IMPACT OF 2014 GENERAL ELECTIONS ON THE INDIAN STOCK MARKET.

LLM Dissertation

Submitted in partial fulfillment of the requirements for the degree of

Masters of Laws

by

P PAMEELA GEORGE(A0319314012)

AMITY INSTITUTE OF ADVANCED LEGAL STUDIESUttar Pradesh, Sector 125, Pin 201301

DISSERTATION APPROVAL SHEET

Dissertation report titled “IMPACT OF 2014 GENERAL ELECTIONS ON

THE INDIAN STOCK MARKET” submitted by P PAMEELA GEORGE is

approved for the degree of MASTER OF LAW.

_______________________

DR.SACHIN RASTOGI

(SUPERVISOR)

ii

CONTENTS

Chapter 1: INTRODUCTION

1.1 General

1.2 Why sensex is behaving differently in India

Chapter 2 : WHAT IS STOCK MARKET

2.1 Stock Market

2.2 Origin

2.3 Stock Exchanges in India

2.4 How stock works

2.5 Trading in Indian Stock Market

2.6 How stock is traded

2.7 Volatility in stock market

2.8 Financial instruments traded in stock market

2.9 Stock market indices

2.10 Types of indices

2.11 How index are used.

2.12 Market indicators

2.13 Review of recent policy developments

2.14 Factors influencing stock market

Chapter 3 : FACTORS INFLUENCING STOCK MARKET

3.1 General

3.2 Investment

3.3 Marketable securities

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3.4 Factors affecting

a. FII

b. Political state and economical development

c. Inflation

d.Oil

Chapter 4: VOLATILITY ON INDIAN STOCK MARKET & FOREIGN

INSTITUTIONAL INVESTORS AFTER ELECTION

4.1 General

4.2 Movement of sensex and volatility in stock market

4.3 Foreign portfolio and its influence on sensex

Chapter 5: SITUATION OF INDIAN STOCK MARKET PRIOR 2014 ELECTIONS

5.1 General

5.2 Why stock market need Narendra Modi

Chapter 6: PERFORMANCE OF INDIAN STOCK MARKET AFTER 2014 ELECTIONS

6.1 General

6.2 Benefits from NAMO government

6.3 Changes made by the new government

6.4 Upcoming changes

Chapter 7: POLITICAL ISSUES AND STOCK MARKET :

7.1 General

7.2 How the new government affected our economy

Chapter 8: CONCLUSION

BIBILOGRAPHY

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CHAPTER-1

INTRODUCTION

If I wanted to become a tramp, I would seek information and advice from

the most successful tramp I could find. If I wanted to become a failure, I

would seek advice from the men who never succeeded. If I wanted to

succeed in all things, I would look around me for those who are succeeding

and do as they have done” – Joseph Marshall in Wall Street Wisdom.

India wanted to succeed and had looked around; and that looking around was

the last general election.The impact of this general election on Indian Share

Market though predictable but was unbelievable. The NSE index which was

trading around 6000 - 6500 was rocketed up and as on date is trading at 8125.

A record high which never ever happened in India’s trading history. Of all the

markets in a nation the Stock Market is the exact indicator of the nation’s

financial health. This is mainly because the market index represents a varied

spectrum of companies involved in every conceivable act of nation building.

But this index also commensurate with the multiple factors prevailing in a

nation and the political stability is the most important among them. In fact an

ideal political atmosphere will be a corrective measure in any type of adverse

eventualities which a stock market may confront. Political stability will

probably subsume an increase in domestic production (GDP) and control of

inflation. In fact inflation is a major spike and source of worry for the nation

prior to the Election. 1

On 22 August 2013 the inflation caused Indian rupee to fall against the US

dollar from Rs.63 it plummeted to 65 ddollars and within few days it again

doomed into 69 only because of its political instability. The results were

catastrophic. The NSE index fell 5770 to 4800 in just one week. The State

Bank Of India the so called Nation’s banker fell from 2270 to almost 1800 that

was a major impact.

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And hence all these saga regarding the loss of company are running behind us

now. As a Phoenix bird the stock market revived its self from this fall and

rushed ahead with NSE Index now touching 9000. The only factor behind this

resurgence is the general election. But what can be the reasons for this

astonishing recovery? I shall elucidate the same in succeeding paras.

On the day of counting Indian stocks rose as votes from India's general election

indicated the leader of the opposition Baratiya Janata Party (BJP), Narendra

Modi, would be the next prime minister. The Sensex index rose 6% to a record

25375.63, before falling back to stand up 1.29% at 24121.74. Both foreign and

local investors were buying in the hope that new govt reforms will revive the

Indian economy. India's stock market had hit repeated highs during this week

as foreign investors placed their bets on the policies by Mr Modi.

1.1 WHY SENSEX BEHAVING DIFFERENTLY:

There are reasons why the Sensex is behaving differently now.The market has

its own fears and hopes.

First, the market detests uncertainty, which was at its peak in coalition times

with regional parties vying for power.

Second, the market would like the communist parties to be drowned in political

backwaters. Though a few regional parties want to assert their right to

influence the government at the centre, the Bharatiya Janata Party (BJP) can

still command a good number of seats from the states that it already rules as

well as others. This has generated confidence in investors who are looking to

make some quick gains. This year, investors seem excited that the BJP has

formed the government with Narendra Modi as the prime minister. They hope

he will give priority to development by reforming policies and governance

which he is doing now.The movement of stock prices is highly sensitive to

fundamentals of economy aswell as many other subjective factors which are

unpredictable and also non quantifiable.

The domestic economic fundamentals play determining role in the performance

of stock market. As the economy is globally integrated so domestic variables

4

are also depends upon the global events. The common external factors

influencing the stock return would be stock prices in global economy, the

interest rate and the exchange rate. Currency appreciation and depreciation is

also a key factor which impacts in the movement of stock market.

In financial market one important point here to be noted is that assets can be

returned through a set of macroeconomic variables. Such a situation can be

contradictory for the efficient market hypothesis, in particular, semi-strong

form efficiency which states that stock prices must contain all relevant

information including publicly available information. There is a growing

literature showing strong influence of macroeconomic variables on stock

markets. Earlier the Arbitrage Pricing Theory (APT) developed by Ross and

Chen also showed that economic variables have a systematic effect on stock

market returns. As financial theory asserts that movement in stock prices is

related to macroeconomic variables, it is important to understand the economic

meaning of such relationships. To start with, an increase in current real activity

increases demand on existing capital stock, which ultimately induces increased

capital investment in the future, and the stock market is very likely to anticipate

this. Money supply has a direct effect on stock prices by changing liquidity.

Money supply also has an indirect effect on stock prices through corporate

dividends by increasing or decreasing interest rates.

Stock prices are also influenced by changes in interest rates. Since interest rate

is an opportunity cost of holding stock, an increase in interest rate is likely to

lead to a substitution effect between stocks and other interest bearing assets. It

is therefore expected that as interest rate declines stock price would rise.

Inflation also affects the stock market through the output link.

There is also strong evidence on the causal influence of exchange rate on stock

prices. The main implication is that changes in exchange rate affects firm’s

exports and also the cost of imported goods and production inputs and thus

ultimately affects stock prices. In recent times the link between stock return

and changes in oil price has also been examined. The linkage between different

equity markets can also be due to liberalization of different markets,

improvement and development of communications technology, innovations in

financial products and services, increase in the international activities of

multinational corporations etc. This international integration, in particular of

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emerging stock markets, with the rest of the world has also led to link-up of the

domestic stock markets with the world financial and economic variables. It is

also pertinent to note that foreign investment in the developing countries is

now playing a crucial role in restructuring of these economies.2

Apart from the aforesaid interrelations between economic variables on the one

hand and stock return on the other, an important issue in the context of this

analysis is the relative role of local factors over global factors as the primary

source of variation in stock returns in emerging markets. This issue is

important mainly for international investors since the benefits from

diversification are enhanced when the allocation of funds is spread across,

rather than within regions. The purpose of this paper is to examine the

impact the election has bought in the Indian economy. What were the

changes brought after the election.

REFERENCE :

1.Wall street journal,volume II2. Sudarshan pillai,indian economy and development,academia.edu

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CHAPTER-2

WHAT IS A STOCK MARKET

In this chapter mainly we shall be dealing on what is stock market? How it works?

What are the types of indices? And lastly how the national politics influence the stock

market.

2.1 STOCK MARKET:

The Securities Contract (Regulation) Act, 1956 [SCRA] defines’ Stock Exchange’ as a

body of individuals, whether incorporated or not, constituted for the purpose of

assisting, regulating or controlling the business of buying, selling or dealing in

securities.3In other words, a stock exchange is an organization or a market by

which people can trade stocks, and is also known as Equity Market. The stock market

has been regarded as one of the main component for a free-market economy. However

stock market is taken as a barometer of a nation’s financial health. Though there are

millions of factors influence the stock prices what is predominant is the political

scenario prevailing in a nation. The political climate of a nation either boosts or retard

the stock values. Before we evaluate these aspects with reference to Indian Stock

Market before, during and post general elections of 2014, we shall have a glimpse at

the functional aspects of the stock exchange. Stock market provides liquidity to the

financial instruments which are issued in the primary market. Players in the capital

market are broadly divided in to three categories:

1. Companies issuing securities and includes new companies, existing unlisted

companies and the existing listed companies.

2. Intermediaries who assist in the process of transferring savings into investment

and they include merchant bankers, underwriters, registrars to issue and share

transfer agents, brokers, depositories, collecting agents,

3. Advertising agencies, agents, mutual funds etc.Investors consisting of

institutional investors and the general public.

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2.2 ORIGIN :

The stock exchange or stock market originated in 1792 at new York it is very similar

to a huge crowded market .Stock exchange is an organized market where Government

securities , shares, bonds and debentures of the trading units are regularly transacted.

Today the Stock exchange provides a place for all common citizens to invest in the

securities. Stock exchange being the indicator of nation’s financial health it grows

with the nation and also dooms with it.

2.3 STOCK EXCHANGES IN INDIA:

In India there were regional stock exchanges at Calcutta, Bangalore and at Cochin and

at many other places , but after the computers have formed the part of social life of the

society, the entire stocks were de-mated ( dematerialised) and the physical form of

the stocks were vanished into oblivion along with all the regional stock exchanges.

Today there are only stock exchanges at BSE (Bombay Stock Exchange) and at NSE

(National Stock exchange, New Delhi). All other stock exchanges have become

almost defunct.

BSE (Bombay Stock Exchange): considered to be one of the oldest stock

exchange in Asia and was commonly known as the “the native shares & stock

brokers Association” it attained permanent authorization from the central

government of India in 1956 under the Securities Contract (Regulation) Act,

1956.

NSE (National Stock Exchange): it was given authorization in 1993 and

started functioning on june 1994. NSE has a market capitalization of more

than US$1.65 trillion. NSE was set up by a group of leading Indian financial

institutions by the Indian government to bring transparency to the capital

market. The key domestic investors include Life Insurance Corporation of

India, State Bank of India,  Stock Holding Corporation of India Limited etc and

the key global investors are Gagil FDI Limited, GS Strategic Investments

Limited, Aranda

8

Investments (Mauritius) Pvt. Limited.4 These are just a few and many financial

giants all over the world enter Indian stock exchange on each day of trading.

Mainly these agencies could be summarized as:-

Domestic Retail Participants – These are people like us transacting in

markets

NRI’s and OCI – These are people of Indian origin but based outside India

Domestic Institutions – These are large corporate entities based in India.

Classic example would be the LIC of India.

Domestic Asset Management Companies (AMC) – Typical participants in

this category would be the mutual fund companies such as SBI Mutual Fund,

DSP Black Rock, Fidelity Investments, HDFC AMC etc.

Foreign Institutional Investors – Non Indian corporate entities. These could

be foreign asset management companies, hedge funds and other investors.

The NSE is one of the few exchanges in the world trading all types of securities

on a single platform. Its operations are divided into three segments:

Wholesale Debt Market (WDM)

Capital Market (CM)

Futures & Options (F&O) Market

The Wholesale Debt Market (WDM) segment of NSE deals in fixed income

securities. It commenced its operations on June 30th 1994.WDM provides

trading facilities for various debt instruments like Government Securities,

Treasury Bills and Bonds issued by Public Sector Undertakings/ Corporates/

Banks, like Floating Rate Bonds, Zero Coupon Bonds, Commercial Papers,

Certificate of Deposits, Corporate Debentures, State Government loans, SLR

and Non-SLR Bonds issued by Financial Institutions, Units of Mutual Funds

and Securitized debt by banks, financial institutions, corporate bodies, trusts

and others. NSE started trading in the Capital Market segment or equities

segment on November 3, 1994 and within a short span of one year NSE

became the largest exchange in India in terms of volumes transacted. Trading

in derivatives was started by the exchange with the launch of index futures on

June 12, 2000.

The Exchange introduced trading in Index Options on June 4, 2001. NSE also

became the first exchange to launch trading in options on individual securities

9

from July 2, 2001. Futures on individual securities were introduced on

November 9, 2001. Futures and Options on individual securities are available

on 190 securities stipulated by SEBI.

Each segment has experienced a significant growth over a few years of their

launch. While the WDM segment has accumulated the annual growth of over

40 percent since its opening in 1994, the CM segment has increased by more

than 60 percent during the same period.

Trading Mechanism in National Stock Exchange

NSE is the first stock exchange to be set up in the country having nation-wide access

with fully automated screen based trading system. It has become the largest exchange

in India as on 2008-09 results with more than 70 percent of the trading volumes on it.

It can be quoted as one of very few exchanges in the world which has adopted

anonymous order matching system. Trading system of NSE is National Exchange for

Automated Trading (NEAT).NEAT facilitates an on-line system which is fully

automated and provides nationwide, anonymous, order driven, screen based trading.

The advantages of this system include:

a) Improved operational efficiency by minimizing risk of error and fraud.

b) Increased informational efficiency as it allows faster incorporation of price

sensitive information.

c) Improving the liquidity of the market by making market transparent.

d) User friendly and suitable for retail investors as well as institutional investors.

e) Faster settlement of disputes by logging in to the trade execution process.

f) Trading platform in capital market segment is accessible from computer

terminals of brokers as well as from the personal computers of individual investors.

At the end of March 2009, a total number of 349 members were permitted to allow

investor’s web based access to NSE’s trading system.5

Perfectly integrated markets operate as one entity, with investors facing a common set

of risks. Pricing in such markets also would be in the similar way. Evidence suggests

that developed countries have gained most from capital market integration to date, and

any further integration will mainly benefit emerging markets. So the scope equity

market integration in India in the next few years is tremendous. Integration with other

International capital markets has advantages and disadvantages. Potential benefits

from integration include:

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a) Better allocation of Capital

b) Adoption of efficient risk management strategies

c) Portfolio diversification

d) Presence of a better competitive environment

e) Lower cost of Capital In spite of all these benefits there are certain risks which

arise because of this integration. Integration not only encourages inflows but also

outflows of capital, with potentially adverse consequences for the domestic

economy. Moreover increased correlations between international markets indicate

that benefits of international diversification diminish after an unexpected

exogenous event. This can be very well understood by studying the impacts of

recent financial crisis.

