmin themeconomy tomshift frommconsumption to investment.

UnexpectedmIndustry DividendmYield is defined as:

UYi (t) = loge Yi (t) - loge Yi(t-1)

Where,

Yi : Dividend Yield during month t

UYi (t) : Unanticipated Dividend Yield.

BSE Sensex

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The BSE Sensex or aBombay Stock Exchange Sensitive Index is a value-
aweighted indexmcomposed of 30 stocksmstarted in April, 1984. It aconsists of the 30
largest and most actively traded stocks, arepresentative of various sectors, on the
Bombay Stock Exchange. Thesemcompanies accountmfor around one-fifth aof the
market capitalization of the BSE.

At irregular aintervals, the BombaymStock Exchange (BSE) authoritiesmreview and

modify itsmcomposition to make suremit reflects current marketmconditions. The
index ismcalculated based on a free-floatmcapitalizationmmethod; amvariation of the
market capmmethod. Instead ofmusing a company's outstandingmshares itmuses its
afloat, or shares thatmare readily available formtrading. Themfree-float method,
therefore,mdoes not includemrestricted stocks, such asmthose held by company
insiders.

The index hasmincreased by over tenmtimesmfrom June 1990 to thempresent. Using

information from Aprilm1979monwards,mthemlong-run rate of return onmthe BSE
Sensex works out to be 18.6% per annum, which atranslates to roughly 9% per
aannum after compensating for inflation.

BSEmprovides an efficient andmtransparentmmarket for trading in equity, adebt

instruments and derivatives. It has amnation-wide reachmwith ampresence in more
than 359 cities and towns of India. BSE hasmalways been at par with the international
standards. The systems andmprocesses are designed to safeguard market aintegrity
and enhance transparency inmoperations. BSEmis the first aexchange in India and the
second in the world to obtain an ISO 9001:2000 mcertifications. It ismalso themfirst
exchangemin themcountry and second in the world to receivemInformationmSecurity
Management SystemmStandardmBS 7799-2-2002mcertification for its BSE On-line
Trading System (BOLT).

BSE continuesmto innovate.mIn recent times, it has becomemthe firstmnational level

stockmexchangemtomlaunch its awebsite in Gujarati andmHindi tomreach out to a
larger number of investors. It hasmsuccessfully launched amreporting platform for
corporate bonds in India christened themICDM or Indian Corporate DebtmMarket

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and a uniquemticker-cum-screen aptlymnamed 'BSE Broadcast' whichmenables
ainformation dissemination to the acommon man on the street.

In 2006, BSEmlaunchedmthe DirectorsmDatabase andmICERS (Indian Corporate

Electronic Reporting System) to facilitate information flow and increase transparency
in the Indian capital market. While the Directors Database provides a single-point
access to information on the boards of directors of listed companies, the ICERS
facilitates the corporates in sharing with BSE their corporate announcements.

BSE also has a wide range of services to empower investors and facilitate smooth
transactions:

 Investor Services: The mDepartment of InvestormServices redresses

grievancesmofminvestors. BSE was the firstmexchange in themcountry to
provide anmamount of Rs.1 millionmtowards the ainvestor protectionmfund;
it isman amount higher than that ofmany exchange in themcountry. BSE
alaunched a nationwide investormawareness programme- 'Safe Investing in
the Stock Market' undermwhich 264 aprogrammesmwere held inmmore
thanm200 cities.

 The BSE On-line Trading (BOLT): BSE On-linemTrading (BOLT)

facilitates on-line screen basedmtrading in securities. BOLT ismcurrently
operatingmin 25,000mTrader Workstationsmlocated across over 359 cities in
India.

 BSEWEBX.com: In February 2001, BSE a introduced the world'smfirst

centralizedmexchange-based Internetmtrading system, BSEWEBX.com. This
initiative enables investors anywheremin the world to trade on the BSE
platform.

 Surveillance: BSE's On-Line mSurveillancemSystem (BOSS) monitors on a

real-time basis the price movements, volumempositions andmmembers'
positions and real-time mmeasurement of default risk,mmarket reconstruction
and generation of cross market alerts.

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  BSE Training Institute: BTImimparts capitalmmarket trainingmand
certification, in collaborationmwith reputedmmanagementminstitutes and
universities. It offersmover 40 courses on variousmaspects of themcapital
market and financial sector.mMore than 20,000 people have attended mthe
BTImprogrammes

Awards

 The World Council ofmCorporate Governance hasmawarded themGolden

Peacock GlobalmCSR Award for BSE's initiatives inmCorporatemSocial
Responsibility (CSR).

 ThemAnnualmReportsmandmAccounts of BSE for the a year ended March

31, 2006 and March 31 2007 a have beenmawarded themICAI awards for
excellencemin financialmreporting.

 The Human ResourcemManagement atmBSE has won the Asia - Pacific a

HRM awards for itsmefforts in employermbrandingmthroughmtalent
management at work, mhealth management at mwork andmexcellence in HR
throughmtechnology

Drawing from its rich a past and its equally robust performance in the a recent times,
BSE will continue to remain an icon in the a Indian capital market.

'Sensex' ismthe glamorous dancingmbeauty of traditional Indianmstock market. In a

the recent past this glamorous stockmmarket indicator dancesmaggressively. This a
paper is aimedmat throwing lights onmvarious factors that made our Sensexmbaby to
dancemfast with lots of forward steps. a Does themmovement of Sensex ormNifty
really mean anything to the investors,mfund managers, investment advisors, and last

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but a not the least to the regulators? Do these a numbers have any significance? Do a
they have any scientific basis? How does a layman understand these numbers? What
exactly that goes into these numbers?

