stock market and indian economy

8/3/2019 Stock Market and Indian Economy

1/62


2/62

2

1969 to 30,590 or 42% in 2007, only 32,270 out of 500,000 villages are covered by a

scheduled bank.

India's gross domestic saving in 200607 as a percentage of GDP stood at a high

32.7%. More than half of personal savings are invested in physical assets such as

land, houses, cattle, and gold. The public sector banks hold over 75% of total assets

of the banking industry, with the private and foreign banks holding 18.2% and 6.5%

respectively. Since liberalization, the government has approved significant banking

reforms.

While some of these relate to nationalized banks, like encouraging mergers, reducing

government interference and increasing profitability and competitiveness, other

reforms have opened up the banking and insurance sectors to private and foreign

players.

Stock Market

A stock market is a public entity for the trading of company stock (shares) and

derivatives at an agreed price; these are securities listed on a stock exchange as well

as those only traded privately.

The size of the world stock market is estimated at about $136.8 trillion at the start of

October 2010. The total world derivatives market has been estimated at about

$791 trillion face or nominal value, 11 times the size of the entire world economy.

The value of the derivatives market, because it is stated in terms of notional values,

cannot be directly compared to a stock or a fixed income security, which traditionally

refers to an actual value. Moreover, the vast majority of derivatives 'cancel' each

other out (i.e., a derivative 'bet' on an event occurring is offset by a comparable

derivative 'bet' on the event notoccurring). Many such relatively illiquid securities

are valued as marked to model, rather than an actual market price.


3/62

3

The stocks are listed and traded on stock exchanges which are entities of a

corporation or mutual organization specialized in the business of bringing buyers and

sellers of the organizations to a listing of stocks and securities together. The largest

stock market in the United States, by market capitalization, is the New York Stock

Exchange (NYSE).

Profit and loss are the two inseparable features of the stock market. But losses can

be minimized and profits can be increased with the help of Technicals.

Established in 1875, the Bombay Stock Exchange is Asia's first stock exchange.

The stock market has become an essential market playing a vital role in economic

prosperity that fostering capital formation and sustaining economic growth. Stock

markets are more than a place to trade securities; they operate as a facilitator

between savers and users of capital by means of pooling of funds, sharing risk, and

transferring wealth. Stock markets are essential for economic growth as they insure

the flow of resources to the most productive investment opportunities.

Stock prices change in stock markets on a daily basis. Moreover, during certain times

of the year, it is easy to notice that stock prices appreciate every morning, and this

may take place many times in one day for some stocks. This means that stock prices

are determined by supply and demand forces. There is no foolproof system thatindicates the exact movement of stock prices. However, the factors behind increases

or decreases in the demand and/or supply of a particular stock could include

company fundamentals, external factors, and market behavior.

Company fundamental factors influencing stock prices might include performance of

the company, a change in board of directors, appointment of new management, and

the creation of new assets, dividends, earnings, etc. External factors might include


4/62

4

government rules and regulations, inflation, and other economic conditions, investor

behavior, market conditions, money supply, competition, uncontrolled natural orenvironmental circumstances directly affecting the production of the company,

strikes, etc. Moreover, the behavior of market participants could be an important

influencing factor of stock price.

Molodovsky (1995) discussed dividends as the hard core of stock value. The

importance of dividends was originally emphasized in the work of Williams (1938).

He states that the value of any asset equals the present value of all cash flows of the

asset. Therefore, the current price of share of common stock is presented as follows:

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

Where,

Po = the current stock price

D = the expected cash dividend,

n = the expected year in which the dividend payment is expected

k = the required rate of return (discount rate)

This dividend discount model (DDM) is difficult to apply in practical terms,

particularly over long horizons for firms that do not pay significant dividends.

Alternative forms of stock prices valuation have emerged, such as the discounted

cash flow (DCF) model, with the goal of improved

practical implementation. This model is the most commonly used because of its

direct link to the finance theories of Modigliani and Miller (1958). DCF analysis uses

future free cash flow projections, cash flow available for distribution to a defined set

of capital providers after all operating and investing needs of the firm are met, and

discounts them (most often using the weighted average cost of capital WACC) toarrive at a present value:


5/62


6/62

6

the performance of a stock market of an economy is of interest to various partiesincluding investors, capital markets, the stock exchange and government among

others. Stock market performance is influenced by a number of factors key among

them the activities of governments and the general performance of the economy.

Economic activities do affect the performance of stock markets. Other factors that

affect the stock markets performance include, availability of other investments

assets, change in composition of investors, and markets sentiments among other

factors (Mendelson, 1976).