Over the past ten years Indian Stock Market has witnessed many changes which are in

line with the economic development of the country. Trading and settlement procedures

have been improved and many new instruments have been introduced with an

objective of meeting the varied preferences and risk appetite of Indian investors.

Disclosure levels have been enhanced and market transparency has improved.

Measures to protect investors’ interest have also attained greater importance during the

last few years. Lots of investor education programs are also been initiated by market

regulators with a view to encourage more and more capital market activities in the

country. A code of corporate governance has been put in place and steps were taken to

change the organizational structure of the stock exchanges.

Considering all these factors along with the current economic development of the

country, growth of Indian Stock would be tremendous in the coming years. However

the market has to become further transparent and reliable with lesser volatility to

attract more and more foreign capital inflows in to the country.

Now, irrespective of the category of market participant the agenda for everyone is the

same – to make profitable transactions. More bluntly put – to make money.

Having a look back at the history we can see that there were brokers and scores of sub

brokers and all persons had had to deal with these brokers and they used to trade

physically by shouting in the trading floor. The most important factor was their

trustworthiness because there were many examples of these brokers cheating their

clients. But all these have changed today. Now, one can sit in the comforts of one’s

home and trade sipping his coffee.

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The computerization has changed the whole chemistry of Stock trading. In India the

entire stock markets are regulated by SEBI ( Security and Exchange Board of India)

and their responsibilities are:-

1. The stock exchanges (BSE and NSE) conducts its business fairly

2. Stock brokers and sub brokers conduct their business fairly

3. Participants don’t get involved in unfair practices

4. Corporate don’t use the markets to unduly benefit themselves (Example –

Satyam Computers)

5. Small retail investors interest are protected.

6. Large investors with huge cash pile should not manipulate the markets overall

development of markets

2.4 HOW STOCKS WORKS:

Previously, before the stock markets were computerized the trading was done

physically on ground between the brokers on behalf of the customers. But today all

these have changed and the trading is performed electronically.

For example, consider the current situation of WIPRO. Recently WIPRO was facing a

succession issue, and most of its high authorities have already quitted and some are

still quitting. It seems like the leadership is weighing down the company’s reputation

heavily. As a result, the stock price dropped to Rs.4000 all the way from Rs.4500.

Whenever there are new reports regarding WIPRO management change, the stock

prices react to it.

Assume there are two traders – P1 and P2.

P1’s point of view on WIPRO – The stock price is likely to go down further because

the company is now finding it difficult to find a new CEO. If P1 trades as per his point

of view, he should be a seller of the WIPRO stock.

P2, however views the same situation but in a different aspect. According to him, the

stock price of WIPRO has over reacted to the succession issue and the company will

soon find a good leader, after whose appointment the stock price will move in an

upward level.

If P2 trades as per his point of view, he should be a buyer of the WIPRO stock.

So at, Rs.4,000 P1 will be a seller, and P2 will be a buyer.

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Now both P1 and P2 will place orders to sell and buy stocks through their respective

stock brokers. Hence the stock exchange has to ensure that these two orders are

matched, and the trade gets executed.

This is the primary job of the stock market – to create a market place for the buyer and

seller.6

2.5 Trading in Indian Stock Market

Stock markets refer to a market place where investors can buy and sell stocks. The

price at which each buying and selling transaction takes place is determined by the

market forces. The Indian secondary capital market or the stock market mainly

consists of the stock exchanges, Over the Counter Exchange of India and Stock

Holding Corporation of India. Indian stock market can be quoted as one of oldest stock

markets in Asia which is almost 200 years old.

Stock Holding Corporation of India Ltd was incorporated in 1986 as a public limited

company. It has been jointly promoted and owned by the All India Banks and

Financial Institutions, viz., IDBI Bank Ltd, ICICI Bank, Axis bank, IFCI Ltd, LIC,

GIC, NIA, NIC, UIC, and TOICL, who are all leaders in their fields of business.

SHCIL has been established as a one stop provider of all financial services. It began its

operations by offering custodial and post-trading services and later added depository

and other services to its business portfolio.

Stock exchange represents an organized market in trading of securities. The organized

stock exchanges in India are of recent origin when compared with other financial

markets. The first stock exchange was set up in India under the name of Native share

and Stock Broker’s Association of Bombay (now, Bombay Stock Exchange) in 1875.

At the end of March 2009, there were 20 stock exchanges registered with SEBI

(Securities Exchange Board of India) having a total of 8,652 registered brokers and

62,471 registered sub-brokers trading on them.

The stock exchanges need to be recognized under the Securities Contracts (Regulation)

Act 1956. As of now SEBI has approved and notified the Corporatisation and

Demutualisation scheme of 20 stock exchanges.

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2.5 HOW A STOCK IS TRADED

In this suppose we have decided to buy 100 shares of WIPRO at 2020, and hold on to

it for 1 year. How will it work? Let us have a look below;

With a decision to buy WIPRO, we need to first login to the said trading account

(provided by the stock broker) and then place an order to buy the same. Once placed

an order ticket gets generated containing the following details:

a. Details of our trading account – and identity is revealed

b. The price at which we intend to buy WIPRO

c. The number of shares we look forward to.

Before the broker transfers the order to the exchange he needs to ensure that we have

sufficient money to buy those shares. Then only this order hits the stock exchange.

And thereafter stock exchange tries to find a seller who is willing to sell you 100

shares of Infosys at 2020.

Now the seller could be 1 person willing to sell the entire 100 shares at 2020 or it

could be 10 people selling 10 shares. The permutation does not matters in here.

looking from our perspective , all we need is 100 shares of WIPRO at 2020 . The stock

exchange ensures us whether the shares are available or not/

Once the trade is executed, the shares will be credited to our said account.7

It’s been regarded that NSE and BSE are the only two stock exchanges which

reported significant trading volumes during the last 3 financial years. Other than

Calcutta and Uttar Pradesh Stock exchanges all other exchanges did not have any

trading volumes during 2008-09 and 2009-10 (April-June).National Stock exchange

(NSE) consolidated its position as the market leader with 71.43% of the total trading

volume. The trading platform of a stock exchange is accessible only to trading

members. The brokers would give buy/sell orders either own their own account or for

their clients. The exchange can admit a broker as its member only on the basis of terms

specified by Securities Contract (Regulation) Act, 1956, the SEBI Act 1992, and other

rules and regulations of concerned exchange also. Certificate of registration from SEBI

is compulsory for trading in securities.

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Listing is the formal admission process of a security in to the trading platform of a

stock exchange. Listing of securities India is governed by the provisions in the

following acts:

a) Companies Act, 1956

b) Securities Contracts (Regulation ) Act, 1956

c) Securities Contracts (Regulation) Rules ,1957

d) Circulars/guidelines issued by Central Government and SEBI

e) Rules and Regulations of concerned stock exchanges.

The stock exchanges levy listing fees on the companies, whose securities are listed

with them. Fee structure has two basic components: Initial Fee and Annual Fee Initial

fee is a fixed amount for all the companies as decided by SEBI and stock exchanges

while annual fee varies depending upon the size of the company. As per SEBI

provisions, the basic norms for listing of securities should be uniform for all stock

exchanges in the country.

2.7 Volatility in Stock Markets

Volatility is basically the variation from the average value over a measurement period.

If a price of a security varies a great deal from day to day, the volatility of it will be

high, and conversely if the day to day variation is low, the value of volatility will be

low as well. It is measured by the standard deviation of logarithmic returns during a

certain period. In the financial year 2008-09 stock markets across the globe witnessed

extreme volatility. In India Sensex soared to 43.6 percent in 2008-09 from 30.6 percent

in 2007-08. Similar trend was observed for other indices also. Over the years it has

been observed that the correlation between Indian Stock Market1 and other world

markets are on an increasing trend. This phenomenon should explain the reason for

increased volatility exhibited by Indian markets during 2008-09 periods. When world

markets move the valuation of Indian stocks are also affected.

2.8 FINANCIAL INSTRUMENTS TRADED IN STOCK MARKET :

The Public Ltd companies list their stock and debentures in the stock market which are

available for the public to buy/sell. But there are different modalities by which one

15

could trade these stocks. The stocks are listed with a face value of Rs 1/100and it is

always traded with a premium.

1. Investment : - The customer purchases stocks from the primary / secondary

market which he considers as profit yielding and retain it hoping that its

premium value will enhance.

2. Day Trading : - This is performed in two ways. (a) Margin Intraday square off

(MIS). Here the trader purchases the stocks which he consider to rise / fall

according to the varied trends and factors in the market. If he expects the price

to fall he sells the stock (without actually holding it) and buys the same when

the price falls. This action he has to complete before 320pm in the evening and

if he does not, the accounts will square off automatically and the trader has to

bear the loss.(b) The second method is to buy the stocks in a one month/two

month/ three month contracts and the trader will have the privilege to square

off his trade prior to the expiry of trading time on the last Thursday of the

contracted month.

3. Call & Put option :- It is quite akin to day trading but profit or loss can be

controlled / limited.

2.9 STOCK MARKET INDICES

A stock market index is a number that measures the relative value of a group of stocks.

As the stocks in this group change value, the index also changes its value. If an index

goes up by 1 percent then that means the total value of the securities which made up

the index have gone up by 1 percent in value. An index is created by selecting a group

of stocks that are representative of the whole market or a specified sector .It is

calculated with reference to a base period and a base index value. Some of the benefits

of these stock market indices include:

1. Facilitate comparison of returns on investments in stock market against

other investment options available in the market.

2. For establishing standards against which the performance of individual

scrip or equity fund is compared.

3. Can act as an overall indicator of the state of economy

4. Helps in implementation of appropriate risk management strategies for the

various investments.

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2.10 TYPES OF STOCK MARKET INDICES :

There are various kinds of stock indices but the main indices are BSE index and NSE

index. BSE index are the latest trading averages of 500/200/100 companies share

prices and the NSE index is the average of 50 companies. These companies are

selected to represent all spectrums of society and business. Hence it indicates the exact

trend of the stock market on a given date and time. The index committee of the stock

market selects these companies ascertaining their track record. It is an honor for any

companies to be included in the stock market index. Other than BSE and NSE index

varied other indices are also available to ascertain the trend of a peculiar segment. The

details are as given below:-

(a) BSE Tech index :- this index started on 01 July 2001. This gives the details of

the companies which have market capitalization of 90% in a particular

segment.

(b) BSE- PSU index :- this index depicts the PSU companies where the govt have

51% stock holding.

(c) Bank Index :- This is the index of the banks which are included in BSE 500

index with 90 % maket capitalization and 90 % trading frequency.

(d) Mid – Cap / Small- Cap index :- these are the companies which have trades on

75% trading days with market capitalization of 98.5% for mid cap and 95 to

100 % for small cap.

Other than the indices mentioned above the major sub indices are auto index,

Capital Goods Index, Consumer durables, FMCG, Health Care, IT, Metal , Oil &

Gas, Power Industries and reality Index.

2.11 HOW INDEX ARE USED ?

Information –  The index is a broad representation of the country’s state of economy.

For example the Nifty value on 1st of December was 6200 and the value as of 13th of

march 2015 is 7520. This represents a change of 1320 points in the index of 25.3%

increase. This simply means that the markets have quite significantly risen up

indicating a high level economic future.

Benchmarking – For all the trading or investing a yardstick needs to be measured for

the performance.  

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Trading – Trading is one ofthe most popular uses of the index.

Portfolio Hedging – A typical portfolio contains 10 – 12 stocks. While the stocks are

held from a long term perspective they could foresee a prolonged adverse movement in

the market (2008) which could potentially erode the capital in the portfolio. In such a

situation, investors can use the index to hedge the portfolio. 8

2.12 Market Indicators

Rise or fall of share prices on a particular trading day depends on many factors .The

success of an investor in the stock market always depend on how well he is able to

incorporate all these factors while taking up his investment decisions. Stock market

indicators are extremely used by investors across the world while taking various buy or

sell decisions in the market.

Any indicator which is used to project future financial and economic trends can be

called as market indicators. The following are some of the popular stock market

indicators used by Indian Investors:

1. Market Capitalisation : It refers to the total value of all outstanding shares

which is found out by multiplying the number of shares by the current market

price. The market capitalization to GDP ratio is another parameter for

evaluation of stock markets. Liquidity of the market can be measured by

comparing the traded value to GDP ratio i.e value of the shares traded to GDP

at current market prices.

2. Price to earnings ratio : It refers to a valuation of a firm’s current share price

compared to its earnings per share (EPS). Usually EPS is calculated by using

the previous four quarters. A high P/E indicates significant projected earnings

in future.

3. Return on Equity (ROE): Investment in company’s equity being compared

with the return on equity. It is a measure of company’s profitability compared

with other firms in the same industry.

4. Dividend Yield: A financial ratio that shows how much a company pays out in

dividends each year relative to its share price. It is calculated by dividing

annual dividend per share by price per share.

5. Price to book value: It refers to the process of comparing a stocks market value

to its book value. A low price to book value would be either because the stock

is undervalued or it could mean that the company is not in the best of health.

18

2.13 Review of Recent Policy developments and Programmes

SEBI along with other regulators and government have initiated number of policies

and programmes during the financial year 2008-09 in order to improve the efficiency

of operations in capital market. Basically these measures are aimed at protecting the

interests of the investors. Major policy developments pertaining to capital market are

enumerated below.

1. Shareholding in stock exchanges: To encourage competition in the stock

exchange space, SEBI board decided to enhance the shareholding in the stock

exchanges from 5 percent to 15 percent in respect of six categories of share

holders namely, public financial institutions, stock exchanges, depositories,

clearing corporations, banks and insurance companies as on December

23,2008.

2. Securities Lending and Borrowing (SLB): In pursuant of the feedback from

the market participants, the Securities Lending and Borrowing scheme was

revised with effect from April 21, 2008.Key modifications include increasing

the tenure of SLB, extending the duration of SLB sessions and allowing

margins in SLB. The securities lending and borrowing scheme has the

potential of taking the Indian stock market to great heights. But unfortunately

this scheme till now has not been able to show its presence in the market to its

fullest.

3. Guidelines in respect of exit option to Regional Stock Exchanges:

Broad guidelines were issued by SEBI with the objective of providing an exit

option to Regional stock exchanges (RSEs) whose recognition was withdrawn

or if renewal of recognition was refused by SEBI or for RSEs who would like

to surrender their recognition. As per the SEBI guidelines such RSEs may be

permitted to retain movable and immovable assets and to deal with such assets

as they deem fit, subject to the compliance with SEBI norms in this regard.