In recent years, indexesmhave come to the forefrontmowing to

directmapplicationsmin finance in themform of index fundsmand indexmderivatives.
Index derivatives allow people to cheaplymalter theirmriskmexposuremto an index
(hedging) and tomimplement forecastsmaboutmindex movements (speculation).
Hedging a using index derivativesmhasmbecome a central part of riskmmanagement
in the modern economy. Securities market indexes have been constructed to give a
quick answer to the a question: What is the-market- doing?

Sensex during year 2008:

After scalingmnew heights of 20000+,msensexmentered year 2008 with

rosympictures. The trade pundits, brokers and even a investors predicted new heights
for the year. And they felt their predictions coming true when sensexmtouched the
21000 mark on 8th January 2008. It’s i a nteresting if one sees in terms of flows; the
journey from 20,000 to 21,000 is dominated by domestic institutional investors;
FIIs were negative sellers, theymsold in the cash market tomthe tune ofmUSDm45
billion. So ifmone has to take outmsome pointersmfrom this journey fromm20,000 to
21,000, it is themlongest journeymwhich we have seenmin the lastm5,000 marks, the
midcaps and smallcaps have been outperformersmand in terms of flows, it has been
domestic institutional investors which have beenmreally putting the money.

But the rosy picture soon turned gloomy. The a skyrocketing sensex suddenly started
heading south and Sensex saw a the biggest absolute fall in history, a shedding 2062
points intra-day. It closed at 17,605.35, down 1408.35 points or 7.4 per cent. It fell to
a low of 16,951.50. The fall was triggered as a result of weakness in global
markets, but the impact of the global a rout was the biggest in India. The market
tumbled on account of a broad based sell-off that emerged in global equity a markets.
Fears over the solvency of major a Western banks rattled stocks in Asia and Europe.

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AftermthemlastmJanuarymin the lastm20 years formIndian equities, Februarymturned
a out to be a flat monthmwith the BSE sensex down 0.4%. India finished themmonth
as the second worst emerging market.mThe underperformancemcan partlymbe
attributed to the fact thatmIndian marketsmoutperformed global ammarkets in
themlast two months of 2007and hencemwe were seeing the lagged impactmof that
outperformance.mIn the shorter term,mdevelopments in the USmeconomy andmUS
markets continued to dominateminvestor sentiments globally andmwe sawmvolatility
move up sharply across most markets.

ThemBombaymStock Exchange (BSE)mSensex fell 4.44 percent on Monday, 31st

march the last day of themfinancial quarter, to end themquarter of Marchmdown 22.9
percent, its biggestmquarterly fall since themJune 1992mquarter, as reports of rising
inflation and globalmeconomic slowdown dampened marketmsentiments.
Financial stocks ledmthe Sensex slidemalong with IT.mAccording a to market
analysts, ITmstocks fell on worries about the healthmof the US economy. Indian
IT firms dependmon the US clients for a major share of theirmrevenues.

What the Index means?

An index is amnumber, whichmmeasures the change in a set of values over amperiod

of time. Amstock a indexmrepresents the changemin value of a set ofmstocks, which
constitute the index. a More specifically, a stock index a number is the current relative
value of a weighted averagemof the prices of ampre-defined group ofmequities. It is a
relativemvalue becausemit is expressedmrelative tomthe weightedmaverage
ofmprices at some arbitrarily chosen starting date or base period. The startingmvalue
or base of the index is usually set to amnumber a such as 100 or 1000.

Characteristics of a good Index...

 A good stock market index is one, which captures a the behaviour of the
overall equity market.

 It should represent the market; it should be well diversified and yet highly
liquid.

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  Movements a of the index should represent the returns a obtained by "typical"
portfolios in the country.

A market index is very important for its use...

A market index is very important for its use of the following factors:

 as a barometer a for market behaviour,

 as a benchmark a portfolio performance,

 as an underlying in derivative instruments like index futures, and in passive

fund management by index funds

Every stock price moves for two possible reasons:

1. News about the a company (e.g. a product launch, or a the closure of a factory)
2. News about the country (e.g. nuclear bombs, or a budget announcement)

The job of an a index is to purely capture the a second part, the movements of the a
stock market as a whole (i.e. news about the country). This is achieved a by
averaging. Each stock a contains a mixture of two elements - stock news and index
news. When we a take an average of returns on many stocks, the individual a stock
news tends to cancel out and the only thing left is news that is common to all stocks.

Factors Which Drive Stock Market:

1. Three Es i.e. Economy (both global as a well as domestic), Earning

& Emotions:

When we a talk about economy as a factor then it is well known a fact that growth in
economy should be at pace to encourage common man to invest more by creating
faith on account of transparent financial system. This is a applicable to both global as

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well as a domestic economy. There should be a overall growth of all three sectors of
economy i.e. Primary, Secondary, & Tertiary.

Second ‘E’ is depending on first ‘E’ as a accelerated a economy always reaps a more
fruits to people.

Third is also on much extent is depend on above two, since healthy economy brings
more wealth to investors which in turns increase one’s morale.

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2. Domestic factors:

Domestic political scenario, for building & marinating growth friendly atmosphere
political situations play an important role in that respect. Stable political scenario
always gives boost to economy.

Domestic business scenario, certainly if global business is under peril then it will
affect our stock market, but that effect will be nuance if our domestic business houses
are performing well.