Function and purpose

The stock market is one of the most important sources for companies to raise

money. This allows businesses to be publicly traded, or raise additional capital for

expansion by selling shares of ownership of the company in a public market. The

liquidity that an exchange provides affords investors the ability to quickly and easily

sell securities. This is an attractive feature of investing in stocks, compared to other

less liquid investments such as real estate. History has shown that the price of shares

and other assets is an important part of the dynamics of economic activity, and can

influence or is an indicator of social mood. An economy where the stock market is on

the rise is considered to be an up and coming economy. In fact, the stock market is

often considered the primary indicator of a country's economic strength anddevelopment. Rising share prices, for instance, tend to be associated with increased

business investment and vice versa. Share prices also affect the wealth of

households and their consumption. Therefore, central banks tend to keep an eye on

the control and behavior of the stock market and, in general, on the smooth

operation of financial system functions. Financial stability is the raison dtre of

central banks. Exchanges also act as the clearinghouse for each transaction, meaning

that they collect and deliver the shares, and guarantee payment to the seller of a


7/62

7

security. This eliminates the risk to an individual buyer or seller that thecounterparty could default on the transaction. The smooth functioning of all these

activities facilitates economic growth in that lower costs and enterprise risks

promote the production of goods and services as well as employment. In this way

the financial system contributes to increased prosperity.

Relation of the stock market to the modern financial system

The financial system in most western countries has undergone a remarkable

transformation. One feature of this development is disintermediation. A portion of

the funds involved in saving and financing flows directly to the financial markets

instead of being routed via the traditional bank lending and deposit operations. The

general public's heightened interest in investing in the stock market, either directly

or through mutual funds, has been an important component of this process.

Statistics show that in recent decades shares have made up an increasingly large

proportion of households' financial assets in many countries. In the 1970s, in

Sweden, deposit accounts and other very liquid assets with little risk made up almost

60 percent of households' financial wealth, compared to less than 20 percent in the

2000s. The major part of this adjustment in financial portfolios has gone directly to

shares but a good deal now takes the form of various kinds of institutional

investment for groups of individuals, e.g., pension funds, mutual funds, hedge funds,

insurance investment of premiums, etc. The trend towards forms of saving with a

higher risk has been accentuated by new rules for most funds and insurance,

permitting a higher proportion of shares to bonds. Similar tendencies are to be

found in other industrialized countries. In all developed economic systems, such as

the European Union, the United States, Japan and other developed nations, the

trend has been the same: saving has moved away from traditional (government

insured) bank deposits to more risky securities of one sort or another.


8/62

8

The stock market, individual investors, and financial risk

Riskier long-term saving requires that an individual possess the ability to manage the

associated increased risks. Stock prices fluctuate widely, in marked contrast to the

stability of (government insured) bank deposits or bonds. This is something that

could affect not only the individual investor or household, but also the economy on a

large scale. The following deals with some of the risks of the financial sector in

general and the stock market in particular. This is certainly more important now that

so many newcomers have entered the stock market, or have acquired other 'risky'

investments (such as 'investment' property, i.e., real estate and collectables).

With each passing year, the noise level in the stock market rises. Television

commentators,financial writers, analysts, and market strategists are all overtaking

each other to get investors'attention. At the same time, individual investors,

immersed in chat rooms and message boards,are exchanging questionable and often

misleading tips. Yet, despite all this available information, investors find it

increasingly difficult to profit. Stock prices skyrocket with littlereason, then plummet

just as quickly, and people who have turned to investing for theirchildren's education

and their own retirement become frightened. Sometimes there appears to beno

rhyme or reason to the market, only folly.

This is a quote from the preface to a published biography about the long-term value-

oriented stock investor Warren Buffett.[4] Buffett began his career with $100, and

$105,000 from seven limited partners consisting of Buffett's family and friends. Over

the years he has built himself a multi-billion-dollar fortune. The quote illustrates

some of what has been happening in the stock market during the end of the 20th

century and the beginning of the 21st century.


9/62

9

1.2 Statement of the Problem

A number of studies have been under taken establishing the relationship between

the performance of stock exchange in the world and political activities in specific

countries. Most of these studies were carried out in developed stock exchanges.

Studies on the effect of political activities on the performance of emerging capital

markets are very important as more and more investors participate in these markets.

The investors in emerging markets are local and the number of foreign investors

continues to increase overtime. Developed economies such as the U.S. operate in

different social, economic and political environments than those found in emerging

markets.

1.3 OBJECTIVE OF STUDY

To know the basic terminology of stock market. To make the investor aware about the factors this may affect their

investment.

To get the knowledge of other markets such as commodity market andderivatives.

To know the ups and downs of stock market of last two years. To forecast or predict the future trend of stock market which helps in

investment.

To know the effect of these fluctuation on the Indian economy.


10/62

10

1.4 SCOPE OF STUDY

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

1.5 LIMITATIONS

Limitations are the limiting lines that restrict the work in some way or other. In this

research study also there were some limiting factors; some of them are as under:

1. Data Collection:

The most important constraint in this study was data collection as Secondary data

was selected for study. Secondary data means data that are already available i.e.

they refer to the data which have already been collected and analyzed by someone

else.