4. Introduction of Direct Market Access (DMA): Direct Market Access allows

brokers to offer his clients access to the exchange trading systems through

broker’s infrastructure without manual intervention by the broker. SEBI

introduced DMA with a view to increase liquidity, to have more transparent

trading and to reduce the risk of error associated with manual execution of

client orders.

19

5. Margining of Institutional Trades in the Cash Market:

Margining for institutional trades was made mandatory by SEBI from April

21; 2008.This initiative by SEBI was to strengthen the risk management frame

work in capital market operations. Margins have to be collected from

institutional investors on a T + 1 basis and the institutional investors can

maintain the entire margin in the form of approved securities.

6. Mandatory Permanent Account Number (PAN) Requirement: SEBI exempted

investors residing in the state of Sikkim from the mandatory requirement of

PAN for their investments in mutual funds.

7. Advertisement by Mutual Funds: Investments in mutual funds are subject to

market risk and an investor has to read the entire offer document before going

for such investments. Hence it was made mandatory by SEBI that such

statement i.e statements appearing in clauses of 10, 13 and 14 of schedule VI

of SEBI (Mutual Fund) Regulations 1996, on advertisement code should

appear in all advertisements. However with effect from January 18, 2010 such

advertisement should be printed in bold .This was because these statements

were not often brought to the notice of investors due to the lengthy nature of

mutual fund advertisements.

8. Application supported by blocked amount (ASBA) facility in public issues

and right issues: In its endeavor to make the existing public issue facility more

efficient SEBI has introduced the ASBA facility as on July 30th 2008.Such

facility is made available to retail investors also. ASBA is an application

containing an authorization to block the application money in the bank

account, for subscribing to an issue. If an investor is applying through ASBA,

his application money shall be debited from the bank account only, if his/her

application is selected for allotment.

9. Quarterly Reporting by Foreign Venture Capital Investors (FVCI):

With effect from the quarter that ended in 31st March 2010, all FVCI operating in

India have to submit quarterly reports with SEBI. The report is to be uploaded in

the SEBI portal within 7 days from the end of each calendar quarter. This

measure can be looked upon as one taken for bringing more transparency in the

operations of FVCI. Indian markets had recorded severe volatility at the close of

2007-08. However towards the beginning of 2008-09 the market started

20

recovering and registered gains during April –May 2008.One of the major reason

for such speedy recovery was due to the timely regulations and policies introduced

by various market regulators.

2.14 FACTORS INFLUENCING THE STOCK MARKET :

There are many factors influencing the stock market but among them election issues

has been considered to be one of the main reasons to influence the market. And we

shall be discussing about it in the next chapter.

The following are certain factors which influence the market :

(a) GDP ( Gross Domestic Products) . An even growth of GDP always stimulates

stock market. As on now India has registered a GDP of 7 % and any news

indicating an increase / decrease in this ratings will create appropriate

fluctuations on stock market.

(b) Inflation :- It is double edged weapon. When the GDP moves up inflation take

place and this raised inflation then retards the growth. When there is no growth

it means there is no development. A controlled inflation is the best for the

nation building and is always a stimulant for the stock market.

(c) Foreign Investment :- They are opportunists. They enter the market and

harvest the profit and this creates major fluctuations in the stock market.

(d) Climatic conditions especially Monsoon :- This is a very important factor. This

have an overall effect on nation’s agriculture and economy and it reflects in the

stockmarket accordingly.

(e) Price of Crude :- This has a direct impact on nations foreign reserve and thus

dictates the stock prices.

(f) Value of Indian Rupee :- This is a major factor. An increase / decrease of the

rupee value have varied impact on the export and import and thus dictates the

profit margins of many companies.

(g) Social aspect:- Riots, earthquake, floods war etc.

REFERENCES1. The securities contract regulations Act,19562.NSE (2001): Indian Securities Market: A Review,volume 4

21

3.Introduction to stock markets : zerodha varsity

CHAPTER 3

FACTORS AFFECTING STOCK MARKET

3. OVERVIEWIn current scenario of Indian stock market each investors are required to be alert

enough about happenings in the market. For that purpose it is very important for each

and every investor to be aware about major factors affecting stock market. In this

paper it has been tried to find out major factors responsible for up-down movement in

Indian stock market. From the study it has been found that factors like Flow of

Foreign Institutional Investors, Political Stability, Growth of Gross Domestic Product,

Inflation, Liquidity and different interest rate and Global level factors are major

factors responsible to create movement in Indian stock market. 9

3.2 Investment: Meaning

Investment is the commitment of funds to one or more assets that will be held over

some future time period. Investment sometimes refers as investment process.

Investment process is the process of decision making about parking our fund in

different investment avenues. Investment decision involves the process of selecting

best alternative(s) with respect to risk averseness and expected return of investor. 10Investment avenues we can mainly divide in to two parts: 1. Investment in for of

securities, which are marketable and 2. Non-securities form i.e. non-marketable.

3.2.1 Marketable Securities: Types

Following are marketable securities:

Equity shares: These are shares of company and can be traded in Secondary market.

Investors get benefit by change in price of share and dividend given by companies.

Equity shares represent ownership capital.11 As an equity shareholder, a person has an

ownership stake in the company. This essentially means that the person has a residual

interest in income and wealth of the company. These can be classified into following

broad categories as per stock market:

22

Bonds/Debentures: Bonds/Debentures are the instruments that are considered

as a relatively safer investment avenues. Bonds/Debentures are debt instrument

issued by government or government authority, public sector, companies etc.

Money market instrument: By convention, the term “Money Market” refers to

the market for Short-term requirement and deployment of funds. Money market

instruments are those instruments, which have a maturity period of less than

one year. These instruments are also issued by government, public sectors,

companies etc for their short-term requirement of finance.

Mutual Funds - A Mutual fund is a trust that pools together the savings of a

number of investors who share a common financial goal. The fund manager

invests this pool of money in securities, ranging from shares, debentures to

money market instruments or in a mixture of equity and debt, depending upon

the objective of the scheme. The different types of schemes are: Balanced

Funds, Index Funds, Sector Fund, Equity Oriented Funds

Capital Market :

The capital market is market for financial assets which have a long or indefinite

maturity. Generally, it deals with long term securities which have a maturity period of

above one year. Followings are the importance of capital market.12

1. It is important source for the productive use of the economy’s savings. It mobilizes

the savings of the people for further investment and thus avoids their wastage in

unproductive uses.

2. It provides incentives to saving and facilitates capital formation by offering suitable

rates of interest as the price of capital.

3. It provides an avenue for investors, partially the household sector to invest in

financial assets which are more productive than physical assets.

4. It facilitates increase in production and productivity in the economy and thus,

enhances the economic welfare of the society. Thus, it facilitates “the movement of

stream of command over capital to the point of highest yield” towards those who can

apply them productively and profitably to enhance the national income in the

aggregate.

5. The operations of different institutions in the capital market induce economic

growth.They give quantitative and qualitative directions to the flow of funds and bring

about rational income in the aggregate.

23

6. A healthy capital market consisting of expert intermediaries promotes stability in

values of securities representing capital funds.

7. Moreover, it serves as an important source for technological up-gradation in the

industrial sector by utilizing the funds invested by the public. For better understanding

of capital market we should also know its divisions.

Capital market may be divided in to three segments. 1. Industrial security market; 2.

Government security

market and; 3. Long term loans market. But this paper is restricted to industrial

security market; hence here only industrial security market is discussed below.

Industrial Securities Market

It is market for securities issued by different companies. Such securities are equity

shares, preference shares and debentures. In this market investor invest their money by

purchasing these securities and companies raise their fund from different issues. This

market can be subdivided into Primary market and secondary market. 13

Primary Market :

Primary market is the market where industrial securities are first time issued. This

market is also known as new issue market. It deals with those securities which were

previously not available to the public. Thus it deals with issue of fresh capital by

companies either for cash or for consideration other than cash. This capital may in any

of the form i.e. equity shares, preference shares, debentures etc.

Secondary Market

The stock market is a market for old securities i.e. those which have been already

issued and listed on a stock exchange. These securities are purchased and sold

continuously among investors without the involvement of companies. Stock exchange

provides not only free transferability of shares but also makes continuous evaluation of

securities traded in the market.

3.3 FACTORS AFFECTING:

FOREIGN INVESTORS INSTITUTION:

FII flow is found most important factor affecting Indian stock market. An increase in

FII inflow leads raise in stock market and outflow leads to downfall in stock market.

24

FII flow is one of the significant factors which may change the trend from bullish to

bearish in case of negative flow and bearish to bullish trend in case of positive flow

from outside the country. BSE sensex fell by almost 15% during subprime crises. It

was due to shortage and dry up of capital from FII and FDI, purchases of FIIs are more

than sales involving a net long position, the market may turn out to be bullish and if

net sales are more involving a short position, the market turn bearish. Net investment

of FII had significant bearing on the behaviour of stock prices of during ‘nineties’ in

Indian stock market.14

POLITICAL STATE & ECONOMIC DEVELOPMENT :

Political state and Economic development in the country. This factor mainly includes

Political stability, Government Policy and GDP growth (. Political stability leads to

stability in govt. policy as different political party have different philosophy) and

according to that they used to make certain changes in different policy. All these also

directly or indirectly determine the economic growth of the country i.e. GDP growth

rate. The Government policy also determines opportunity or threat for different

business and industries. So performance of different industries and companies are also

affected by them. There is high positive correlation between performance of economy

and stock market especially in case of recession in economy and crash in stock market

INFLATION:

Inflation as one of the factor among five most important factor affecting stock market.

Effect of inflation may be direct or indirect on stock market. Inflation directly affects

the profitability of the industries by affecting their cost of production. As government

try to control inflation through changes in interest rate which affect liquidity position.

The change in liquidity of cash in market leads to increase or decrease in volume in

stock market. Thus inflation indirectly also affect stock market. Major factors like

inflation, liquidity, interest rates and volume are directly or indirectly related with each

other and affect stock market all together.15

OIL:

Oil is a vital source of energy, an essential transport fuel and an irreplaceable raw

material in many industries. Further, it has become the world’s most important

international trading item. The surge in oil prices has affected microeconomic

25

variables, such as production costs, investor decisions and industry growth and

decline, and has also affected macroeconomic variables, such as inflation, levels of

national incomes, aggregate spending and the balance of payments of different

countries. The enormous sums involved affect levels of international debt, the

functioning of the world’s financial system and countries’ rate of economic growth.

There are three main causes affecting oil price fluctuation: oil demand, oil supply and

speculation. The rise of energy prices is determined mainly by demand and supply and

to lesser but significant extent by the movement of speculators. 16

Oil demand: Over the whole of 2008, the average prices for petroleum energy

increased significantly, with an average USD 97.26 per barrel in 2008 and peaking

above USD 114.0 per barrel in early July, rising for a seventh consecutive year, a first

in the nearly 150 year history of the oil industry. This rise in oil prices resulted in a

record level inflation in certain economies. Oil prices exhibited high volatility again

due to the financial crisis in September 2008 triggering a sharp recession (BP

Statistical Review of World Energy, June 2009). The Asian Development Bank

(2004) reported that over the previous two years, global oil demand grew more than

expected due to a strengthening of the economic recovery in the US, as well as fast-

growing economies in Asian countries, especially China and India. 17This global

recovery and high-growth economy resulted in a rise in oil consumption and more than

doubled the average increase in annual demand between 2000 and 2002.total oil

demand has increased sharply since the 1990s from 65.5 million barrels per day to

80.8 million barrels per day in 2004, due to high growth in consumption from China,

India and the Organisation for Economic Co-operation and Development (OECD)

countries. The BP Statistical Review of World Energy (June 2009) reported that China

accounted for nearly three-quarters of global consumption growth in 2008. Oil prices

exhibited low volatility for a few countries, such as Australia and New Zealand,

because of their strong local currency. In addition, the rising oil prices in terms of US

dollars have been partially offset by an appreciation of the domestic currency. In

contrast, low-income countries in Asia, such as Vietnam, Thailand and the Philippines,

have been affected by high consumer price and inflation pressure, translating into

effective monetary and fiscal policy against inflation (IMF 2008).

Oil supply: Agreements and cartels such as the Organisation of Petroleum Exporting

Countries (OPEC), which was established during the 1960s, have attempted to control

energy supply and prices by manipulating stocks and productions. The diversity of

26

stakeholders, such as oil companies, speculators and refineries, has brought additional

dynamics into the market. Additionally, world events, such as wars, revolutions and

embargoes, can generate a frequent effect on crude oil prices; for instance, the war

between Iraq and Iran increased oil prices from USD 14 in 1978 to USD 35 per barrel

in 1981, and after the Asian financial crisis, oil prices significantly dropped to USD 10

per barrel. Based on these observations, it can be concluded that the price of crude oil

varies widely and erratically (Alvarez-Ramirez, Cisneros, Ibarra- Valdez and Soriano

2002). Moreover, Krichene (2006) indicates that rigid energy supply may generate

high price volatilities and producers’ market power. The relationship between oil price

and interest rate has two sides during a supply shock; oil price increases bring about

rises in interest rates, whereas oil price decreases result in interest rates falling during a

demand shock.18

Speculation: Oil price increase seems to be a result of basic economic forces, such as

the high demand for oil appetites in China and India, the depreciation of the US dollar,

the rapid growth of world consumption, real supply limitations and the risk of supply

disruption, oil prices not only rely on demand and supply but also on speculation and

hedging that result in irrational movements in oil prices. Oil stock can be distinguished

by three categories:

(1) stocks held by sovereign states for strategic and military purposes

(2) stocks held in refineries, for oil production and at distribution sites and for

transportation vehicles

(3) stocks held for speculative reasons states that when oil prices have high volatility,

speculative demand will increase for futures contracts and will contributes to higher

volatility and volatility clustering. petroleum price volatility is an important economic

variable affecting both consumers in terms of disposable income and governments in

terms of fiscal revenues. These authors illustrate that financial hedging instruments,

such as futures and options, can be used to counter this volatility.19

In terms of futures contracts, oil purchasers can lock in a future price and avoid

having to bear risk due to short-term fluctuations in the spot market. With reference to

call options, these options help investors buy options to purchase oil at a strike price;

these options can guarantee a maximum price for investors. This also allows investors

to receive full benefits if oil spot prices are below the exercise price.

Effect of Oil Price on the Economy

27

The history of oil price hikes has shocked the global economy many times; for

example, in 1973, 1979, 1990, 2004 and 2007. Oil price hikes can have different

effects on the economy. The direct effect of oil price hikes depends on oil import

dependency, use efficiency and the structure of the GDP in each country. The indirect

effect would depend on export demand and the world’s consumption, which might be

quarantined from oil price hikes (Asian Development Bank 2004). Since July 2008,

oil prices rose to a peak above USD 114.0 per barrel, which is the highest in 150 years

of oil industry. As a result, the global economy faced recession and equity market

became very volatile. The IMF (2009) presented the idea that both oil price fluctuation

and global recession effects on the region, which specialised in high and medium-

technology manufacturing exports, particularly motor vehicles, electronic goods and

capital machinery as commodity exporters, rely on consumption outside the region

mostly trading with advanced economic countries. The low demand of consumption

has contributed to reducing the region’s GDP, an increased unemployment rate and has

led to a decline in the region’s economic growth rate. 20

As reported in September 2004 by the Asian Development Bank, a rise in oil prices

can affect macroeconomic performance, especially in Asian countries, through various

channels. First, by transferring income from oil importer to oil exporter countries; in

this process, net oil importer countries may suffer the loss of real national income.