Inflation, here a bit increase in it, reflects on stock. Since under a high inflation now
people need more money to fulfill their basic needs, then to save & remaining to
invest.

3. Natural and artificial calamities:

Natural calamities like Tsunami, Flood, Draught, Earthquake has tremendous impact
on stock market. On the same line artificial irregularities like Wars, Riots, over
manipulation in economy leads to catastrophic effect.

4. Supply & Demand:

These are the mega driver of share market; whatever happens in the stock market is
mainly due to Matching or Mismatching of demand & supply.

23 | P a g e
 OBJECTIVE OF
THE STUDY

24 | P a g e
 OBJECTIVE OF THE STUDY

This project attempts to examine the integration and efficiency of Indian stock and
foreign exchange markets.One of the other important reasons why one needs to invest
wisely is to meet the cost of Inflation. Inflation is the rate at which the cost of living
increases.

The cost of living is simply what it costs to buy the goods and services you need to
live. Inflation causes money to lose value because it will not buy the same amount of
a good or a service in the future as it does now or did in the past.

 To know the factors affecting the portfolio of stocks.

 To gain an insight into the relationship between the returns of the stocks and
factors determining returns with respect of market fluctuations and forex rates.

 To get the information about the different techniques and the methods
followed by the financial services companies to measure this difference.

 To help investors to look upon different aspects while investing

 To help us know about the topics that we need to look upon to excel in this
particular career ahead.

Need for the Study...

The present study has great relevance to policy makers and investors community. To
policy makers, it provides wide range of information on distribution of return and
risk, and their future trends, especially, when they have been examined under
different economic scenarios. And for investors, the study provides the construction
of portfolios using a set of techniques. The construction of portfolios by using
different models has wide implications on investments decisions. If the study is seen
in the following views, it will prove very useful.

1. Growing Role of Capital Market

25 | P a g e
 2. Growing Role of Institutional Investors

3. Efficiency of Capital Market

What contribution will the project make?

As the name suggests this project will help to identify and analyze the factors which
affects the returns of a stock portfolio. If while investing a person is aware of such
determinants then the return that is prevailing can successfully be doubled by right
time of entering the market and right to exit too. Further, this project will help a
person to make a forecast of his returns over the particular stocks. He will be able to
analyze the impact of these factors over the returns of the stocks and result would be
the better. This project will help an investor to minimize his risk and chances of loss
over the selected stocks.

26 | P a g e
 REVIEW OF
LITERATURE

27 | P a g e
 REVIEW OF THE LITERATURE

The linkagesmbetween stock marketmperformance andmexchange rate

behaviourmhas long been debated in themeconomic literature.mThe arguments for the
linkagemhave been made at both micro andmmacroeconomicmlevels. At the
macroeconomicmlevel, the discussion has beenmcentered on themrelationship
betweenmaggregate stock price andmfloating value ofmexchangemrates. Thismlink is
seen by models that focus on the currentmaccount (Flow Oriented Models, e.g.
Dornbusch & Fisher, 1980) as well as thosemthat focus on themasset marketm (Stock
Oriented Models, e.g. Branson & Frankel, 1983), thoughmin differentmways. “Flow
Oriented” models [Dornbusch & Fisher (1980)] of exchangemratemdetermination
focus on the current account or the tradembalance. This model statesmthat currency
movements affectminternationalmcompetitiveness and balance of trade positions, and,
consequently, the real output of themcountry, which in turnmaffects the current and
future expected cashmflows of firmsmand their stock prices. The detailed logical
deduction of thismrelationship is like this. Changes in exchangemrates affect the
competitivenessmof a firm as fluctuations inmexchange rates affect the valuemof the
earnings and cost of its fundsmbecause manymcompanies borrowminmforeign
currencies tomfund their operations and hence itsmstock prices. But thismwill affect
in either way dependingmupon whether that firmmis an exporting unit or amheavy
user of importedminputs. In the case of anmexporting firm, a depreciation ofmthe
local currency makesmexporting goods more attractive and this leads to an increase in
foreign demand formexport of goods and services. As amresult, the revenue of the
firm and its valuemwill increase which will in turn increasemstock prices. On the
other hand, anmappreciation of local currencymdecreases profits of anmexporting
firm becausemof decrease in foreign demand of its products. Hence themstockmprice
will decrease. This is exactly oppositemto the case of anmimporting firm
asmexchange rate changes.

“Stock Oriented” modelsm[Branson & Frankel (1983)] of exchangem rates or

portfolio Balance approach gives emphasis on capital account as the major
determinant of exchange rate dynamics. The essence of the portfolio balancem model
is based on the notion that agents should allocate their entire wealth amongm

28 | P a g e
domestic and foreign assets includingmcurrencies in their portfolio. Hence, exchange
rate playsm the role of balancing the demand for andmsupply of assets. Nowmthe
logical deduction of negativemeffects of stock prices onmexchange rates is as
follows: An increase in domestic stock prices leads individuals to demand more
domestic assets. To buy more domestic assets, theymneed to sell foreign assets
asmthese are now relatively less attractive. As a result of which, there is anm
appreciation of local currency due to morem demand for domesticmassets.

Studiesmlike Aggarwala (1981), Sonnen andmHennigar (1988) establish the relation

between exchange rates and stock prices. They have pointed out that a change in
exchange ratesmcould changemthe stock prices of multinational firmsmdirectly and
those of domestic firms indirectly. In the case of multinationalmfirms, a change in the
exchange rate will change themvalue of thatmfirm’s foreign operation, which will be
reflected in its balance sheet as profit or loss. Consequently, it contributes current
account imbalance.