11/62

11

2. Time Period:

Time period was one of the main factors as only one month was allotted and the

topic covered in research has a wide scope. So, it was not possible to cover it in a

short span of time.

3. Reliability:

The data collected in research work was secondary data, so, this puts a question

mark on the reliability of this data, which a very important factor of this study as

conclusion has been derived from this secondary data only.

4. Accuracy:

The facts and findings of the data cannot be accepted as accurate to some extent as

firstly, secondary data was collected. Secondly, for doing descriptive research time

needed to be more, because in short period you cannot cover each point accurately.


12/62

12

2.0 LITERATURE REVIEW

2.1 The Role of the Stock Market

A large number of empirical studies have been conducted about the determinants of

stock prices. In this section, some of these studies will be reviewed. However, most

of these studies dealt with stock markets of developed countries.

The stock market is subject to a kaleidoscopic range of factors that influence its

movement. Expectations remain key. Even if an economic report is negative, if it

comes in better than expected, the market may well rise. In addition to focusing

upon individual companies and earnings, investors generally key into a number of

key economic factors reported on a weekly or monthly basis.

Factors affecting stock prices have been studied from different points of view.

Several researchers examined the relationships between stock prices and selected

factors which could be either internal or external. The results show a variety of

findings depending on the scope of the study. Some of those factors could be

common for all stock markets. However, it is difficult to generalize the results due to

the various conditions that surround each stock market environment. Each market

has, for example, its own rules and regulations, country of location, type of

investors, and other factors that provides the basis of its uniqueness. Some studies

have concluded that company fundamentals such as earning and valuation multiple

are major factors that affect stock prices. Other indicated that inflation, economic

conditions, investor behavior, the behavior of the market and liquidity, are the most

influencing factors of stock prices. In addition, the effect of interrelated factors has

been covered in some other studies. The following three sections deal with three

types of studies: the first section is devoted to reviewing studies emphasizinginternal factors (i.e., company fundamentals). The second section deals with studies


13/62

13

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

emphasized internal or external factors.

The major role that the stock markets have played, and continues to play in many

economies is that they promote a culture of thrift, or saving. The very fact that

institutions exist where savers can safely invest their money and in addition earn a

return, is an incentive to investors to consume less and save more. The growth of

related financial services sector such as unit trusts investments clubs, pension and

provident fund schemes have extensively contributed towards the deepening of the

stock market. It should be appreciated that in as much as an economy can

have savings, there is usually lack of established mechanisms for channeling those

savings into activities that create wealth. Therefore encouraging a culture of saving

in less developed financial markets may first track economic growth.

An efficient stock market sector will have the expertise, the institution and the

means to prioritize access to capital by competing users so that an economy

manages to realize maximum output at least cost. This is what economist refers to as

the optimum production level. If an economy does not have efficient financial

markets there is always the risk that scarce capital could be channeled to non-

productive investments as opposed to productive ones, leading to wastage of

resources and economic decline (Lee, 1998).

The existence of stock markets promotes higher standards of accounting, resource

management and transparency in the management of business. This is because

financial markets encourage the separation of owners capital from managers of

capital. This separation is important because people who have money may not have

the best business ideas and people who have the best ideas may not have money to

invest. The Stock Exchange thus becomes an important link. A private company in

need of capital for expansion can therefore raise funds through the stock market.This arrangement benefits both those with excess funds and the company that raises


14/62

14

funds because the manager of capital, who is the entrepreneur, is able to access

capital to turn his idea into a reality, while the owners of capital, who are theshareholders, receive a return on their investment. Improving access to finance by

providing the flexibility for customization is an important role of the stock market.

This is made possible as the financial sector allows the different users of capital to

raise capital in ways that is suited to meeting their specific needs. Established

companies for example can raise short term finance through commercial paper;

small companies can raise long term capital through selling shares; the government

and even municipal councils can raise funds by floating various types of bonds and

other debt instrument as an alternative to borrowing from the external market.

Stock markets provide investors with an efficient mechanism to liquidate their

investments. The very fact that investors are certain of the possibility of selling out

what they hold as and when they want, is a major incentive for investment as it

guarantees mobility of capital in the purchase of assets .The interactions of buyers

and sellers in a stock market determine the price of traded assets ;or equivalently

the required return that investors demand and is this feature of stock market that

signals how funds in the economy should be allocated among financial assets

(Fabozzi ,1995).

Reduction of the search and information costs of transaction at the stock market is

key to facilitating growth of the market. Search costs presents explicit costs such as

money spent to advertise, the desire to sell or purchase a financial asset, and implicit

costs such as the value of the time spent in locating counter party. The presence of

an organized stock market reduces search and information costs (Fabbozi 1995).