Second, oil price increases affect production costs and reduce the output of

manufactured goods affecting the supply side and exerting an inflationary pressure on

the economy. Nevertheless, higher oil prices directly affect consumer prices via the

high prices of petroleum products, and an increase in input costs on the supply side

translate into inflation. The higher consumer price levels and higher inflation are the

causes of lower r21eal income and further domestic demand, leading to rising

unemployment.

Uncertain Political Conditions:

The stock market generally responds to new economic and political information.

Fama, Fisher, Jensen and Roll (1969) and Fama (1970) have suggested that efficient

stock market movements are normally a reaction to current news. Particularly, news

about economic policies could be derived from onshore and offshore political events,

such as political evolution, political dissolution, coup and sedition, which may

influence stock market volatility and the economic architecture. Kim and Mei (2001)

28

noted that political risks are based on political news and that there is a significant

relationship between news and the Hong Kong stock market volatility. Emerging stock

market returns and volatility are associated with event news, particularly political

events.

Political stability is a key factor that controls the economy, reduces equity volatility

and raises local and foreigner investor confidence. Investors do not prefer political

uncertainty about value stability and future policies in the political environment.

Moreover, a fall in equity flows normally characterises an election. This happens only

where the incumbent is not re-elected, advising continuity is valued by investors. The

choices of investors are affected by potentially radical swings in policy. A decrease in

the democracy score represents lower equity flows, but democracy in itself does not

affect equity flows that are consistent and equity funds are vigilant when potentially

adverse changes in the political environment arise. 22

A number of studies in the past have observed that investments by FIIs and the

movements of Sensex are quite closely correlated in India. NSE (2001) also observes

that in the Indian stock markets FIIs have a disproportionately high level of influence

on the market sentiments and price trends. This is so because other market participants

perceive the FIIs to be infallible in their assessment of the market and tend to follow

the decisions taken by FIIs. This ‘herd instinct’ displayed by other market participants

amplifies the importance of FIIs in the domestic stock market in India.

However,Stock analysis services can help us identify stock market prices and

fluctuations, but sometimes we can use key factors to predict prices on your own. Here

are some of the best factors that control, sway and stimulate the markets.23

1. World Events

When anything happens on the international stage, good or bad, it usually affects

the American markets. Changes in leadership, whether through elections,

through violent take-overs or monarchial deaths, can all negatively or positively

affect the markets. Exchange rates, trade agreements and shifting international

relations can boost the economy and promote spending, or inversely, can cause

market panic.

29

2. Economy

A natural indication of economic health is a stable stock market. This model also

works vice versa, as a healthy economy indicates a strong stock market. When

the unemployment rate is low, it indicates that the economy is strong. When

people have jobs, people have money to invest. The same concept applies to

boosts in retail sales. Companies and their stocks do better during the times of

year when retail sales are high, for instance around Thanksgiving, Black Friday

and Christmas. Stocks tend to perform poorly after such holidays when retail

sales return to their normal rates.

3. Scandals

Nothing gets the attention of the US media quicker than a good-old-fashioned

scandal. Insider trading, fraud, cooking the books and other high-end, white

collar scams have all collapsed popular companies and negatively impacted the

markets in the recent past. Household names such as Enron and Bernard Madoff

caused plummeting stock prices and created a domino effect with associated

businesses and firms. Moral of the story, cheating investors is illegal and leads

to jail time, worthless stock prices and large-scale corporate layoffs.

The domestic stock markets have come a long way in terms of maturity over the

last few years. Mature and developed markets provide high returns with low

volatility in the long term. A mature stock market provides an efficient channel

for the corporates to access savings of investors. The rise and fall of share prices

depend on various market forces and the factors that affect stock markets have

increased significantly over the last one decade due to globalisation and

technological advancements.24

This economy is the second fastest growing one in the world today. The real

GDP grew at an average rate of more than eight percent per annum over the last

three years. The volatility in the domestic markets has increased significantly

over the last few years.

30

Volatility is an important consideration while computing risk, and hence the

returns expectation from investments in the market. These are some market

forces that directly or indirectly drive the stock market volatility.25

REFERENCES :

1Singh, S. (2010). “Global Financial Crisis and Indian Economy: Impact Assessment, Policy Responses and Recovery”p.872Bhalla, V. K. (2011). Investment Management (Seventeenth ed.). New Delhi: S.Chand & Company Ltd.p.43 para 53 Rao, K. C., & Rangnathan, K. (2005). “Indian Stock Market: Some Issues”.p.1804 www.stockmarket.com5 Avadhani, V. A. (2009). Securities Analysis and Portfolio Management (Nineth Revised Edition ed.)Himalaya Publishing House.p.1676 Rajgopal, M. (2009). "Impact of Global Financial Crisis on India" Excel Book.p.2307 Singh, S. (2010). “Global Financial Crisis and Indian Economy: Impact Assessment, Policy Responses and Recovery”.8 Desai, J. N. (2009). “Global Economic Crisis, Volume 48 (Number 13), 13-169 ibid10White, E. N. (1990). “The Stock Market Boom and issues” p.11011Shreenivasa M. S. (2009). "Economic Turbulence: Short or Long-term Strategies" Contemporary Issue in Finance.p.8512.Pethe,and Ajit Karnik (2000): “Do Indian Stock Markets Matter? Stock Market Indices and Macro-economic Variables. Universal journal,p.1513Rao, K. C., & Rangnathan, K. (2005). “Indian Stock Market: Some Issues”.14Schwert, G.W. (1990). “Stock Volatility” The Review of Financial Studies, p.77

31

CHAPTER-4

VOLATILITY ON INDIAN STOCK MARKET AND FOREIGN INSTITUTIONAL INVESTORS AFTER ELECTION.

4.1 OVERVIEWThe first few phases of polling of the general election in India led to a spurt in stock

market volatility in this country. The prospect of a non-BJP government in the center

made the big players in the stock market nervous about the continuation of the ongoing

reform measures in India. The selling pressures from foreign institutional investors

(FIIs) prompted the Bombay Stock Exchange Sensitivity Index (Sensex) to decline

from about the 5,900 on 22nd April to around 4,500 on May 18th. 26

On 17th May, it registered a record 800 point decline, which is the steepest fall in the

130-year-old history of the stock exchange, before recovering to close 564 points

lower. 27To calm these investors, senior Congress leaders had to issue statements

reaffirming their faith in the market oriented ‘reform’ measures. Even though the

verdict of the general election was seen as a mandate against the neo-liberal economic

policies pursued by the outgoing government, the upheavals of the stock markets

managed to influence the new government’s policies even before the new ministry was

formed.

There was a general conception that the stock market and institutional investors

managed to influence policymaking which kicked a hornet’s nest in India. Financial

analysts urged that the decline of the Sensex happened because major ‘market’ players

was wary about the political stability of the new regime and they did not approve of

the policy statements made by some of the leaders of the United Progressive

Alliance28. These investors showed their disapproval and lack of confidence in the new

government by withdrawing from the market. However, many analysts suspected that

it was an attempt by financial rentiers, particularly foreign institutional investors, to

overrule the anti-reform verdict delivered in the election and nudge policy makers

towards adopting neo-liberal policies which essentially suit these investors. 29

4.2 Movement of Sensex and Volatility in the Stock Market :To recapitulate the events, the general election was held in four phases-the dates of

polls being 20th April, 26th April, 5th May and 10th May. The counting started on

13th May and because of use of electronic voting machines, most results were declared

on that day. However, it was perceptible from the exit polls conducted by the media

32

the possibility for a non-NDA government from the second phase of polling. From a

detailed analysis of the behaviour of the Sensex during this period one can easily

understand that the downward movement of the Sensex started around 23rd April, that

is between the first and second phase of polling and kept declining till the middle of

May. 30

It is interesting to observe that the behaviour of the foreign portfolio investors matched

the behaviour of Sensex during this period. Net FII investment in the Indian capital

markets started fluctuating sharply from 23 April and from 30th April until it turned

negative. And this trend in net FII investment in the Indian stock market being

negative continued till the middle of May. During this period, the Sensex and net FII

investment showed very high degree of correlation. And it is worthy to note that for

the period starting from 23rd April to 17th May, the correlation between daily net FII

equity investment and the Sensex was as high as 0.70. Figure 1 shows daily

movements of Sensex and Net FII investment in India during the months of April,

May and June.

A slightly different trend is observed from 18th May to the end of that month. The

Sensex started a recovery from 18th May and the declining trend of net FII investment

also reversed from that day.

4.3 Foreign Portfolio Investment and Its Influence on Sensex :

A candid analysis of the stock market trend since 2003 would go to show that there has

been a very sharp increase in the net FII investment in India since April 2003. For the

financial year 2003-04, FIIs have invested more than Rs 44,000 crore of portfolio

capital in the Indian stock market.31 To put this figure into perspective, for the period

1992-93 to 2002-03, the maximum annual net investment by FIIs in India was in the

year 1999- 2000 and for that year, total net FII investment in India was Rs 9,765

crores. 32

This rising trend of portfolio investment continued in 2004 also. In fact, in March

2004, a record Rs 8.800 crores of net foreign portfolio investment came into the Indian

equity market. This trend continued till the end of April and more than Rs 4,200 crores

of portfolio investment was made in the Indian stock market in that month. However,

for the month of May, FIIs turned net sellers in the Indian equity markets. In 17 of 22

trading days between 30th April 2004 and 31st May 2004, net FII investment was

33

negative. During this period, FIIs withdrew more than Rs 3,500 crores from the Indian

equity market. In June, net FII investment turned positive, however, net FII investment

for the month of June was only Rs 516 crores which is much lower than the average.

The FIIs are the major players in the domestic stock market in India, but their

influence on the domestic markets is also growing. Data on trading activity of FIIs and

domestic stock market turnover suggest that FII’s are becoming more important at the

margin as an increasingly higher share of stock market turnover is accounted for by FII

trading. Given the perception about FIIs as market leaders in the domestic stock

market, the increasing importance of FII trading at the margin and the dominant

position of FIIs in the Sensex companies, it is not surprising that FIIs are in a position

to influence the movement of Sensex in a significant way. 33

The influence of FIIs on the movement of Sensex became apparent after the general

election in India when the sudden reversal of FII flows triggered a panic reaction

which resulted in very high volatility in the Indian stock market. During this period,

the Sensex experienced its worst single-day decline in its history and in the three

month period between April to June 2004, it declined by about 17 percent. And it all

started because of the selling pressure exerted by the FIIs after the post- election phase

when they became less confident about ‘the continuation of reform process in India’.

To explain the anomaly, one can argue that after the elections FIIs were concerned

about the continuation of reform process in India and started withdrawing their

investments. This led to the stock market crash and prices of shares tumbled. However,

once the assurance about the continuation of reform process was given, FIIs started

buying back the shares they sold earlier. Taking advantage of the stock market crash,

they managed to regain their portfolio at a much cheaper price. If this chain of events

is true then it shows that the FIIs have come out as the clear winner in the post-election

turmoil of the stock market. Not only have they gained financially out of the situation,

but they have also managed to influence policy making in this country. The pressure

exerted by FIIs also allowed them to get some fiscal sops in the recent budget. It needs

to be reiterated here that there has been no change in the macroeconomic fundamentals

faced by the country before and after the volatile period in the stock market. 34

It needs to be remembered that in India, almost all previous experiences with high

phases of stock market volatility have been associated with some form of irregularities

and corruption. Given the frequent occurrences of scams and irregularities in the

Indian stock market, the likelihood of market manipulation cannot be totally ruled out.

34

The manner in which record FII investments build up the stock market during the first

quarter of the year and the way the stock market was brought down, strengthens this

apprehension. It also needs to be considered here that FIIs have emerged as the major

market drivers of Sensex companies and, in the past, there have been instances where

the nexus between FIIs and big brokers of the BSE was found to be involved in price

manipulations in the BSE.

The whole process also highlights another disturbing feature. During the post election

period, the sudden volatility in the stock market and the subsequent decline of Sensex

was almost treated as a national emergency in India by the financial media and to a

certain extent, by the incoming UPA government. It is very difficult to understand why

the government feels so concerned about speculative investors and the movements in

Sensex. Most studies have shown that Sensex is neither a good barometer of economic

fundamentals it is not an indicator of future growth prospects of the economy.

REFERENCES :

Chandrasekhar, C. P. (2004): “The Markets vs. The People: A tale of two mandates” - http://www.macroscan.org/the/finance/may04/fin170504Markets_vs.htm2Ibid3 Che-Yang Lin. “General Change and Market Efficiency: Long- Perspective in Developed Stock Market”,Investment and Banking (2008) 4Parthapratim (1998): “Foreign Portfolio Investment in Indian Equity Markets: Has the Economy Benefited?” Economic and Political Weekly, Vol. 33.5Ibid; vol.33,No.116Supra n 17Supra n 48Bruce A. (1998): “Emerging Stock Markets, Portfolio Capital Flows and Long- Term Economic Growth: Micro and Macroeconomic Perspectives”, Cambridge Discussion Papers in Accounting and Finance, AF30, University of Cambridge, March 1998. 9Raju (2013): “Stock Market Volatility – An International Comparison”-Working paper series no. 8, Securities and Exchange Board of India, April 2012

35

CHAPTER-5

SITUATION OF INDIAN STOCK MARKET PRIOR TO GENERAL ELECTIONS

5.1 GENERAL

Election is regarded as the important phase or a carnival in India with the entire

population from every nook and corner gets attracted to it. Everything becomes just

like a still picture in the heart of every individual. The Indian stock Market had seen a

lot of volatility and the result was many traders had lost their money but on the other

side investors were becoming the gainers.

The Indian general election of 2014 held the 16th Lok Sabha, electing members of

parliament for its constituency in India, which ran in nine stages from 7 April to 12

May 2014, declared as one of the greatest election in the world .According to the  

reports given by the Election Commission of India , more than 850 million people

were eligible to vote, with an increase of 600 million voters since the last  election in

2009 making it one of the strongest election in the past history compared to other

elections whole world.35

The results were declared on 16 May 2014, The BJP won mass full of victory, taking

336 seats. The BJP itself won 33% of all votes and 282 of all seats. It is the first time

since the 1984 Indian general elections that a party has won 90% seats to govern

without the support of other parties.

Despite the seats won by the BJP party certain matters can be looked in order to

understand he changes in the Indian economy has been brought through one election.