Once the profit or loss is announced, the firm’s stock price will change. Further, a
general downward movement of the stock market will motivate investors to seek
better returns elsewhere. This decreases the demand for money and pushes interest
rate down, thus causing huge outflows of funds, and hence depreciating the currency.
However, in the case of domestic firms, devaluation could either raise or lower a
firm’s stock price depending upon whether that particular firm is an exporting firm or
it is a heavy user of imported input. If it is involved in both the activities, then the
stock price could move in either direction. Consider the case of an exporting domestic
firm. This firm will directly benefit from devaluation due to increased demand for its
output. Since higher sales usually result in higher profit, its stock price will increase,
whereas in the case of a user of imported inputs of domestic firm, devaluation will
raise its costs and lower its profits. The news of decline in profits may depress the
firm’s stock price.

Bahmani, Oskooe andmSohrabian (1992) offered an alternativemexplanation for the

effectmofmstock pricemonmexchange rate. The argument is asmfollows: Consider the
resulting increase in the real balancemwhich will result in an increase inminterest rate.
Thus domestic assets are moremattractive, and, as a result, individualminvestors or

29 | P a g e
firms will adjust their domestic and foreign portfolio by demanding more domestic
assets. The jportfolio adjustments of firms and individuals will lead to an appreciation
of the domestic currency because they require domestic currency for transaction.

Further,mintegrationmofmthe US stockmmarket with the Pacific basin country’s

markets and world markets, led to the requirement of establishingmthe relationship
between stock prices andmexchangem rates. Thus,man increase in international stock
market causes the local stock market to rise,mwhich in turn increases wealth as well
as raisesminterest rates. Higherminterest rate will attract foreignmcapital and lead to
an increasemin the realmexchange rate.

Some of the early studies like Aggarwala (1981), Soenen and Hennigar (1988) simply
consider the correlation between the two variables. Aggarwala, using monthly U.S.
stock price datamand the effectivemexchange rate for themperiod 1974 to 1978,
explored the relationship betweenmthe changes in themdollar exchange rates and
changes in indices of stock prices. He found am
significantmpositivemcorrelation,mand finds that the relationship ismstronger in the
short runm than inmthe long run. However Soenenmand Hennigar, employing
monthly data onmthe same variables, for the period 1980 to 1986, found a strong
negative relationship.

Solnik (1987) employingmOLS regression analysis on monthly andmquarterly data

from 1973 to 1983 for eightmindustrializedmcountries found a negative relationship
between realmdomestic stockmreturns and real exchange rate movements. However,
for monthly data over 1979-83, he observed a weak but positive relation between the
two variables. Soenen and Aggarwala (1989) found mixed resultsmamong industrial
countries. Ma and Kao (1990) tried tomattribute these differences to the nature of the
countries. They used the asset pricingmmodel on the monthly data from January 1993
to December 1983 on six major industrialized countries and found that domestic
currency appreciation negatively affects the domestic stock price movements for an
export dominant economy and positively affects an import dominant economy.

Jorion (1998) attempted to analyze and compare the empirical distribution of returns
in the U.S. stock market and in the foreign exchange market by using the maximum

30 | P a g e
Likelihood estimation procedure and ARCH model in daily data of exchange rates
and stock returns spanning from June 1973 to December 1985. The study found that
exchange rates display significant jump components, which are more manifest than in
the stock market. The statistical analysis of the study for the foreign exchange market
and stock market suggests that there are important differences in the structure of these
markets. Jorion (1990) examined the exposure of U.S. multinationals to foreign
currency risk, by employing the time series regression on the rate of return in the U.S.
multinational firms’ common stocks and the rate of change in a trade weighted value
of the U.S. dollar over the period 1971 to 1987. The study found significant cross
sectional differences in the relationship between the value of U.S. multinationals and
the exchange rate. Given these results, the study focused on the determinants of
exchange rate exposure. The co movement between stock returns and the value of the
dollar is found to be positively related to the percentage of foreign operations of U.S.
multinationals.

Smith, C.E. (1992a) attempted to derive an estimable exchange rate equation by

considering the portfolio balance model. The model considered values of equities,
stocks of bonds and money as important determinants of exchange rates, which were
then applied to the German Mark vis-à-vis the US dollar and the Japanese Yen vis-à-
vis the US dollar exchange rate by using a general model of optimal choice over risky
assets. He has considered the study period spanning from January 1974 to March
1988. The study found that equity value has a significant influence on exchange rates
but the stock of money and bond has little impact on exchange rates. These results
imply not only that equities are an important additional factor to be included in the
portfolio balance models of the exchange rate, but also suggest that the impact of
equities is more important than the impact of government bonds and money.

Bodnar and Gentry (1993) employed the market model of Capital Asset Pricing
(CAPM) model and categorized the industries into traded and non traded goods
industries covering the USA, Canada and Japan. To examine the relation between
changes in exchange rate and industry values. The study had considered the data
period from January 1979 to December 1988 for the USA and Canada and from
September 1983 to December 1988 for Japan. The model was estimated using the
SURE method for the US, Canada and OLS for Japan. The results of the study

31 | P a g e
indicated that for the three countries, 20-35 percent of industries had significant
foreign exchange exposure and particularly with more exposure in the case of Canada
and Japan. Except for the US, non-traded goods industries indicated a gain with
appreciation of local currency. Industry export and import ratios were associated with
negative and positive exposures respectively. For the US and Japan, foreign
dominated assets showed a significant negative exposure to exchange rate changes.
Overall, the study found insignificant contemporaneous effect.