Through the stock market companies can raise equity through initial public offers

and secondary offers of rights issues and can further raise funds through the issue of

debt.

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


15/62

15

term investment are available at the stock market. This also leads to wealth

redistribution from state and private companies to the investing public since theycan share in the returns of the privatized entities. The establishment of an efficient

stock market is therefore indispensable for any economy that is keen on using scarce

capital resources to achieve economic growth.

2.2 Stock Market Economic Indicators

An economic indicator is in simple terms, the official statistical data of a certain

economic factor that are published periodically by the government agencies, which

an investor can use to gauge the economic situation. It allows investors to analyze

the past and current situation and to project the future prospects of the economy.

There are basic indicators that matter to investors in the stock market, namely

inflation, gross domestic product (GDP), industrial production, FIIs and the labor

market.

* Inflation

Inflation is important for all investments, simply because it determines the real rate

of return that you get from your investment. For instance, if the inflation rate is 5

per cent and the nominal return is 8 per cent, this means that your real rate of

return is 3 per cent as the 5 per cent has been eaten by inflation.

Inflation's impact on the stock market is even more complicated. A company's profit

will be affected by higher inflation. Its input cost will increase and the impact of the

increase will depend on how much of the incremental cost the company is able to

pass on to its consumers. The amount that the company will have to absorb will

reduce its profits, assuming all else being equal.

The stock market will suffer further negative impact if it is accompanied by increasedinterest rates as the bond market is seen as a cheaper investment vehicle compared


16/62

16

to stocks. When this happens, investors will sell off their stocks to invest in bonds

instead.

The most commonly used indicator for the measurement of inflation is consumer

price index (CPI). It consists of a basket of goods and services commonly purchased

by consumers, such as food, housing, clothes, transportation, medical care and

entertainment.

The total value of this basket of goods and services will be compared with the value

of the previous year and the percentage increase will be the inflation rate.

On the other hand, where the value drops, it will be a deflation rate. A steady or

decreasing trend will be favorable to the overall stock market performance.

* Gross Domestic Product

Another important indicator is the GDP measurement. It is the total value of goods

and services produced in a country during the period being measured. When

compared to the previous year's reading, the difference between these two readings

indicates whether a country's economy is growing or contracting. GDP is usually

published quarterly.

When the GDP is positive, the overall stock market will react positively as there will

be a boost in investor confidence, encouraging them to invest more in the stock

market. This will in turn boost the performances of companies.

When the GDP contracts, consumers tread cautiously and reduce their spending.

This in turn will affect the performance of companies negatively, thus exerting more

downward pressure on the stock market.


17/62

17

The Gross Domestic Product (GDP) represents the productivity of workers and

overall economic output, and is a compendium of all produced products and

services. Market participants also closely watch the data on manufacturing activity,

which reflects the economic yield within that sector.

* Labour market

The unemployment rate as a percentage of the total labour force will basically

indicate the country's economic state. During an economic meltdown, most

companies will either freeze hiring or in more severe cases downsize, by cutting

costs and reducing capacity. When this happens, the unemployment rate will

increase, which in turn, creates a negative impact on market sentiment.

Unemployment remains among the largest single determinants of economic distress.

High unemployment leads to lower consumer spending, which results in lower

corporate profits with a negative stock market impact. Conversely, low

unemployment generally reflects economic prosperity and, in conjunction with other

factors, can positively affect the stock market. On Thursday mornings, the

government releases the figure on weekly unemployment claims, while reporting the

monthly employment numbers on the first Friday of the month. Investors closely

watch these figures for signs as to the health of the labor market.

* Industrial Production

This report shows the change in the production of factories, mines and utilities within

a nation. It also reports their 'capacity utilizations', the degree to which the capacity of

each of these factories is being used. It is ideal for a nation to see an increase of

production while being at its maximum or near maximum capacity utilization.

Traders using this indicator are usually concerned with utility production, which can

be extremely volatile since the utilities industry, and in turn the trading of and demand


18/62

18

for energy, is heavily affected by changes in weather. Significant revisions between

reports can be caused by weather changes, which in turn, can cause volatility in the

nation's currency.

* FIIs

The growth of institutional investors in the market is having its own advantages as

well as its own share of problems on the brighter side almost always purchase stocks

on the basis of fundamentals. And this means that it is essential to have information

to evaluate, so research becomes important and this leads to increasing demands on

companies to become more transparent and more disclosures. This will lead to

reduction in information asymmetries that plagued the Indian markets for quite a

while. Also, the increasing presence of this class of investors leads to reform of

securities trading and transaction systems, nurturing of securities brokers, and liquid

markets.