The certain issues during the campaign included high inflation, increase in

unemployment, economic wastage, corruption, lack of security concerns, terrorism,

religious communalism, and lack of infrastructure such as roads and electricity. In

another survey by Times Of India news for about 20% of people, corruption is the

main critical issue in the election.36

Ernst & young had highlighted India's slowing economy with a result of high current

account deficit and a falling rupee in the year of 2013. It listed out a few lack of

infrastructure investment and a government likely to increase to give subsidies which

36

the national finances could not afford just before the election. Other issues it

mentioned was stagnant policymaking and diplomatic behaviour .

The economy of our country was concentrated as a main issue in the campaign.

Former Finance Minister Yashwant Sinha criticised the Mr.Chidambaram saying he

had a "habit that he will get a strong economy, and he will ruin it before he leaves...

Shri Chidambaram will be remembered in history as a spoiler, as someone who

specialises in sub-five per cent growth rate, for his hubris, arrogance"

Moving on further yet another issues we got to see are a number of scams by the

previous government came to public attention, where the government itself

deteriorated its own image infront of the common man. These scams included

2Gscam.

Price rise is the biggest worry in the mind of voters as India prepares to elect its

16th Lok Sabha. A pre-poll Lok Sabha election survey conducted by Zee News-

Taleem, shows the common man on the street is fedup with the increasing rise in

prices of essential commodities in the last few years. The ruling UPA government has

been severely criticised in the last for having failed to control inflation. In spite of

being led by an economist Prime Minister, this issue has continued to haunt

the Congress party. Apart from price rise, other key issues in the election are expected

to be corruption and unemployment. The UPA government has faced a series of

corruption scandals in last ten years including the infamous 2G scam and CWG scam.

While Congress party has claimed to have tried its best to tackle the menace of

corruption, the opposition led by BJP seems to have been successful in making this a

poll issue. 37

Basic amenities like road, electricity and water also feature in the list of election issues

for voters. Gujarat Chief Minister and NDA Prime Ministerial Candidate Narendra

Modi has been portraying himself as an advocate of development and using the

‘Gujarat’ Model to speak about the need to get basic amenities in place across the

country.

There was high hopes from the election when it came to economic condition of our

country, however various economist world wide are of the view that our country’s

economy concentrate much more on global economy than the people who rules in the

37

capital of India. India considered as the world’s largest and biggest democracy with an

electorate of more than 800 million voters, who went to the poll on the month of April-

May 2014 , and it was believed fact that the new government (namo) would throw out

the UPA hanging the Parliament with a fractured mandate.It was assured and proved to

the people in our country as long as there is a powerful government like namo the

investors were stabilised with regard to the government as well as the new policies.

1 Wall street journal,volume 22 Sudarshan pillai,indian economy and development,academia.edu3The securities contract regulations Act,19564 NSE (2001): Indian Securities Market: A Review,volume 45 Supra,p.2,volume 46 Introduction to stock markets : zerodha varsity7Ibid;zerodha varsity chapter 38 Supra p.3 ,n.4 Zerodha varsity9 Singh, S. (2010). “Global Financial Crisis and Indian Economy: Impact Assessment, Policy Responses and Recovery”p.8710 Bhalla, V. K. (2011). Investment Management (Seventeenth ed.). New Delhi: S.Chand & Company Ltd.p.43 para 511 Rao, K. C., & Rangnathan, K. (2005). “Indian Stock Market: Some Issues”.p.18012 stock-exchanges-linking-investors-and-public-companies. Retrieved August 18, 2011, from www.stockmarkets.com: http://www.stockmarkets.com/blog/stock-exchanges-linking-investors-and-public-companies13 Avadhani, V. A. (2009). Securities Analysis and Portfolio Management (Nineth Revised Edition ed.). Mumbai, Maharastra, India: Himalaya Publishing House.p.16714 B., R., & Rajgopal, M. (2009). "Impact of Globa Financial Crisis on India", Contemporary Issue in Finance. (Jagdeesha, & S. Deene, Eds.) Excel Book.p.23015 Singh, S. (2010). “Global Financial Crisis and Indian Economy: Impact Assessment, Policy Responses and Recovery”.16 Desai, J. N. (2009). “Global Economic Crisis: Prospects of Indian Outsourcing Services. Southern Economist”, Volume 48 (Number 13), 13-1617 ibid18 White, E. N. (1990). “The Stock Market Boom and issues” p.11019 Ibid ; p.11320 Shreenivasa, R. H., & Yathishchandra, M. S. (2009). "Economic Turbulence: Short or Long-term Strategies" Contemporary Issue in Finance.p.8521 ibid;p.9022 Pethe, Abhay and Ajit Karnik (2000): “Do Indian Stock Markets Matter? Stock Market Indices and Macro-economic Variables” Economic and Political Weekly,universal journal,p.1523 Ibid;p.1524 Rao, K. C., & Rangnathan, K. (2005). “Indian Stock Market: Some Issues”.25 Schwert, G. W. (1990). “Stock Volatility and the Crash of '87. The Review of Financial Studies”,p.7726 Chandrasekhar, C. P. (2004): “The Markets vs. The People: A tale of two mandates” - http://www.macroscan.org/the/finance/may04/fin170504Markets_vs.htm27 Ibid28 Yu Lee and Che-Yang Lin. “General Change and Market Efficiency: Long- Perspective in Developed Stock Market”. f Money, Investment and Banking (2008) 29 Pal, Parthapratim (1998): “Foreign Portfolio Investment in Indian Equity Markets: Has the Economy Benefited?” Economic and Political Weekly, Vol. 33, No. 11, March 14.30 Ibid; vol.33,No.1131 Supra n 1

38

There was an opinion by the media an establishment of new government would have

no impact on the macro data releases or the new policy action in the market . it was

presumed by the investors that a change in government, led by the BJP would be a

fresh mandate and a new perspective for the policy making in our country.

After the first few phases of polling of the general election in India, there was a sudden

and sharp increase in stock market volatility in this country. Apparently, the prospect

of a non-BJP government in the center made the big players in the stock market

nervous about the continuation of the ongoing reform measures in India. Largely

owing to selling pressures from foreign institutional investors (FIIs), the Bombay

Stock Exchange Sensitivity Index (Sensex) declined from about the 5,900 on 22nd

April to around 4,500 on May 18th.

On 17th May, it registered a record 800 point decline, which is the steepest fall in the

130-year-old history of the stock exchange, before recovering to close 564 points

lower. To calm these investors, senior Congress leaders had to issue statements

reaffirming their faith in the market oriented ‘reform’ measures.

Even though the verdict of the general election was seen as a mandate against the neo-

liberal economic policies pursued by the outgoing government, the upheavals of the

stock markets managed to influence the new government’s policies even before the

new ministry was formed.

The apparent ease in which the stock market and institutional investors managed to

influence policymaking created a debate in India. In the financial media there was a

view that the decline of the Sensex happened because major ‘market’ players was wary

about the political stability of the new regime and they did not approve of the policy

statements made by some of the leaders of the United Progressive Alliance.

32 Supra n 433 Singh, Ajit and Weisse, Bruce A. (1998): “Emerging Stock Markets, Portfolio Capital Flows and Long- Term Economic Growth: Micro and Macroeconomic Perspectives”, Cambridge Discussion Papers in Accounting and Finance, AF30, University of Cambridge, March 1998. 34 Raju, M.T and Ghosh, Anirban (2013): “Stock Market Volatility – An International Comparison”-Working paper series no. 8, Securities and Exchange Board of India, April 201235 Ashu Dutt , review on ,modi effect on indian economy September 2014,volume 536 Times of india,page 3,201337 The economic times, page 6,2013

39

These investors showed their disapproval and lack of confidence in the new

government by withdrawing from the market. However, many analysts suspected that

it was an attempt by financial rentiers, particularly foreign institutional investors, to

overrule the anti-reform verdict delivered in the election and nudge policy makers

towards adopting neo-liberal policies which essentially suit these investors.

Given this controversy, this paper aims to take a detailed look at the stock market and

the behavior of different investor groups, especially the FIIs, in India for the period

March 2004 to June 2004. The objective of the paper is also to investigate how the

withdrawal of foreign portfolio capital in the post election phase has affected the price

and equity holding pattern of different Sensex companies. This will help us understand

the dynamics of the stock market crash in the post election period.

To recapitulate the events, the general election was held in four phases-the dates of

polls being 20th April, 26th April, 5th May and 10th May. The counting started on

13th May and because of use of electronic voting machines, most results were declared

on that day.

However, the exit polls conducted by the media started to give an indication of a non-

NDA government from the second phase of polling. If one looks closely at the

behaviour of the Sensex during this period, it shows that the downward movement of

the Sensex started around 23rd April, that is between the first and second phase of

polling and kept declining till the middle of May.

The behaviour of the foreign portfolio investors matched the behaviour of Sensex

during this period. Net FII investment in the Indian capital markets started fluctuating

sharply from 23 April and from 30th April it turned negative. Net FII investment in the

Indian stock market continued to be negative till the middle of May. During this

period, the Sensex and net FII investment showed very high degree of correlation.

For the period 23rd April to 17th May, the correlation between daily net FII equity

investment and the Sensex was as high as 0.70. Figure 1 shows daily movements of

Sensex and Net FII investment in India during the months of April, May and June. A

somewhat different trend is observed from 18th May to the end of that month. The

40

Sensex started a recovery from 18th May and the declining trend of net FII investment

also reversed from that day.

The churnings of stock prices led to a sharp rise in stock market volatility in May. To

measure how much the volatility increased during that month, the following two

methods of estimating inter and intra day stock market volatility is used here. These

measures are suggested in a recent SEBI Publication on volatility by Raju and Ghosh

(2004).

From January to April, both intra and inter day volatilities of Sensex were on a decline

and were below the 1.5 mark. Suddenly in May there was a spike in volatility and both

inter and intra day volatility almost doubled for that month. However, after May,

volatility has again subsided and has settled down to levels observed during the earlier

part of the year. Most Sensex companies experienced price increase and the Sensex

increased by about 3.5 percent, however, between April to June, the Sensex declined

by about 17 percent and twenty eight of the thirty Sensex companies experienced a

decline in price. Only Infosys and Wipro, the two companies dealing with Information

Technology (IT), did not experience a price decline over this period. It also shows that

twenty two of the thirty companies have experienced more than 10 percent decline in

price during the same period. More than 25 percent price drop has been observed for 6

companies: Tata Power Co. Ltd, Hindustan Petroleum Corpn. Ltd, Reliance Energy

Ltd, State Bank Of India, Maruti Udyog Ltd and Tata Iron & Steel Co. Ltd. The price

decline of the Sensex companies is in stark contrast with the period just before the

election when the stocks of 26 of the 30 constituent companies experienced a price

increase.

If one looks at how the price decline has affected companies with different market

capitalization and weightage in Sensex, some other interesting facts appear. It should

be noted that Sensex is a weighted average of the share prices of the 30 constituent

companies. Prior to September 2003, companies’ weightage in Sensex was based on

the total market capitalization of companies. A company’s weightage in Sensex was

proportional to its share in total market capitalization of the constituent companies. But

currently the BSE Sensex is calculated on a free float basis where weightage is

assigned depending upon the value of free float shares of the company.

41

The S&P BSE Sensex has moved in a narrow range so far in the year 2013 and the

trend is likely to continue till elections which are due in May 2014, say analysts.

The BSE Sensex has rallied nearly 3 per cent so far in the year 2013 and is likely to

give single digit return amid muted growth, as is expected, in corporate earnings,

slowdown in economy and global headwinds.

The reason is simple. Modi has always been pro-business, which is what counts in the

stock market. Many commentators have said Gujarat scores badly on social indicators.

The markets don’t really give a damn. What they want is not inclusive growth, but

earnings growth.

Some have argued that we need to have growth before we start distributing the fruits of

development. The market is not interested in that debate either. Distribution raises the

spectre of more government spending, a higher fiscal deficit and the possibility of

higher interest rates, all anathema to business and to investors.

A minimum of distribution to avert social strife may be inevitable, but anything

beyond that is unwelcome. Thousands of crores spent on sops for industry are an

incentive, but money spent on ensuring food for poor families is a subsidy.

Modi’s track record of development also inspires confidence. Some say that while

Gujarat’s growth has been high, there have been other states that have done equally

well. But, has any other chief minister built up the kind of charisma exuded by Modi?

It doesn’t matter if part of it is hype—perception makes a big difference. The

packaging is even more important than the content. These days, even ordinary folk

need to package their personalities to be sold in the job markets. We are all salesmen

now.

Some may argue that the stock market is a microscopic part of Indian society and its

opinion doesn’t count. They would be completely wrong. During the boom years of

2003-07, the discovery of India by foreign investors led to a euphoric rise in the

market, which allowed companies to raise money cheaply, which allowed them to

expand capacity and the result was a virtuous circle of growth and wealth and job

creation.

The markets are terribly important for the economy. Foreign investors are even more

so, for the dollars they bring in Help Bridge the country’s current account deficit. In

2010, multinationals based in China were responsible for 68% of its trade surplus.

42

The Sensex went up 2,000 points when the news came in that the United Progressive

Alliance had won the 2009 election without the support of the Left. But that hope has

been completely demolished.38 Not only did UPA-II see an orgy of corruption and utter

mismanagement, a section of the party believes that more sops for the masses will

ensure re-election. Why else did they push through the land acquisition law, so

inimical to industry? The party, in a confused attempt to project itself as social

democratic, has vacated space on the political right to the Bharatiya Janata Party, in

spite of identical views on most economic policies.

That is why businessmen and the markets are overwhelmingly for Modi. He has also

been projected as having a decisive personality, but everything depends on what a

leader is decisive about. The markets would hate a strong-minded personality on the

Left. The fact is you cannot have a capitalist economy and not do what capitalists want

to be done, especially in these times of globalisation. You cannot expect capitalists to

be the engine of economic growth and then put a spoke in their wheels. Look at the

pickle the social democrats of Europe find themselves in.

But there are many populist elements in the BJP’s economic agenda. Modi opposed

foreign direct investment in retail and wanted a more comprehensive food security

law. BJP legislators waxed eloquent about the benefits to farmers from the land

acquisition legislation. The problem is that India’s economy is trying to take off while

having all the trappings of democracy, a feat attempted by no other late-developing

country in the world. No party, if it wants to win elections, can be seen as ignoring the

masses. But the BJP has its Hindutva ideology, which diverts attention from issues of

social justice. And its support base is certainly not among the poor. That is why the

markets believe it will be less populist than the Congress.

Some may find the stock market’s attitude cold-blooded and callous. Keynes explained

it thus in 1930: “For at least another 100 years, we must pretend to ourselves and to

everyone that fair is foul and foul is fair; for foul is useful and fair is not.” He was, of

course, an incurable optimist.