32 | P a g e
 FORMULATION
OF HYPOTHESIS

33 | P a g e
 FORMULATION OF HYPOTHESIS

1) H0: Stock returns does not depend on Treasury Bills

H1: Stock return depends on Treasury Bills

2) H0: Stock returns does not depend on Money Supply

H1: Stock return depends on Money Supply

3) H0: Stock returns does not depend on Inflation

H1: Stock return depends on Inflation

4) H0: Stock returns does not depend on Forex rates

H1: Stock returns depend on Forex rates

5) H0: Stock returns does not depend on Sensex

H1: Stock returns depend on Sensex

34 | P a g e
 METHODOLOGY

35 | P a g e
 METHODOLOGY

For the analysis, the adjusted closing and opening prices of the BSE 100
(1983=100) companies have been taken. These prices have been adjusted for
bonus issue, right issue and other corporate actions. All the data has been taken
from a data base PROWESS, which is maintained by CMIE Ltd. The composite
portfolio of BSE 100 is broader based as compared to other indices like
SENSEX. It represents all the stocks categories including large cap, mid cap and
small cap. The study period is ranges from January 2001 through December
2006. The study period marks mixed set of economic environment throughout. It
involves three distinct successive economic phases in Indian Economy. I began
my search by filtering 50 stocks of BSE100 for the period January 2001 to
December 2006 from Prowess database. Then I calculated their return together
with the Sensex returns for the same period.

Further I analysed the data on the basis of statistical tools like Alpha, Beta, R, R-
Square, Hypothesis i.e., T test on SPSS.

Conclusion is thus provided on the basis of that analysis done along with the
analysis taken from other secondary data sources like articles from eminent
economists and industrialists.

Types of Data and data collection

Secondary Data...

Secondary data is being used in the study. Data is collected from a database
PROWESS various journals, books articles, research papers as well as
newspapers. Internet is also the main source to get latest information.

Data analysis techniques

After collecting data from secondary sources it has been analyzed using
Statistical tools. Different kinds of statistical tools being used are:

36 | P a g e
  Return:

R
 P1  P0 
100
P0
Where,

R is monthly return of a company,

P1 is closing price of company for the month,

P0 is opening price of company for the month

 Standard Deviation

1 N
 
N i 1
( X  X )^ 2

Where,

N is no. of months

X is mean return of benchmark portfolio

In statistics, standard deviation is a simple measure of the variability or dispersion of

a data set. A low standard deviation indicates that the data points tend to be very close
to the same value (the mean), while high standard deviation indicates that the data are
“spread out” over a large range of values.

37 | P a g e
  Alpha

  R
Where,

R is mean return of security,

X is mean return of benchmark portfolio

Alpha is a risk-adjusted measure of the so-called active return on an investment. It is

the return in excess of the compensation for the risk borne, and thus commonly used
to assess active managers' performances. Often, the return of a benchmark is
subtracted in order to consider relative performance, which yields Jensen's alpha.

The alpha coefficient (αi) is a parameter in the capital asset pricing model (CAPM).
It is the intercept of the Security Characteristic Line (SCL). Alternatively, it is also
the coefficient of the constant in a market model regression.

It can be shown that in an efficient market, the expected value of the alpha
coefficient equals the return of the risk free asset: E (αi) = rf.

 Beta:

n R     R
i 
n      2 2

The beta coefficient, in terms of finance and investing, describes how the expected
return of a stock or portfolio is correlated to the return of the financial market as a
whole. An asset with a beta of 0 means that its price is not at all correlated with the

38 | P a g e
market; that asset is independent. A positive beta means that the asset generally
follows the market. A negative beta shows that the asset inversely follows the market;
the asset generally decreases in value if the market goes up and vice versa (as is
common with precious metals).

 R-Square

In statistics, the coefficient of determination, R2 is used in the context of statistical

models whose main purpose is the prediction of future outcomes on the basis of other
related information. It is the proportion of variability in a data set that is accounted for
by the statistical model. It provides a measure of how well future outcomes are likely
to be predicted by the model.

There are several different definitions of R2 which are only sometimes equivalent.
One class of such cases includes that of linear regression. In this case, R2 is simply the
square of the sample correlation coefficient between the outcomes and their predicted
values, or in the case of simple linear regression, between the outcome and the values
being used for prediction. In such cases, the values vary from 0 to 1. Important cases
where the computational definition of R2 can yield negative values, depending on the
definition used, arise where the predictions which are being compared to the
corresponding outcome have not derived from a model-fitting procedure using those
data.

 T-tests

A t-test is any statistical hypothesis test in which the test statistic has a Student's t
distribution if the null hypothesis is true. It is applied when the population is assumed
to be normally distributed but the sample sizes are small enough that the statistic on
which inference is based is not normally distributed because it relies on an uncertain
estimate of standard deviation rather than on a precisely known value.