On the flip side the increase of foreign investors in particular will bring a very

welcome inflow of foreign capital, but there are always some dangers if certain limits

are exceeded. Firstly, the foreign capital is free and unpredictable and is always on

the lookout of profits. Flls frequently move investments, and those swings can be

expected to bring severe price fluctuations resulting in increasing volatility. Here we

analyze the comparative trend of Sensex and FII, how it affected the market, Here

the grey curve shows Sensex indices and black curve shows the FII cash flow, Here

we can see how FII cash inflows increases the market indices and cash outflows

decreases the Indian stock market indices:


19/62

19

This is the way FII is supplementing volatility in Indian market. This is what is

happening in current scenario. Also, increased investment from overseas may shift

control of domestic firms to foreign hands. This showed us how the Indian market is

interdependent on global markets like U.S., Europe and other Asian markets. This

was the same as happen in current scenario, U.S. and other market meltdown

slotted in direct impact on Indian market. The FII are taking out the money and the

impact is shown on current Indian markets.

By understanding the economic indicators, you should be able to gauge the current

state of economy and more importantly, the direction in which its headed. Pooling

this knowledge together with the detailed research on the companies that you are

interested in, you should be well equipped to make sound investment decisions.

Bear in mind that when the economy slows down and the market is on a downward

trend, it is not necessarily bad as this could be your golden opportunity to spot some

good stocks at a bargain that are worth buying.

The prices of stocks around the world do not move together in an exact manner. This

is because the economic systems in which stock markets are located have dissimilar

environments in terms of taxation, industrial growth, political stability and monetary

policies among other factors.


20/62

20

Stock markets may experience a general increase in price level referred to as a bull

market or general decrease in price level referred to as bear market. Stagnant pricesor sudden big price movements downward is referred to as stock market crash.

Among the main measures of stock market performance include; stock market

indexing, market capitalization and stock turnover. Stock market indexing is one of

the most widely used measures of stock performance. Investors hold portfolios of

many assets but it is cumbersome to follow progress on each security in the

portfolio. Thus it is prudent to observe the entire market under the notion that their

portfolio moved in the same direction as the

aggregate market. The market index such as the NSE index is used to observe total

returns for an aggregate market and these computed returns are to judge

performance of individual portfolios. The assumption is that randomly selecting a

large number of stocks from the total market should enable the investor to generate

a rate of return comparable to the market (Simiyu, 1992).

Market capitalization is another measure of stock market performance .This

measure is used to measure market movements by measuring the total value of

stock in a particular stock market by aggregating the market value of the quoted

stocks. Changes in market capitalization occur due to fluctuations in share prices or

issuance of new share prices or issuance of new shares and bonus issues. This

implies that high activity at the stock market may signal more investments in the

stock markets. Market turnover indicates inflows and outflows in the stock market

and is based on the actively traded shares. A change occurs due to the actively

traded shares and to fluctuations in share prices or number of shares traded in a

given day (Otuke 2006).

Among the determinants of stock market performance include, performance of the

economy, monetary policies, fiscal policies, inflation, availability of substituteinvestments, change of investor preferences and market sentiments. Activities of


21/62

21

government and general performance of the economy influence stock market

activity and therefore the performance of stock markets. Monetary and fiscalmeasures enacted by various agencies of national governments influence the

aggregate economies of those countries. The resulting economic conditions

influence all industries and companies in an economy positively or negatively which

in turn affect the performance of stock markets (Reilly 1997).

Fiscal policy incentives such as tax cuts can encourage spending, where as additional

taxes on income, petroleum products, cigarettes, and alcoholic beverages discourage

spending. Increase or decrease in government spending also influence the general

economic activity by triggering multiplier effect (Stieglitz 1993). Monetary policy has

implications to the economy. A restrictive monetary policy reduces the supply of

funds for working capital and expansion of business. Alternatively a restrictive

monetary policy may lead to increased interests rates thus increasing the cost of

capital which makes it more expensive for individuals to finance home mortgage and

purchase of durable goods (Mendelson 1976).

Inflation affects the performance of stock markets as it causes differences between

real and nominal interests rates thus changing the spending and saving behavior of

consumers and corporations. Unexpected changes in the rate of inflation make it

difficult for firms to plan, which inhibits growth and innovations .Beyond the impact

of the domestic economy, differential inflation and interest rate influence the trade

balance between countries and exchange rate of currencies (Reilly, 1997). Events

such as war, political upheavals within or outside a country ,or international

monetary devaluation produces changes in the business environment that lead to

uncertainties and earnings expectations of investors therefore increasing the risk

premium of investors (Mendelson 1976).

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


22/62

22

assets in an economy such as corporate bonds, governments bonds, treasury bills,

real estate and foreign equity among others. Changes in investor composition alsoaffect stock market performance .As supply and demand for security change

overtime, different types of investors are attracted to the market. If the risk

preferences of the investors are not as those of current investors the required rate

of return tend to shift .Accordingly price relationship will change quite

independently of any modification in earnings expectations. Participation by

institutional investors at Nairobi Stock Exchange influences pricing and returns

generated at the stock market (Reilly, 1997). Market sentiment also referred to as

the psychology of market participants affect stock market performance. Market

sentiment is often subjective, biased, and obstinate .The uncertain mass reaction of

individuals to developments affecting the stock market is one of the factors that

handicaps stock market forecasting .A mild stock market flurry caused by a spurt in

business activity may generate a wave of buying enthusiasm that raises prices to

blossom levels.