5.2 Reasons why the markets wanted Narendra Modi to win:

• Policy clarity: Stock markets hate uncertainty. They believe that Narendra Modi and

the Prime Minister’s office would have more power than the incumbent Manmohan

38 The economic times,page 4,25th October 2014

43

Singh’s PMO. This is critical for future investment plans in India. The new

government is expected to create a more conducive climate for investment.

• Investment and infrastructure: Due to uncertainty over policy and slow decision

making, public and private investment in India fell to 15% of Gross Domestic Product

in 2013-14 from a peak of 26.2% in 2008, according to CRISIL, a credit rating agency.

This was the key reason for the slowdown in the economy. The stock market expects

this trend to reverse. The new government is expected to clear large infrastructure and

investment projects faster than the existing government.

• Fiscal deficit: When a government’s expenditure exceeds income, it has to borrow

from the market to fund the additional expenditure. This borrowing is the fiscal deficit.

The fiscal deficit has remained above 7.5% for the past four years. RBI is forced to

provide money to fund the government expenditure and keep interest rates high. This

hurts ordinary people and businesses alike. It adds to inflation and increases borrowing

rates. To keep this in check, the government has to either cut expenditure or increase

revenue. The stock market expects the new government to implement a nationwide

goods and services tax (GST) and boost revenue as promised in the election manifesto.

According to industry estimates, a rise in revenue could help the government boost

overall economic growth to 7% from less than 5% now.

• Helping wisely: The government spending on subsidies keeps prices of fuel,

fertilizer and food artificially low. This means the government pays the market price or

a high price to procure them and sell it at a low price to people. To continue to pay for

subsidies as growth slowed, the UPA government cut productive expenditure on

healthcare and education and other expenditure, according to CRISIL. “Productive

expenditure by the government over a 2-year period – fiscals 2013 and 2014 – rose by

a mere Rs110 per person whereas spending in the remaining categories (subsidies)

rose more than Rs1900 per person,” according to CRISIL, a rating agency. Lower

productive spending by the government in the past couple of years added to an already

slowing growth and discouraged private investment. As a result of this, businesses

created fewer jobs.

The stock market expects the new government to reverse this trend. Job prospects for

people could improve if the government spends money on creating new assets along

with offering subsidies food and fuel to the poor. In short, the new government led by

44

Narendra Modi is expected to spend the public money wisely instead of spending it

largely on entitlements.

If Modi doesn't come to power the stock market will see a free fall. Most importantly,

the rupee will fall close to 70 per dollar following an outflow from foreign institutional

investors. If that happens, it will have a contagion effect with the greatest fears for

India being a downgrade by rating agencies. India is just one notch above the junk

status. A downgrade would mean losing its investment-grade rating and no money

coming into the liquidity driven equity market. FII flows remain key to India and its

capital markets. Rating agency Moody's has clearly indicated it would downgrade

India if it doesn't see a stable government at the Centre. A fragmented government

without either a clear mandate or policy platform would heighten the downside credit

risk.

In the current scenario, however, the fear seems to be unwarranted and a downgrade

doesn't look likely. Looking at the economic numbers one would feel the fear of a

downgrade has receded with the current account deficit and fiscal deficit under control

and the rupee stable. This along with export income improving, import declining as

well as inflation falling to an eight-month low augurs well for India. On the currency

front, the Reserve Bank of India (RBI) has done a remarkable job with strong foreign

exchange reserves ($292 billion) as well as allowing domestic banks to raise foreign

currency non-resident deposits up to $30 billion. The RBI is also keeping a close

watch on the US by keeping favourable interest rate differential among both nations

such that flows into India remain intact. The new Fed chief's statement that interest

rates will not be raised in the medium term has brought comfort to the market.

Today, barring a stable government at the centre all factors that could pull down the

market - increase in US interest rates, uncontrolled deficit and drop in FII inflows have

taken a back seat.

There is a feeling that the National Democratic Alliance (NDA) is pro-business, and

therefore everyone wants Modi to come to power as they think he will replicate the

Gujarat growth model in the country. This is the reason why most companies have

stalled their investment spends as they don't have the confidence in the current system.

One wonders why it took 10 years for businessmen to realise that the NDA is pro-

business. You can call it luck that played a huge role in the United Progressive

Alliance (UPA) governing India for the past 10 years. After the UPA came to power in

2004, India saw its biggest ever bull-run for the next five years and it also enjoyed the

45

multiplier effect of work that the previous government had done in terms of

infrastructure and growth. In fact, in May 2009 after the UPA emerged victorious, the

Sensex rose 20 per cent in a single day on the hope that reforms will take forefront, but

the UPA's second stint was marred by corruption and scams, and reforms and growth

took a back seat.

Today, the government machinery is in a deadlock. The market wants a government

that is pro-reforms. It is not that Modi has a magic wand that can bring growth from

day one. It will take at least 12 to 18 months for the economy to come back on track,

but hopes are if Modi comes to power he will start on a clean slate and will have no

baggage like the UPA, which will help him to drive economic reform and growth.

Though the market is hoping for Modi to come into power, Modi or not, a stable

government at the centre will emerge as a key catalyst for the market.

Meanwhile, with the December quarterly results coming to an end, the focus will shift

to global markets and FII flows. On Monday, the government will also unveil its

interim budget for 2014/15. In less than 100 days India will see a new government

coming into power. Until then, the Indian market may remain range bound as well as

volatile, and react to global events.

 

REFERENCES :

Ashu Dutt , review on ,modi effect on indian economy September 2014,volume 52Times of india,page 3,20133 The economic times, page 6,20134 The economic times,page 4,25th October 2014

46

CHAPTER-6

PERFORMANCE OF INDIAN STOCK MARKET AFTER 2014

GENERAL ELECTIONS.

5.1 OVERVIEW :

India’s 68-year-old democracy may be young compared with that of the United

States–the world’s oldest democracy but there are parallels between our NAMO

government victory and Barack Obama’s Presidential victory.

Both Narendra Modi and Barrack Obama largely appealed and attracted the young

voters and made a message of bringing changes, expanding economic opportunity

and bringing out a good governance.

Indians are in a need of economic growth and whatever that had had happened in

the past the corruptions and troubled by the Congress ruling party have grown

frustrating.

And with the happening of such a scenario the Indians turned to Mr. Modi, a

capable leader with a compelling story. Born in a lower caste family, he was a

formerchaiwalla (tea seller). In his 12 years of position being as a chief minister of

Gujarat, he has created a reputation and strived hard for good results and fostering

economic development, employment opportunities and improving infrastructure.

An Indian reporter had said during the elections that expectations from Mr. Modi

and his government are so high that if the lives of average Indians as he had

promised in the campaign do not change, then“emotions will break.”

But changing a totally corrupted political systems isn’t easy. Few years back

Barrack Obama had promised to change the culture and development of

Washington, but the promised change has not yet been materialized and hence, the

47

result being Obama administration and Congress have 70 percent broken the trust

of its citizens.

The Indian Markets respect our Prime Minister Narendra Modi, however a

competition in the stock exchange guided by his new policy and reforms cannot

necessarily be regarded as a strategy to win in the markets especially for investors.

Narendra Modi has been in power for ten months, during the first few months it

couldn’t be said that every major announcement or policy by the NAMO

government would bring an impact in the stock in factit was reported some led to a

fall in the value of the Sensex.

This happens because markets mostly move on with high expectations. For

instance, with an expectation that Mr. Modi would become prime minister, the

benchmark stock index BSE Sensex rose 572.61 points or 2.6% to 24,783.35 in

that week before he took office on May 26. 39

However, the index lost 460 points or 1.7% to 23,517.24, in the week .In the

month of June two weeks after his appointment as Prime Minister ,the

benchmark Sensex index hit a record high of 29,527.96 after Mr Modi appointed

his new cabinets with an agenda for a new economic reforms.

Six months after the 2014 general election, the Indian markets have turned their

tables as the local investors had returned back to the market and the new

government as had promised brought a change regarding promised policy changes,

ending heavy prices on diesel and petrol. The Sensex had gained 35 per cent last

year in the month of May 2014, reaching new high level. 40

As Mr Modi gave his first step inside the office, domestic investors have also

become important. As inflation slows down, household savings has very much

being transferred towards financial assets from physical assets such as real estate

and gold.

“As per street estimates, domestic savings worth approximately $20bn

(earmarked for importing gold) is lying idle, which now needs to be

39 National stock exchange review,Mumbai40 ibid

48

channelled into investments in productive assets,” says Premal Madhavji, head

of equities at Espirito Santo Securities in Mumbai.

On October 2014, for the first time in India after the 2009 general elections, the

monthly net investments into equities by domestic institutional investors, at

$700m, had exceeded investments by the foreign institutional investors, at $150m

– giving it an added boost.

There can be risk which could level down on India’s equity markets. Narendra

Modi’s victory in the general election has already improved the trade ties between

New Delhi and Washington and has eventually lifted U.S. exports in industries

starting from pharmaceutical products to infrastructure.

Strong foreign buying has pushed both the Sensex and Nifty up by over 25 percent

so far till this year, posting a series of record highs so far including an outstanding

performance at a 5 percent gain in the MSCI Asia-Pacific index. Other gainers

include domestic oriented sectors such as infrastructure and construction, along

with interest rate sensitive sectors such as banking and automobile company

markets. The market value of the NSE and BSE makes India the second largest

among the emerging markets in Asia.

“Looking at his reputation and track record in Gujarat, there were some good signs

from his tenure there,” said Linda Dempsey, vice president of international

economic affairs at the Washington-based National Association of

Manufacturers, a trade group.41

Investors reacted to the news with enthusiasm, and Mumbai's Sensex index

advanced by more than 5% in early trading before paring gains to close 0.4%

higher. The rupee strengthened by more than 1% and hit a new 10-month high

against the dollar.

The prospect of a Modi-led government has helped boost India stocks by almost

13% since the start of the year. The rupee has responded too, clawing its way back

from a dismal performance in 2013.

41 India today,p78,volume 20

49

A jubilant BJP described the result of the election as a defining moment point for

Asia's third largest economy.

"Till some time ago, it was said India's success story is over. Now, the time has

come to rewrite India's success story," the BJP party chief, Rajnath Singh told

reporters.

Exit polls released after the election suggested that India's 815 million eligible

voters had supported the BJP in large numbers, but observers expressed surprise

Friday at the extent of the party's apparent dominance over rivals including the

Congress Party.

It was observed that the market gave 10-12% returns for 2014. The year-end target

for the Sensex for the year 2014 was 23,500. A leap from the flattish to a mild

recovery in the economy was detected by the analyst, which was remarked to have

brought returns in the market. In early part of the previous year, market focused on

tapering and the elections in India.

The market touched its all-time high after six years but the valuations varied

widely when the elections approached. Leaving aside the top 12-15 stocks, heavily

owned by foreign institutional investors (FIIs), and the rest of the market was

cheap. Studies indicated that inflation was likely to top out as a repercussion due to

slowing demand and wage growth, which meant interest rate cycle would peak out

post another quarter percentage hike in policy rates. If we go by the assurance

given by the finance minister, the fiscal deficit target will be met. This can be

another booster for the market.

In the detailed disquisition about the stock market it was ascertained that the equity

markets were to gain positively in the year 2014 on the back of supportive global

cues as well as improving domestic economic outlook. Our external sector is more

resilient now as the trade deficit has narrowed owing to the boost from export

performance and moderation in import demand. It is anticipated that better

agricultural production to result in easing of inflation and that is in turn likely to

give the RBI (Reserve Bank of India) room to bring rates down. At the same time,

revival in the investment cycle has the potential to boost GDP (gross domestic

50

product) growth considerably. The Sensex is likely to scale 24,600 over the

coming one year.

Market participants are way over-extended on a vastly under-analysed and over-

simplified perspective, called the (Narendra) Modi Trade. No amount of cold data

or reasoning swayed these minds from considering any perspective other than a

Modi sweep at the centre in 2014. This is the classical mindset of crowds at the

peak or trough of markets, when the collective minds are unwilling to consider any

perspective other than what they have fallen hopelessly in love with.

It was estimated in the study that the equity market would be volatile in 2014 as it

would be supported by shift occurring in favour of financial savings from physical

savings and it would get supported by broad valuation which were near fair value.

Though it was to face the uncertainty of election outcome till the actual results are

out. It was also assessed to look forward to revival in investments by the new

government to sustain higher growth.

The study also indicated that large part of volatility will also come from the fact

that there is very high polarization among sectors like technology, pharma, FMCG

(fast moving consumer goods) on one side and capital goods, real estate, metals,

auto on the other side. The markets will favour contra investment style rather than

momentum style.

The markets were estimated to move higher in 2014 on the back of better earnings,

performance of corporates, better government at Delhi, better global growth and

low tail risk out of Europe

One of the top themes for equity investment in 2014 was the economic recovery in

the developed world and rupee depreciation. IT (information technology) and

pharmaceutical sectors were on our top plays. It was believed by the economists

that private sector banks would continue to outperform their public sector peers

both in terms of financial and stock performance. With consumer sentiment in rural

India much better than urban India, tractors and two-wheelers could see better

performance. Oil sector reforms are expected to continue, giving larger benefits to

private E&P (exploration and production) players.

51

The herculean task to capitalize will be to play contra in the share market rather

than to chase the momentum. Markets will be volatile and hence anyone who has

the courage to buy when others are selling and to sell when others are buying will

make more money. Another trend to capitalize on will be the import-substitution

theme. Rupee depreciation has made many Indian companies across sectors like

chemicals, capital goods, consumer goods etc. very competitive. These companies

will now benefit from operating leverage in local as well as exports market.

In the technology sector, mid-caps and some of the stocks valued at the lower end

of valuation range appears to better reward investors than large-caps. In the

banking space, the clear trade will be to move from highly valued banks and non-

banks to lower valued banks and non-banks within the private banks and NBFC

(non-banking financial companies) space.

With the assumption of power by Modi it was believed that India will move from

an era of easy liquidity, high growth to slightly lower liquidity and better growth.

While the US Fed was to taper from early 2014, the impact is likely to be muted

relative to what we saw in May previous year. First, trade and current account

deficit in India now have trended much lower than six months ago. The economists

anticipated that the current account deficit for FY14 would be under 3% compared

to the near 5% for FY13. Secondly, foreign investors have reduced their positions

in the debt market relative to six months ago. Indeed the market will correct a bit

but it will be minor and offer a buying opportunity.42

India’s current account deficit has moderated to comfortable levels and the Indian

economy is much better prepared to tackle risks on the external sector. Hence,

markets have also shrugged off the Fed’s announcement of tapering of its stimulus

programme. The experts believe that a gradual tapering of monetary stimulus by

policymakers indicates confidence in the firm economic recovery in the US. In the

medium-term, a revival of growth in advanced economies is beneficial for export

demand from emerging economies like India.