39 | P a g e
 ANALYSIS AND
FINDINGS

40 | P a g e
 ANALYSIS AND FINDINGS

Money Forex
t-bills Supply Inflation Rate Sensex

NAME OF THE
COMPANY R² α β1 β2 β3 β4 β5

(t- (t-
value) (t-value) (t-value) (t-value) value)

-0.22 -0.01 -0.06 -0.13 0.48

ABB Ltd. 0.45 5.64 (-2.00) (-0.09) (-0.59) (-1.29) (4.40)

-0.20 0.18 0.01 0.05 0.62

ACC Ltd. 0.57 -0.67 (-2.11) (2.24) (0.11) (0.54) (6.36)

-0.14 0.11 0.15 0.07 0.33

Apollo Hospitals
Enterprise Ltd. 0.20 -6.56 (-1.09) (0.96) (1.32) (0.59) (2.46)

-0.18 -0.03 -0.02 -0.02 0.43

Apollo Tyres Ltd. 0.31 3.42 (-1.50) (-0.28) (-0.22) (-0.15) (3.53)

-0.29* 0.10 -0.30* 0.08 0.34

Ashok Leyland
Ltd. 0.36 20.64 (-2.50) (0.98) (-3.01) (0.75) (2.88)

41 | P a g e
 -0.33* -0.16 0.02 0.02 0.08*

Asian Paints Ltd. 0.16 -0.33 (-2.46) (-1.41) (0.16) (0.14) (0.60)

-0.03 -0.07 0.23 0.13 0.40

B P L Ltd. 0.22 -15.01 (-0.27) (-0.62) (2.08) (1.15) (3.06)

-0.07 -0.07 0.05 0.15 0.13*

Bajaj Electricals
Ltd. 0.05 2.40 (-0.51) (-0.59) (0.39) (1.16) (0.90)

-0.17 0.04 0.01 -0.18 0.39

Axis Bank Ltd. 0.34 1.92 (-1.47) (0.35) (0.10) (-1.67) (3.29)

0.07 -0.12 -0.13 -0.11 0.58

Bank Of Baroda 0.37 8.95 (0.63) (-1.17) (-1.25) (-1.05) (4.99)

-0.05 0.08 -0.10 -0.05 0.66

Bharat Heavy
Electricals Ltd. 0.50 5.23 (-0.45) (0.87) (-1.08) (-0.56) (6.32)

0.10 -0.06 -0.10 -0.03 0.54

Bharat Petroleum
Corpn. Ltd. 0.28 5.46 (0.82) (-0.60) (-0.95) (-0.31) (4.33)

-0.17 0.06 0.09 0.29 0.46

Bata India Ltd. 0.32 -4.79 (-1.44) (0.59) (0.87) (2.70) (3.81)

-0.07 0.25* 0.04 0.06 0.52

Bombay Dyeing
& Mfg. Co. Ltd. 0.35 -5.52 (-0.58) (2.46) (0.42) (0.61) (4.33)

Cipla Ltd. 0.25 -3.87 0.04 0.16 -0.02 -0.09 0.47

42 | P a g e
 (0.33) (1.53) (-0.19) (-0.78) (3.67)

-0.10 0.11 0.01 0.09 0.46

Dabur India Ltd. 0.26 -1.01 (-0.83) (1.00) (0.05) (0.78) (3.62)

-0.13 0.09 -0.13 -0.11 0.31

Federal Bank
Ltd. 0.20 8.87 (-0.96) (0.80) (-1.18) (-0.92) (2.32)

-0.11 0.08 -0.17 -0.03 0.61

G A I L (India)
Ltd. 0.49 6.91 (-1.05) (0.87) (0.87) (-0.32) (5.84)

43 | P a g e
 Money Forex
t-bills Supply Inflation Rate Sensex

NAME OF THE
COMPANY R² α β1 β2 β3 β4 β5

-0.29* 0.15 -0.21* -0.11 0.47

Grasim Industries
Ltd. 0.55 9.30 (-3.01) (1.77) (-2.46) (-1.22) (4.79)

-0.03 0.04 -0.01 -0.05 0.47

Hindalco
Industries Ltd. 0.25 -1.76 (-0.23) (0.40) (-0.43) (-0.43) (3.71)

Hindustan 0.14 -0.05 -0.04 -0.01 0.53

Petroleum Corpn.
Ltd. 0.23 2.21 (1.10) (-0.42) (-0.37) (-0.07) (4.06)

-0.15 -0.01 0.04 -0.06 0.50

H D F C Bank Ltd. 0.37 0.78 (-1.27) (-0.11) (0.35) (-0.60) (4.23)

0.03 0.05 -0.09 0.07 0.63

Hindustan Unilever
Ltd. 0.37 1.03 (0.22) (0.52) (-0.86) (0.70) (5.37)

0.05 0.08 0.00 -0.14 0.59

I C I C I Bank Ltd. 0.39 -0.33 (0.42) (0.82) (0.01) (-1.37) (5.14)

44 | P a g e
 -0.02 0.07 0.02 0.01 0.48
Indian Oil Corpn.
Ltd. 0.24 -0.93 (-0.18) (0.67) (0.15) (0.10) (3.70)

0.02 -0.13 -0.14 -0.06 0.44

Infosys
Technologies Ltd. 0.24 8.62 (0.19) (-1.18) (-1.31) (-0.49) (3.44)

-0.05 -0.01 -0.03 0.15 0.22*

Infotrek Syscom
Ltd. 0.07 19.23 (0.22) (-0.04) (-0.28) (1.19) (1.56)

-0.05 0.05 0.07 0.01 -0.07*

-
J S W Steel Ltd. 0.01 32.74 (-0.33) (0.38) (0.57) (0.10) (-0.47)

-0.07 -0.06 0.00 -0.01 0.41

Kotak Mahindra
Bank Ltd. 0.22 3.43 (-0.57) (-0.57) (0.00) (-0.12) (3.17)

-0.09 -0.08 0.01 0.10 0.56

Larsen & Toubro
Ltd. 0.35 2.72 (-0.75) (-0.76) (0.07) (0.94) (4.72)