2.3 The Indian Stock Market

2.3.1 The Historical Perspective

The Bombay Stock Exchange (BSE) is known as the oldest exchange in Asia. It traces

its history to the 1850s, when stockbrokers would gather under banyan trees in front

of Mumbais Town Hall. The location of these meetings changed many times, as the

number of brokers constantly increased. The group eventually moved to Dalal Street

in 1874 and in 1875 became an official organization known as The Native Share &

Stock Brokers Association. In 1956, the BSE became the first stock exchan ge to be

recognized by the Indian Government under the Securities Contracts Regulation Act.


23/62

23

The Bombay Stock Exchange developed the BSE Sensex in 1986, giving the BSE a

means to measure overall performance of the exchange. In 2000 the BSE used thisindex to open its derivatives market, trading Sensex futures contracts. The

development of Sensex options along with equity derivatives followed in 2001 and

2002, expanding the BSEs trading platform.

Historically an open-cry floor trading exchange, the Bombay Stock Exchange

switched to an electronic trading system in 1995. It took the exchange only fifty days

to make this transition.

Capital market reforms in India and the launch of the Securities and Exchange Board

of India (SEBI) accelerated the integration of the second Indian stock exchange called

the National Stock Exchange (NSE) in 1992. After a few years of operations, the NSE

has become the largest stock exchange in India.

Three segments of the NSE trading platform were established one after another. The

Wholesale Debt Market (WDM) commenced operations in June 1994 and the Capital

Market (CM) segment was opened at the end of 1994. Finally, the Futures and

Options segment began operating in 2000. Today the NSE takes the 14th position in

the top 40 futures exchanges in the world.

In 1996, the National Stock Exchange of India launched S&P CNX Nifty and CNX

Junior Indices that make up 100 most liquid stocks in India. CNX Nifty is a diversified

index of 50 stocks from 25 different economy sectors. The Indices are owned and

managed by India Index Services and Products Ltd (IISL) that has a consulting and

licensing agreement with Standard & Poors.

In 1998, the National Stock Exchange of India launched its web-site and was the first

exchange in India that started trading stock on the Internet in 2000. The NSE has alsoproved its leadership in the Indian financial market by gaining many awards such as


24/62

24

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

Award by CHIP magazine (1999).

2.3.2 The Hours of Operation

2.3.3. National Stock Exchange of India Market Segments

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

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

Session Timing

Beginning of the day session 8:00 - 9:00

pre-open trading session 9:00 - 9:15

Trading Session 9:15 - 15:30

Position Transfer Session 15:30 - 15:50

Closing Session 15:50 - 16:05

Option Exercise Session 16:05 - 16:35

Margin Session 16:35 - 16:50

Query Session 16:50 - 17:35End of Day Session 17:30


25/62

25

August 2008 Currency derivatives were introduced in India with the launch of

Currency Futures in USD INR by NSE. Currently it has also launched currency futures

in EURO, POUND & YEN. Interest Rate Futures was introduced for the first time in

India by NSE on 31 August 2009, exactly after one year of the launch of Currency

Futures.

NSE became the first stock exchange to get approval for Interest rate futures as

recommended by SEBI-RBI committee, on 31 August 2009, a futures contract based

on 7% 10 Year GOI bond (NOTIONAL) was launched with quarterly maturities.


26/62

26

3. 0 RESEARCH OBJECTIVES & METHODOLOGY

Research

Research is defined as human activity based on intellectual application in the

investigation of matter. The primary purpose for applied research is discovering,

interpreting, and the development of methods and systems for the advancement of

human knowledge on a wide variety of scientific matters of our world and the

universe. Research can use the scientific method, but need not do so. Scientific

research relies on the application of the scientific method, a harnessing of curiosity.

This research provides scientific information and theories for the explanation of the

nature and the properties of the world around us. It makes practical applications

possible. Scientific research is funded by public authorities, by charitable

organizations and by private groups, including many companies. Scientific research

can be subdivided into different classifications according to their academic and

application disciplines. In this project the research type used is descriptive because

this research is the most commonly used and the basic reason for carrying out

descriptive research is to identify the cause of something that is happening. For

instance, this research could be used in order to find out what age group is buying a

particular brand of cola, whether a companys market share differs between

geographical regions or to discover how many competitors a company has in their

marketplace. However, if the research is to return useful results, whoever is

conducting the research must comply with strict research requirements in order to

obtain the most accurate figures/results possible.