 India is the only country that has successfully turned its current account problem

around: we are now, incrementally, a current account surplus country. None of the

42http://money.cnn.com/2014/05/16/investing/india-election-stocks

52

other chronic CAD (current account deficit) countries have managed to overcome

this—South Africa, Turkey, Brazil, Thailand, Indonesia. These countries have seen

their currencies and stock markets getting crushed in the past month or so. India is

standing head and shoulders above this pack.

The market seems to have priced in gradual decline in Fed buybacks and low interest rates well past 2014. Indian equity markets will be far more driven by what happens in the local macro environment than what happens on US taper. It will be formidable to take an economy off from the fiscal and monetary support hastily. If Indian economy grows at its potential, we will continue to see fair amount of flows. If Indians can reduce their appetite for gold, then there will be enough domestic savings available for equity markets.

It remains to be seen how FIIs react to tapering. As a consequence of the Asian Crisis in 1997, FII flows in India remained much muffled. Asian economies should be able to manage their balance sheets better this time around, in spite of the fact that a lot of credit has flowed from developed countries to the Asian countries in the period 2003-2008.43

 Now that Fed has formally announced the commencement of QE (quantitative easing) tapering and the quantum of reduction of bond purchases, the uncertainty about tapering is behind us. The economists, as a matter of fact, believe that, the extent of volatility in equities and currencies would be lower now than during the May-July period of previous year when the “tapering scare” first arose. Most economies with CAD have reduced their CADs considerably and the quantum of capital flows that are needed to neutralize their deficits are significantly lower than earlier. They also thought that beginning of QE tapering implies increased confidence of Fed in growth revival— and that’s good news for risk assets in general and global and emerging market (EM) equities in particular.

 Markets generally have a pre-election rally. Buying six months before elections and selling on the day before the results have made money in five of the past six elections. The average returns are 15%. Secondly, if we look at market performance during all governments over past 30 years, there is no trend in terms of market favouring any party. In fact, markets have done well during the coalition governments. So, there could be volatility around election time but over a longer term, it’s more the reforms done by the government that matter rather than the nature and shape of the government.44

43http://money.cnn.com/2014/05/16/investing/india-election-stocks

53

 The general elections have the potential to reset the system and kick-start the reform process. The question that concerns the market is not which among the two national parties will return to power but would the priority-based good governance back in place. If Congress-led UPA (United Progressive Alliance) came to power, the fresh mandate from the people of India would have seen critics shying away. But the BJP (Bharatiya Janata Party)-led NDA (National Democratic Alliance) came to power, helping the market to get even more legs due to its widespread perception of a NaMo (Narendra Modi) wave changing the dynamics of the economy.

 The markets were hoping for a strong show by the BJP-led government in the general elections owing to their pro-development and reform agenda. It was believed by experts that, when Modi came to power the market momentum would strengthen benefiting stocks in cyclical sectors. Even if that was not the case, from a medium- to long-term horizon, markets would continue to be poised positively. It was so assumed by the economists that given our demographics, the new government would focus on revving up the growth engine in the economy and creating more job opportunities.45

 Markets don’t like surprises. In past two elections in 2004 and 2009 results were different from what the market had priced in. Today market seems to be near all-time high in terms of index but from valuation point of view, it is below its historical average. The bullishness in market is driven by a few sectors like technology, pharmaceuticals and FMCG whereas the massacre in small and mid cap is hidden. The market has priced in a pro-reform, pro-growth, stable government. Any outcome different from that expectation will have its consequences.

 There was an expectation for a change of government at the centre and that a Narendra Modi-led BJP government would come to power, then the markets would surely move up. If a BJP-led coalition didn’t come to power and a Congress-led coalition comes to power then the market may correct a bit but any crash or a serious correction was not forseen.

A flow chart has been given regarding the changes happened after the 2014

election.

44http://www.equitypandit.com/news_and_events/analysis-effect-of-election-mania-on-indian-stock-market45http://www.equitypandit.com/news_and_events/analysis-effect-of-election-mania-on-indian-stock-market

54

5.2 BENEFITS EXPECTED FROM NAMO’S GOVERNANCE:-46

Despite the old relation of Mr. Obama’s government and the Indian Congress

Party, the U.S government has been predicting benefits from the new Modi

government. Below are some U.S. sectors that could see benefits or flourishing

results under Mr. Modi’s government:

1.Bollywood and Hollywood Industries :

The U.S.T.R  has put India among those list of countries which has low intellectual

property standards, but senior officials of Washington said they have been

optimistic and happy about working with the new government on movies and other

issues. A U.S. official on the month of February 2015 told reporters that keeping

up a good tie under a new government could help Hollywood cooperate more with

Bollywood Industries.

2.Solar Flare-Up

Earlier the U.S. had twice put on a solar power issue with India to the WTO,

complaining that a democratic country like India would put up a discrimination

46http://www.quora.com/Dalal-Street-1/How-would-our-stock-markets-respond-if-BJP-wins-the-2014-general-elections-and-Narendra-Modi-becomes-the-PM-of-India

55

against the American suppliers if its planning to increase its solar generating

capacity. The U.S. solar industry predicts India’s new reforms would put $300

million to $500 million U.S. exports at risk.Indian officials responded to the U.S.

officials stating they are unreasonable demands on India’s economy. According to

upcoming business groups said a new government would likely move more

quickly than the current one to address discriminatory rules that require some

electronics and other products to be produced locally in India

3.Relation with Defence

U.S. defense contractors and aircraft manufacturers has agreed for a new trade ties

with the new Indian administration, and were also of the opinion that it would not

be better if it weren’t under Modi “Some of the industries in the U.S,

particularly defense and aerospace, didn’t see any particular difficulty

making sales in India, not that it was easy,” Ms. Dempsey said.

Defense-related cooperation requires a combination of bureaucratic friendship on

both sides. U.S. firms are slowly and steadily building up their relation with New

Delhi, which for decades was a relative of the Soviet Union and Russia on

everything from warplanes to nuclear energy. Depending on how the NAMO

government will be formed, top U.S.defense exporters will rebuild some delicate

relationships.

5.3 CHANGES MADE BY THE NEW MODI GOVERNMENT.47

1. Crore jandhan account opened : As many as 11.5 crore bank accounts

have been opened under the Pradhan Mantri Jan DhanYojana, exceeding

the enhanced target of 10 crore and covering 99.74 per cent of

households.

2. $1 billion to be invested for swacch bharath

5.4 UPCOMING CHANGES:

From the new policies made by the NAMO government we can see lot of changes

and a new developing Nation in the future. India which was known for lowest

economy is now been regarded as the upcoming new global economy among other

47http://www.quora.com/Dalal-Street-1/How-would-our-stock-markets-respond-if-BJP-wins-the-2014-general-elections-and-Narendra-Modi-becomes-the-PM-of-India

56

countries the following graph shows the different changes being brought into our

country.

1. Infrastructure:

The NAMO Govt has planned to spend an additional amount of Rs70,000 crore

($11.35 billion) in order to boost up the investments in the country’s infrastructure

sector. In effect, infrastructure will now be about 15%, compared to 12% that of

previous year.

Moreover the level of pressure has increased and seems necessary at present,

especially since projects worth Rs.9 lakh crore ($156 billion) have been delayed

due to high rates of interest, lack of infrastructure, internal and external demand.

“It is no secret that the major slippage in the last decade has been on the

infrastructure front,” Jaitley said. “There is a pressing need to increase public

investment.”

The government has decided to spend by Rs. 14031 Crore ($2.27 billion) on roads

and another Rs10050 Crore ($1.6 billion) on railways.

Even as Modi fights to push a controversial land acquisition law through

Parliament, he is hawking another plan to lure private investors into

the infrastructure sector.

After assuring clearances—typically a bugbear for industry—and linkages for coal

and other resources, Jaitley will auction five new ultra mega power projects.

57

Together, these will add 16,000 MW and unlock investments worth one Lakh

Crore ($16 billion). The model that will be subsequently extended to other

infrastructure projects such as roads, ports, rail lines, and airports—all sectors

where regulatory clearances have been a persistent problem.

The Modi government will also revamp India’s public-private-partnership model—

a similar plan was announced for the Indian railways—for sectors such as roads,

power, airports and ports.

To pay for this, Jaitley will establish a National Investment and Infrastructure

Fund, where the government will put in Rs. 20,000 Crore, and provide leverage to

infrastructure finance companies. Alongside, tax-free infrastructure bonds will be

allowed in railways, road and irrigation sectors.

“The major issue involved is rebalancing of risk,” Jaitley explained. “In

infrastructure projects, the sovereign will have to bear a major part of the risk

without, of course, absorbing it entirely.”48

2. Foreign investors

Aside from opening up of the infrastructure sector, Modi’s government’s other key

is to attract foreign money. India’s FDI inflows grew 28% in 2014 reaching up to

$35 billion.

There will also be a composite cap on the investments, which will allow foreign

investors to invest more in Indian companies than their current limits. They can,

for instance, invest up to 74% in private banks now, compared to the earlier cap of

49%.49

Also significant is the implementation of the general anti-avoidance rule (GAAR),

a retrospective taxation measure that ensnared multinationals and scared away

potential investors. Telecom services provider Vodafone, for instance, was handed

a bill of Rs20000 crore ($3 billion) in a retrospective capital gains tax. Instead of

scrapping the GAAR entirely, Jaitley has chosen only to defer it by two years.

4. Private equity

The finance minister has also allowed foreign investors to invest in Indian

alternative investment funds (AIFs). The AIFs invest in non-traditional asset

48http://www.wsj.com/articles49http://www.wsj.com/articles

58

classes as opposed to stocks or bonds, the most common being private equity (PE)

and venture capital.

5. Corporate tax

For domestic firms, the finance minister has proposed to lower the corporate tax to

25%, from 30% currently, but this will be spread over the next four years. Service

tax, which is levied on everything from restaurants to advertisers, has been hiked

from 12.5% to 14%.50

Yet the finance minister drew short on the most anticipated tax reform for decades,

the goods and services tax (GST). While industry largely expected him to provide

a clear roadmap for the GST’s rollout, Jaitley only provided a date for its

implementation: April 2016, a decade after it was first proposed.51

The GST, once implemented, will bring different central and state taxes like the

central excise tax, service tax and the value added tax under one umbrella, thus

simplifying the tax structure for corporates.

India currently stands out as a rose among thorns in the big group of emerging

markets.

The Indian stock market has rallied impressively around the election of Prime

Minister Narendra Modi in last May, as other major emerging markets such as

Brazil and Russia have struggled.52

Last year, talk of the US Federal Reserve rolling back its expensive asset purchase

programme sent jitters through emerging markets and India was among the most

vulnerable economies.

India's foreign exchange reserves hit a new high of $327.88 billion in the week

ended January 30, according to data published by the Reserve Bank of India. This

was a surge of $5.8 billion from the previous year tally of around $320 billion.

The previous record high was $322.13 billion recorded for the week ended January

16. The surging reserves come as foreign investors have continued to be hefty

buyers of bonds and shares because of expectations for economic reforms from

50http://www.livemint.com/Mone/Market-will-rise-in-2014-all-eyes-on-elections-Expert-view.html51 Ibid52http://www.financialexpress.com/article/markets/indian-markets/investors-brace-for-stock-market-crash-on-narendra-modis-possible-defeat-to-arvind-kejriwals-aap-in-delhi

59

Prime Minister Narendra Modi's government and the central bank's success in

reducing inflation. Foreign institutional investors poured in a $26.4 billion into

Indian bonds. 53

The RBI has also been keen to build up its defense’s after the country suffered in

2013 the worst rupee turmoil since a balance of payment crisis a decade ago

because of dwindling reserves and a high current account deficit.

The rupee is among the best performing Asian currencies so far this year, with a

gain of around 2 per cent against the dollar, supported by capital inflows and

expectations the Reserve Bank of India will ease policy to encourage growth.

Dr. Rajan also highlighted the improving current account deficit numbers of the

country. He said that the current account deficit of this fiscal is likely to fall to 1.3

per cent of GDP and could go even lower in the next fiscal. India's current account

deficit has narrowed from a record high of 4.8 per cent of GDP in the 2012/13

fiscal year as the government has imposed stringent curbs on gold imports.54

A breakdown of forex reserves showed that for the week ended January 30, foreign

currency assets (FCA) rose by $5.814 billion to $303.32 billion. Foreign currency

assets (FCA), expressed in dollar terms, include the effect of appreciation and

depreciation of non-US currencies such as euro, pound and yen held in reserves.

The country's gold reserves remained unchanged at $19.377 billion.

REFERENCES:

National stock exchange review, Mumbai2 ibid3India today,p78, volume 204http://money.cnn.com/2014/05/16/investing/India-election-stocks5http://money.cnn.com/2014/05/16/investing/India-election-stocks6http://www.equitypandit.com/news_and_events/analysis-effect-of-election-mania-on-indian-stock-market7http://www.equitypandit.com/news_and_events/analysis-effect-of-election-mania-on-indian-stock-market8http://www.quora.com/Dalal-Street-1/How-would-our-stock-markets-respond-if-BJP-wins-the-2014-general-elections-and-Narendra-Modi-becomes-the-PM-of-India9http://www.quora.com/Dalal-Street-1/How-would-our-stock-markets-respond-if-BJP-wins-the-2014-general-elections-and-Narendra-Modi-becomes-the-PM-of-India10http://www.wsj.com/articles11http://www.wsj.com/articles12http://www.livemint.com/Mone/Market-will-rise-in-2014-all-eyes-on-elections-Expert-view.html13Ibid

53

54

60

14http://www.financialexpress.com/article/markets/indian-markets/investors-brace-for-stock-market-crash-on-narendra-modis-possible-defeat-to-arvind-kejriwals-aap-in-delhi

CHAPTER-7

POLITICAL ISSUES AND STOCK MARKET

6.1 OVER-VIEWRecently, the stock markets of India has languished largely on account of opaque

decision-making by the Central Government, high inflation and declining economic

growth even when most of the countries are confronting a slower than expected global

recovery, political turmoil. The Modi’s optimism and emotion-led expectations

brought in euphoria that helped to make the Indian stock markets the best performing

markets in the world.

Incidentally, if someone takes into consideration the conversion rate, INR has

strengthened by about 5.95 per cent over the same period and by about 13.42 per cent

since the INR touched a low of 68.61 on September 4, 2013 against the USD. Hence,

if we take into account the appreciation in INR, the price return over September 12,

2013 would be 32.27 per cent and as high as 39.74 per cent. Over the same period, the

Egyptian Pound depreciated by 1.73 per cent, taking the gains down to 38.48  per cent,

making India the most attractive stock markets of the world vis-à-vis other emerging

markets and the developed markets. 