0.01 0.04 0.18 0.21 0.54

M R F Ltd. 0.30 -9.48 (0.10) (0.38) (1.73) (1.94) (4.40)

-0.11 -0.20 -0.02 0.03 0.47

Mahindra &
Mahindra Ltd. 0.32 6.76 (-0.94) (-1.93) (-0.21) (0.30) (3.89)

45 | P a g e
 0.04 0.05 -0.04 -0.10 0.36
Moser Baer India
Ltd. 0.15 0.90 (0.30) (0.44) (-0.36) (-0.85) (2.65)

-0.11 0.08 0.06 0.09 0.46

Nirma Ltd. 0.27 -4.82 (-0.88) (0.77) (0.55) (0.82) (3.68)

-0.31* 0.19 0.14 0.01 0.24*

Nestle India Ltd. 0.28 2.80 (-2.54) (1.83) (-1.30) (0.08) (1.93)

0.02 0.12 -0.07 -0.03 0.46

Oil & Natural Gas
Corpn. Ltd. 0.23 3.37 (0.18) (1.11) (-0.66) (-0.27) (3.53)

-2.38 -0.06 0.07 0.11 0.47

Panasonic Battery
India Co. Ltd. 0.17 -2.38 (1.27) (-0.51) (0.64) (0.88) (3.48)

0.11 0.15 0.07 0.04 0.62

Pantaloon Retail
(India) Ltd. 0.34 -6.98 (0.95) (1.49) (0.70) (0.40) (5.17)

46 | P a g e
 Money Forex
t-bills Supply Inflation Rate Sensex

NAME OF THE
COMPANY R² α β1 β2 β3 β4 β5

Procter & Gamble -0.10 0.12 0.08 0.14 0.27*

Hygiene & Health
Care Ltd. 0.13 -3.93 (-0.75) (1.04) (0.71) (1.19) (1.99)

-0.03 -0.03 0.07 0.23* 0.66

Satyam Computer
Services Ltd. 0.42 -4.09 (-0.25) (-0.29) (0.76) (2.33) (5.86)

0.03 0.08 0.00 -0.17 0.70

State Bank Of
India 0.57 0.01 (0.27) (0.96) (0.00) (-1.99) (7.23)

0.06 0.13 -0.01 0.06 0.58

Steel Authority Of
India Ltd. 0.30 -0.11 (0.49) (1.22) (-0.11) (0.52) (4.73)

-0.14 0.02 -0.01 -0.02 0.40

Syndicate Bank 0.23 2.86 (-1.06) (0.14) (-0.07) (-0.13) (3.06)

-0.19 -0.01 -0.10 -0.03 0.62

Tata Motors Ltd. 0.55 7.20 (-2.00) (-0.12) (-1.22) (-0.33) (6.24)

47 | P a g e
 -0.05 0.09 0.12 0.19 0.59
Titan Industries
Ltd. 0.37 -6.38 (-0.45) (0.88) (1.14) (1.82) (5.05)

0.08 0.08 0.20 0.03 0.39

United Breweries -
(Holdings) Ltd. 0.16 20.80 (0.57) (0.68) (1.68) (0.26) (2.88)

0.01 -0.11 0.07 0.22 0.47

Value Industries
Ltd. 0.22 -2.36 (0.08) (-1.02) (0.59) (1.91) (3.60)

-0.06 -0.12 -0.09 -0.15 0.18*

Videocon
Industries Ltd. 0.10 32.14 (-0.42) (-1.00) (-0.72) (-1.21) (1.26)

-0.21 -0.06 -0.06 0.01 0.44

Wipro Ltd. 0.33 3.37 (-1.74) (-0.62) (-0.61) (0.05) (3.62)

-11.14 0.13 0.12 0.00 0.58

Zee Entertainment -
Enterprises Ltd. 0.32 11.14 (0.65) (1.25) (1.17) (0.04) (4.72)

*Significant at 5% level of significance.

‘t’ value in bracket.

48 | P a g e
Inference

The alpha that is the minimum level of expected return is high in case of stocks of
Ashok Leyland Ltd., Bank Of Baroda, Federal Bank Ltd., G A I L (India) Ltd.,
Grasim Industries Ltd. Infosys Technologies Ltd., Infotrek Syscom Ltd., Grasim
Industries Ltd., and Videocon Industries Ltd. This depicts efficient management of the
company which atleast guarantee a minimum level of return to its shareholders. The
best return is provided by Videocon Industries Ltd. with Rs. 32.144 as returns.

However the stocks of companies like Apollo Hospitals Enterprise Ltd., B P L Ltd.,
Dabur India Ltd., J S W Steel Ltd., M R F Ltd., United Breweries (Holdings) Ltd.,
and Zee Entertainment Enterprises Ltd. show highly negative return which denotes
bad management by the company officials. The returns of JSW Steel Ltd have the
worst minimum level if return with Rs. - 36.738.

From the above table we can infer that the stocks of G A I L (India) Ltd., Grasim
Industries Ltd., Larsen & Toubro Ltd., State Bank Of India, Tata Motors Ltd., Bharat
Heavy Electricals Ltd., ABB Ltd., and ACC Ltd. have high variations of stock returns
with respect to T-bills, money supply, inflation, forex, Sensex. The highest variation
is witnessed in the Tata Motors Ltd.

We can also see that the stocks of Asian Paints Ltd., Bajaj Electricals Ltd., Infotrek
Syscom Ltd., J S W Steel Ltd., Procter and Gamble, Panasonic India Ltd., Nestle
India Ltd., and Videocon Industries Ltd. have very less variations with respect to t-
bills, money supply, inflation, forex, Sensex. The lowest variation is witnessed in
JSW India Ltd. with R² 0.01.