27/62

27

DESCRIPTIVE RESEARCH

Descriptive research is used to obtain information concerning the current status of

the phenomena to describe "what exists" with respect to variables or conditions in a

situation. The methods involved range from the survey which describes the status

quo, the correlation study which investigates the relationship between variables, to

developmental studies which seek to determine changes over time. Descriptive

research can be of two types:

I. Quantitative descriptive research emphasizes on what is, and makes use of

quantitative methods to describe, record, analyze and interpret the present

conditions.

ii. Qualitative descriptive research also emphasizes on what is, but makes use of non-

quantitative research methods in describing the conditions of the present.

Current state of Indian Economy

OVERVIEW OF THE ECONOMY

The Indian economy, after exhibiting strong growth during the second quarter of

2008- 09, has experienced moderation in the wake of the global economic

slowdown. There has been significant slowdown in the capital expenditure. The

government estimated that economy would expand at 7.1% in FY 09, the slowest

pace in six years and below the previous year's 9%, as the global slowdown cuts back

demand and hurts key sectors. The main focus of the government during this period

was to tame inflation along side sustaining growth. This fiscal saw two stimulus

packages and the third one seems likely to be on its way.


28/62

28

GDP Growth

The Central Statistical Organization (CSO) has released the revised estimates for GDP

for 2010-11. Alongside, it also released the quarterly estimates for GDP for the

fourth quarter of 2010-11. According to the latest numbers made available by CSO,

Indias GDP at factor cost at constant prices registered an increase of 8.5 percent in

the year 2010-11. This revised estimate of 8.5 percent growth for GDP in 2010-11 is

only a shade below the advance estimates that had pegged GDP growth for 2010- 11

at 8.6 percent. This slight dip in overall GDP growth can be attributed to weaker

performance in sectors such as mining and quarrying, manufacturing, trade,

hotels, transport and communication and financing, insurance, real estate and

business services than anticipated earlier. In case of the agriculture and allied

activities sector, we find that the revised estimates have pegged growth in 2010-11

at 6.6 percent, which is much higher compared to the advance estimates that had

put growth at 5.4 percent. In this context it is important to note that the third

advance estimates of crop production released by the Ministry of Agriculture have

shown a significant upward revision as compared to second advance estimates in the

production of wheat [84.27 million tonnes from 81.47 million tonnes], pulses [17.29

million tonnes from 16.51 million tonnes], oilseeds [302.51 lakh tonnes from 278.48

lakh tonnes] and sugarcane [340.54 million tonnes from 336.70 million tonnes].

These revisions are responsible for lifting the GDP growth rate for agriculture and

allied activities sector. Another sector where we see a substantial upward revision in

growth rate between the advance and revised estimates is the community, social

and personal services sector. While in its advance estimate, CSO had indicated a

growth of 5.7 percent for this sector, in the revised estimates this figure has been

moved up to 7.0 percent. This revision comes on the back of a larger increase in total

expenditure of the central government than anticipated earlier.

The moderation in the expected pace of expansion of the mining and

manufacturing sectors can be related to certain adverse policy developments as


29/62

29

well as hardening of the interest rates in the economy. Further, as performance of

the financing, insurance, real estate and business services sector is closely relatedto performance of the manufacturing sector, this sector too has seen a slippage in

growth between advance and revised estimates.

Moving on to the quarterly estimates for GDP growth for the fourth quarter of 2010-

11, we see that although the economys performance is still decent at 7.8 percent ,

an unmistakable downward trend is visible. Quarterly growth estimates show that

GDP growth has come down from 9.3 percent in Q1, 2010-11 to 8.9 percent in Q2,

2010-11 to 8.3 percent in Q3, 2010-11 and further down to 7.8 percent in Q4, 2010-

11.

Amongst sectors, the ones that have seen a considerable erosion of growth

momentum over the last one year are mining and quarrying and manufacturing.

While in case of the former, the growth figures have come down from 7.1 percent in

Q1, 2010-11 to 1.7 percent in Q4, 2010-11, in case of the latter, growth has

moderated from 12.7 percent in Q1, 2010-11 to 5.5 percent in Q4, 2010-11. The

performance of the agriculture and allied activities sector in the fourth quarter has

been particularly strong at 7.5 percent. The other sectors that have registered strong

growth in Q4, 2010-11 are electricity, gas and water supply *7.8 percent+,

construction *8.2 percent+, trade, hotels, transport and communication *9.3

percent+ and financing, insurance, real estate and business services *9.0 percent+.

A look at quarterly GDP figures by expenditure class shows that growth in private

final consumption expenditure is maintained at a robust 8 percent even in the fourth

quarter of the fiscal 2010-11. However, what is worrisome is the trend in the growth

numbers for gross fixed capital formation, which shows that year on year growth,

has tapered from 17.4 percent in Q1, 2010-11 to just about 0.4 percent in Q4, 2010-

11. This is a clear indication of weakness in the investment activity level in theeconomy and does not bode well for growth in the current year.