  The 2014 Poll Campaign of BJP began with Modi being declared the Prime

Ministerial Candidate on September 13, 2013 and continued on a very calculated path

with a fierce attack on the ruling Congress-led UPA on various issues of serious

national concern such as corruption,  security, infiltration and above all on economic

disaster brought in on the country with “unprecedented widening of India’s current

account deficit, macro-economic imbalances, structural weaknesses, high inflation,

large fiscal deficit, binding supply constraints” said the official authorities, IMF. The

ruling Congress Party and its allies had no issues against the BJP , except calling them

‘communal’ , which subsequently became  personal such as ‘Modi’s Gujarat Model’ ,

61

‘Land allocation scam in Gujarat’ which created a larger than anticipated image of

Modi. It is surprising to note that both the odds and evens worked in favour of Modi,

thus creating a Modi wave .

Through the BJP’s campaign, a combination of many issues that added to the euphoria

in the stock markets was presented in the ‘Event Box’ below. 

 The euphoria was so intensive that on the ‘Victory Day’ May 16, 2014, the NSE Nifty

Index touched an intraday high of 7,552.60 and closed the day at 7,203 with a gain of

1.12% and a record turnover of Rs. 21,057.07, highest ever turnover on the NSE since

its inception traumatizing the speculators.

The ‘Modi Effect’ also brought in stability and provided positive direction to the stock

markets of India besides value appreciation and increase in turnover. During 2013,

since Modi was declared BJP’s Prime Ministerial candidate, the NSE Nifty Index

recorded 7.77% of the total price return of 8.12%, and the volatility reduced to 9.1%

from 17.96% for the entire year. Similarly, the direction of the market changed from a

negative 5.7% skewness for the entire year to a positive 69.62%.  The markets

continued to remain bullish (positive skewness of 46.39%) with a record gain of

13.49% in NSE Nifty, with further lower volatility of 7.75% during 2014 until the

Victory Day- May 16, 2014.  

As a matter of fact, the stock markets have given a thumbs-up to Modi and the BJP.

Now it is time for Modi and BJP to live up to the expectations and win the trust of the

people of India. If they succeed in doing so, we can expect a strong bullish trend going

ahead, as reflected in the technical signals of long-term valuation trends and dividend

yields presented below. We expect NSE Nifty to cross 7,500 marks in the current rally

and will continue to touch new highs during the coming year.   

 6.2 HOW THE NEW GOVERNMENT AFFECTED OUR ECONOMY:

1. Encouraging foreign investors:It can be seen that investment by both international and domestic firms has come down

over the last few years. Even though foreign direct investment did go up in 2013, the

sentiment has largely been skeptical due to several reasons. Some of the steps taken by

the India government to augment trade in recent years were seen to be unfriendly for

foreign businesses. A bitter tax row with Vodafone and policy flip-flops has made

investors apprehensive. And to add to that, India is regularly ranked as one of the

62

toughest places to operate - currently 134th on the World Bank's "ease of doing

business" list. 55

The Union Cabinet has cleared the FDI proposals in the defense and railway sectors. In

defense, the investment cap has been raised from 26 percent to 49 percent, while in the

railway sector, some projects have been allowed FDI of 100 percent. Considered to be

the new NDA government’s first major economic reform, the Cabinet Committee on

Economic Affairs (CCEA) approved the raising of Foreign Direct Investment (FDI)

cap in insurance from 26 percent to 49 percent. This will ensure more capital inflows

into the insurance sector. Even as the investment cap is raised to 49 percent, the full

management control will remain with Indian entity.56

2. GDP on the rise:India's economy expanded at its fastest pace in more than two years in the April-June

quarter, revitalized by a decisive political mandate for the Narendra Modi-led BJP and

subsequent actions by his government, suggesting that growth may be turning around

at long last. India's GDP grew at 5.7% in the first quarter of 2014-15, exceeding

expectations. This was the fastest pace since the fourth quarter of FY12, while being

dramatically up from the 4.6% rise recorded in the preceding quarter.

3 Inflation on a low-down:The inflation rate in India was recorded at 7.96 percent in July of 2014. Inflation Rate

in India averaged 9.49 Percent from 2012 until 2014, reaching an all-time high of

11.16 Percent in November of 2013 and a record low of 7.31 Percent in June of 2014.57

4. Sensex on all time high:Sensex extended gains for the sixth straight session and also gained for the seventh

straight month, rising the most in May, after the Modi-led NDA government took

charge and announced a slew of initiates that helped improve business sentiment and

lifted the economy back on the growth track. Both the benchmark share indices ended

at record closing highs. The 30-share Sensex reached at 27,000 mark after hitting a

fresh intra-day high. For the seven months since February 2014, the benchmark index

surged nearly 27%. Tracking the momentum, the 50-share Nifty index also breached

8,100 levels for the first time.58

55 http://www.thehindubusinessline.com/economy/india-ranks-142-in-ease-of-doing-business-world-bank/article6544619.ece56 Modi and indian economy,academia.edu,p.1557 http://www.tradingeconomics.com/india/inflation-cpi

63

5 Announcement of Good and Service Tax (GST) :GST will bring about a change on the tax firmament by redistributing the burden of

taxation equitably between manufacturing and services. It will lower the tax rate by

broadening the tax base and minimizing exemptions. It will reduce distortions by

completely switching to the destination principle.59 It will foster a common market

across the country and reduce compliance costs. It will facilitate investment decisions

being made on purely economic concerns, independent of tax considerations. It will

promote exports. GST will also promote employment. Most importantly, it will spur

growth. GST is expected to simplify and streamline the indirect tax regime. It contains

all the indirect taxes levied on goods - including central and state-level taxes. For the

taxpayer, it will mean less paperwork and could actually translate into a lower tax

burden, as it would remove distortions from the system. Modi government is on a fast

paced regime to launch GST by year end60.

6. Manufacturing sector boom :On August 15, 2014, Prime Minister Narendra Modi, in his maiden Independence Day

speech, appealed to companies around the world to ‘Come, make in India’. From the

ramparts of the Red Fort, Modi’s voice boomed from the lectern, urging world powers

to ‘Come, manufacture in India’. “Sell in any country of the world but manufacture

here. We have got skill, talent, discipline, and determination to do something.

7. Bringing back Black Money: The first decision Modi Sarkar took after assuming Office was setting up of a Special

Investigation Team (SIT), headed by former Supreme Court Judge MB Shah, to

unearth illegal money stashed in tax havens. The SIT has already prepared a

comprehensive action plan, including creation of an institutional structure that could

enable India to fight the battle against black money. 61

8. Bilateral diplomacy:Prime Minister Narendra Modi’s SAARC diplomacy was indeed a bold step towards

creating an atmosphere for multilateral economic cooperation. The common

challenges that these nations face have made Narendra Modi create a common agenda

58 http://economictimes.indiatimes.com/indices/sensex_30_companies.cms59 Satya Poddar, Ehtisham Ahmad “GST Reforms and Intergovernmental Considerations in India “, Working Paper No.1/2009-DEA 60 Ibid61 Hussain F, Mahmood T (2015). The stock market and modi government.

64

of growth with mutual cooperation. During his visit to Nepal and Bhutan, Narendra

Modi used the greater Hindu heritage as an instrument of foreign policy. Modi

Government has given a strong message to Pakistan by calling off the Foreign

Secretary-level talks after Pakistani High Commissioner to India Abdul Basit met

Kashmiri separatists despite clear no from Foreign Ministry. For the first time in

India’s history, New Delhi under the leadership of Narendra Modi has asserted that it

can’t be bullied by the pressure from the Kashmiri separatists and various lobbyists.

Narendra Modi’s ongoing Japan visit underlines the fact that India-Japan Strategic and

Global cooperation can shift the balance of power in Asia.

9. Stability of Indian Rupee:The Reserve Bank of India said steadying the rupee to help preserve economic stability

has become the priority for monetary policy and that more steps are needed to curb the

nation’s current-account deficit. The Indian rupee weakened for a fourth consecutive

session on Tuesday, dropping the most in three weeks, tracking weaker Asian

currencies amid caution ahead of key events including a European Central Bank

meeting and U.S. monthly jobs data. Data showing the April-June current account

deficit widening from the previous quarter due to rising imports hit sentiment at first,

although traders later said the gap was still within the comfort zone.

The index of the dollar against six major currencies was up 0.3 percent. Most Asian

currencies too traded weaker against the greenback. Snapping its four-day losing

streak, the rupee recovered by seven paise to 60.61 against the US dollar.

10. Infrastructural Development: “Economy is bleak without Infrastructure. Hence, the prime focus of my government is Infrastructure.” – Shri Narendra Modi The focal point of the Union Budget 2014 was infrastructure, a sector which was

neglected in the last 10 years under the Congress-led UPA rule. The Government has

attracted large-scale investments in infrastructural sector by reviving the Special

Economic Zone (SEZ), streamlining the Public Private Partnership (PPP) models and

creating Infrastructural Investment Trusts (InvITs). Work for the ambitious Diamond

Quadrilateral rail network — connecting major metros across the country — is in the

full swing. The Narendra Modi Government has laid the groundwork for its ambitious

‘100 smart cities’ project. To develop infrastructure in rural areas, the Government has

launched Syama Prasad Mookerjee Rurban Mission and Deendayal Upadhyaya Gram

65

Jyoti Yojana. The Government is also working on strengthening and modernising the

border infrastructure.

11. Streamlining bureaucracy:To take administration closer to people and ensure that governance doesn’t get stuck in

red tape, the Narendra Modi Government is streamlining the bureaucracy with thrust

on transparency. The Government has amended the All India Service (Conduct) Rules,

1968. The amended guidelines mandate that the bureaucrats must maintain political

neutrality, take decisions and make recommendations on merit alone and take

decisions solely in public interest. 62

12. Recasting judicial appointment :In a path-breaking initiative, Narendra Government has got the National Judicial

Appointments Commission (NJAC) Bill passed in both the Houses of Parliament. The

Bill scraps the Collegium System of appointment of Judges of Supreme Court and the

High Courts and established a six-member body for the appointment of the Judges.

The Chief Justice of the Supreme Court will head the NJAC. Besides, the judiciary

would be represented by two senior Judges of the Supreme Court. Law Minister and

two eminent personalities will be the other members of the Commission. 63

REFERENCES :

http://www.thehindubusinessline.com/economy/india-ranks-142-in-ease-of-doing-business-world-bank/article6544619.ece2 Modi and indian economy,academia.edu,p.153 http://www.tradingeconomics.com/india/inflation-cpi4 http://economictimes.indiatimes.com/indices/sensex_30_companies.cms5 Satya Poddar, Ehtisham Ahmad “GST Reforms and Intergovernmental Considerations in India “, Working Paper No.1/2009-DEA 6 Ibid7 Hussain F, Mahmood T (2015). The stock market and modi government.8 Rani N., Yadav,The Journal of Business Perspective (2013) 9Bijy Abraham (2011). “ Performance of Stock Market of India: An Empirical Study on elections and its impact on economy.

62 Rani N., The Journal of Business Perspective, 17(1), 1-16 (2013)

66

CHAPTER-8

CONCLUSION

● This research was mainly to understand how elections can affect the share

prices in the market changes in the Sensex and so on. Election results indicate 63Bijy Abraham (2011). “ Performance of Stock Market of India: An Empirical Study on elections and its impact on economy.

67

that foreign institutional investment and other matters have significant positive

impact on. However, at certain level Sensex had a great fall but the new

government had a huge positive impact on inflation on the stock market

performance in India.

● Under the light of above results it is highlighted that there is a need of well

managed economic policies so that one can attain the benefits from the capital

market. In order to have full advantage of stock market and to have good ties

with international markets are necessary in which interest rates and inflation

rate are thoroughly monitored. It increases the confidence level of the investors

as well as the industries.

● Developing countries like India, are becoming fast engines for future growth.

The present scenario is that, only a very low percent of the household savings

of Indians are being invested in the domestic stock market, but with the

increase of GDP at 8-9% annually and a stable financial market. It’s advisable

for foreign investors to think hard about investing in the market.

● Foreign investors can attain exposure to Indian stock market through

institutional investors. As per Indian regulations, participatory notes explaining

the bottom line Indian stocks can be issued offshore by foreign institutional

investors but only to regulated entities.

● Foreign investments are classified into two categories:

1. Foreign Direct Investment (FDI)

2. Foreign portfolio investment (FPI).

Investments wherein an investors taking part in the day-to-day management

and operations of the company, are known as FDI, whereas investments in

shares without any control over management and operations, are treated as FPI.

● For making portfolio investment in India, one should be registered either as

a Foreign Institutional Investor (FII) or as one of the sub-accounts of one of the

registered FIIs. Both registrations are granted by the market regulator, SEBI.

Foreign institutional investors mainly consist of mutual funds, pension funds,

endowments, sovereign wealth funds, insurance companies, banks, asset

management companies etc.

68

● At present, India does not allow foreign individuals to invest directly into its

stock market. However, high-net-worth individuals can be registered as sub-

accounts of an FII.

● Foreign institutional investors and their sub accounts can invest directly into

any of the stocks listed on any of the stock exchanges. Most portfolio

investments consist of investment in securities in the primary and secondary

markets, including shares and debentures of companies listed or to be listed on

a recognized stock exchange in India.

● FIIs can also invest in unlisted securities outside stock exchanges, subject to

approval of the price by the Reserve Bank of India. Finally, they can invest in

units of mutual funds and derivatives traded on any stock exchange.

● The subject becomes all the more relevant when analyzed from a critical

perspective on impacts of stock markets on domestic & international

economy and how it could be triggered by events of supreme

significance. 2014 witnessed a paradigm shift in the governance of our

country with Narendra Modi becoming the Prime Minister after a

decisive verdict from the masses. It was epic on many accounts - first

time a government getting single majority, whole world looking keenly

on the switch in power as it has manifold ramifications on geopolitics &

more significantly, it had a pertinent impact on the stock market of India.

● The impact of elections in stock market is a topic worthy of analysis

since we have already witnessed through 2014 elections that the outcome

of elections has a profound effect on the short term stock markets and

long term capital markets. Through this dissertation, i have tried to

elucidate how exactly the election of Narendra Modi has influenced stock

markets & what are its possible consequences on economy in general and

stock markets in particular.

69

BIBLIOGRAPHY

1. BAREACTS :

Securities Contract (Regulations) Act, 1956.

2. NEWSPAPERS & JOURNALS :

Economic Times,2013

Economic Times, 2014

70

India Today,2014

National Stock Exchange review, Mumbai

Times Of India,2014

University Of Cambridge review,2013

Wall Street Journal, volume 2

3. BOOKS:

Ashu Dutta, Modi effect on Indian Economy, Universal Publishers (2013)

Avadhaani V.A, Securities Analysis & Portfolio Management (2009)

Mansoor& Mansoor publishers.

Balla V.K, Investment & Management (2011), Chand & Co.Ltd

Bijy Abraham, Performance of Stock Market and Global Issues (2008)

Widenfield & Nicolson Co.Ltd

Desai J.N. Stock Market Boon & Issues ,(2009) Pothan Publishers

Hussain F Mahmood, Stock Market & Modi Government (2015) Mansoor &

Mansoor Publishers.

4. WEBSITES

http://money.cnn.com

http://equitypandit.com

http://wsj.com

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