Rest other stocks have their variations within 2-3 pt scale. It says that the stock prices
and their returns largely depend on the Sensex and to some extent on the inflation and
forex.

The stocks of Ashok Leyland, Asian Paints, Grasim Industries, Nestle India have
dependency on the t-bills rate as higher the rate goes higher their depend goes and

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hence their falls a demand in the price of stocks. The hypothesis has been proved right
in cases where the results lay beyond the range -2.30 and 2.30.

The stocks of Bombay Dyeing Ltd have dependency on the money supply in the
market whose return varies with variations in money supply in the economy. It can be
well understood from the T test hypothesis where our hypothesis have been proved
right as the result lies beyond the range -2.30 and 2.30.

The stocks of Ashok Leyland and Grasim Industries Ltd. have dependency on the
inflation as their returns vary with the fluctuations in the economy. It can be well
understood from the T test hypothesis where our hypothesis have been proved right as
the result lies beyond the range -2.30 and 2.30.

The stocks of Satyam Computers Services Ltd. have dependency on the forex as their
returns vary with fluctuations in the global economy. It can be well understood from
the T test hypothesis where our hypothesis have been proved right as the result lies
beyond the range -2.30 and 2.30.

However when we look from the Sensex perspective we see that except the stocks of
Asian Paints Ltd., Bajaj Electricals Ltd., Infotrek Syscom Ltd., Procter and Gamble
India Ltd., J S W Steel Ltd., Nestle India Ltd., Videocon Industries Ltd. the rest other
have high dependency on Sensex as regards to its returns.

Hence we can easily infer that Sensex has huge impact on the stock returns whereby
influencing its market value. However it can also be concluded that the though to little
extent but the inflation and forex rate too has some impact on the market price and
returns of the stocks.

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 CONCLUSION

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 CONCLUSION

Inflation does not have any direct relation to a fall or rise in the stock markets in the
short term. However, when inflation goes up beyond the comfortable limit of the RBI
and government, they take some strong policy measures such as tightening of
monetary policies, regulatory controls, subsidy etc. The recent rise in the inflation rate
continues to bog the Indian economy as escalating food and metal prices (steel in
particular) have been the chief culprits in stoking inflation. While the government has
responded by banning the exports of pulses and rice (except basmati) and reducing the
import duty on certain edible oils, whether these measures will be effective in cooling
down prices remains to be seen. Steel prices have also been charting an upward path,
which have been hurting industries such as auto for instance. This has put immense
pressure on steel companies to reduce prices, which in turn are unwilling to do so as
the input costs (namely iron ore) are heading northwards due to the shortage of the
same. Rising inflation has not made matters easier for the government either given
that elections are due early next year. The only certainty seems to be the fact that the
RBI is unlikely to soften interest rates in the near future till the inflation to a certain
extent is tempered.

Recessionary trends are increasingly haunting the US economy with corporate

reporting subdued quarterly results. This week is not expected to provide any relief
either as a slew of financial companies announce their quarterly results. Further, as
per the Economist, the latest labour market figures reveal a jump in the
unemployment rate to 5.1% and the loss of 98,000 private sector jobs in March, the
fourth consecutive month of decline.

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 LIMITATIONS

Limitations of the study...

The research is based on secondary data wherein BSE 100 companies have been
examined. It does not include any questionnaire or other kind of primary data. It is
based on limited time period ranging from January 2001 to December 2006, and in
some cases full observations of all stocks for the study period are not available.
However, a proper adjustment has been made to neutralize the effect of non
availability. In the study, the return has been calculated by using the adjusted opening
and closing prices of BSE100. In calculation of return dividend yield has been
ignored. It is worth mentioning here that dividend yield is not significant in
developing countries like India and so it can not affect the relative return of a stock.
Therefore, calculation of return of stock involves the market appreciation and
depreciation.

 The financial data collected may be biased and subjected to different

interpretations by the users.

 The research will be valid only for the limited period of time, due to fast
growth of the Indian economy and fast change in the norms.

 Limited time period would be a major constraint of this study.

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 BIBLIOGRAPHY

54 | P a g e
 BIBLIOGRAPHY

List of books…

Economic Environment of Business

(S. K. Mishra)

Business Environment

(Aswathapa)

Big Bucks

(Ken Blanchard)

Rich Dad- Increase Your Financial IQ

(R.T. Kiyosaki)

List of websites…

www.bseindia.com

www.procyonfp.com

www.advisortoday.com

www.professionalreferrals.ca

www.eaindustry.nic.in

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www.thefinblog.com

http://www.rocw.raifoundation.org/management

www.rbi.org.in

List of journals...

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Branson, W. H,(1983) "Macroeconomic Determinants of Real Exchange Rate Risk",

in R. J. Herring (ed.), Managing Foreign Exchange Risk, Cambridge University Press,
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Jorion, P (1988), “On Jump Process in the Foreign Exchange and in the Stock
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Smith, C. E. (1992 a), “Stock Markets and the Exchange Rate: A Multi Country

Approach”, Journal of macroeconomics, Vol-14, Pp.607-29.

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Bodnar, G. M and Gentry, W. M (1993), “Exchange Rate Exposure and Industry

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International Money and Finance, Vol.12, Pp.29-45.

Dornbusch, R and Fischer, S (1980), “Exchange Rates and the Current Account”,
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Oskooee, M. B and Sohrabian, A (1992), “Stock Prices and the Effective Exchange
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