30/62

30

With regard to GDP growth in the year 2011-12, it was noted even in our earlier

report that the initial guidance provided by Ministry of Finance of 9 percent growthis looking increasingly difficult to achieve. With time even the government has come

around this view and growth projection for the year 2011-12 has been lowered to 8

to 8.5 percent.

It is interesting to note that in FICCIs most recent Economic Outlook Survey, results

of which were released in May 2011, the median forecast for GDP growth in the

current year comes to 8 percent. The inputs and projections provided by various

participating economists in this survey

show that while the agriculture and allied activities sector is projected to grow by 3.7

percent this year, industry and services sector are poised to grow by 8 percent and

9.2 percent respectively.

The key risks to growth in India in the current year are the negative impact of

continuous tightening of monetary policy by RBI and a slowdown in global growth

due to high international oil prices. Further, although the Indian Meteorological

Department has projected a normal monsoon this year, we will have to wait for

more updates to get a clearer picture on the spatial distribution of the monsoon.

Industrial Production

The Central Statistical Organization (CSO) has revised the base year for the industrial

production data series from 1993-94 to 2004-05. The new series also incorporates a

much larger set of items2 that reflect the contemporary production activity in the

country and is expected to offer a better gauge of the countrys industrial activity.

The weighting diagram of the three major sectors under two digit level indices and

four different goods sectors under use based classification has also changed to


31/62

31

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

As the above table shows, in the new series, while the weight of the mining sector

has gone up that of the manufacturing sector has gone down. Amongst the use

based segments, while basic goods have seen their weight go up substantially,

intermediate goods have seen a reduction in the weight assigned for construction of

the index. Even before data as per the new series for industrial production was

brought out by CSO, economic analysts had predicted that data as per the new series

Comparison of weights assigned in the Old and New series of IIP Indices

Sectors Old series New series

1993-94 Base Year 2004-05 Base Year

Two-digit level Indices

Mining 10.47 14.16

Manufacturing 79.36 75.53

Electricity 10.17 10.32

General Index 100.00 100.00

Use- based Index

Basic goods 35.57 45.68

Capital goods 9.26 8.83

Intermediate goods 26.51 15.69

Consumer goods 28.66 29.81

Durables 5.37 8.46

Non durables 23.3 21.35

General Index 100 100

Source CSO, MOSPI, Govt. of India


32/62

32

would provide an upward bias to growth as it would incorporate new fast growingsectors of the economy. The new numbers have confirmed this and we see a

substantial change in growth performance in 2010-11 when we compare the results

of the new series with the results based on the old series. It is also interesting to

note that the adverse impact on industrial production in the period following the

global slowdown is also accentuated as per the new series and this is reflected in the

numbers for 2009-10.

As the data given in the next table shows, overall industrial production [as per the

new series] registered a growth of 8.2 percent in 2010-11. And this is much better

than the 5.3 percent growth clocked in 2009-10. Further, a good part of industrial

growth in 2010-11 was driven by the manufacturing sector, which recorded a growth

of 8.9 percent compared to a growth of 4.8 percent in 2009-10. The other two

sectors, mining and manufacturing, however saw their performance going down in

2010-11 compared to 2009-10. Coming to the use-based classification, we see that

all sectors, barring consumer durables, saw an improvement in performance in 2010-

11 over 2009-10. And among the sectors that saw an improvement in performance,

the capital goods sector stands out as its growth improved from 1 percent in 2009-

10 to 15 percent in 2010-11.

As mentioned earlier, these numbers, based on the new industrial production series,

reflect a much different and improved performance compared to results based on

the old series.

In fact, in FICCIs most recent Business Confidence Survey, members of corporate

India had indicated the following five point strategy for the authorities to revitalize

industrial and economic growth in the country

Lower interest rates, particularly the cost of credit to SMEs.

Fasten the pace of implementation of infrastructure projects.


33/62

33

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

Core Sector

The composition of the core sector has also undergone a change with two new

segments being added to the existing list of six industries. These two new segments

are fertilizers and natural gas and with the addition of these segments the combined

weight of core sector in IIP has increased from 27 percent to 37.9 percent. As part of

this revision, weights of the existing sectors have also seen some change and base

year has also been revised to 2004-05. The new expanded list of sectors that now

make up the core sector along with the weights attached is presented in the

following table.

Segments of the Core Sector

Segment Weight in the old series Weight in the new series

Overall Index 26.68 37.9

Coal 3.22 4.38

Crude Oil 4.17 5.21

Natural Gas nil 1.71

Refinery Products 2 5.94

Fertilizers nil 1.25

Steel 5.13 6.68

Cement 1.99 2.41

Electricity 10.17 10.32

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


34/62


35/62

35

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

FICCIs interaction with economists, policy experts and analysts shows that the

emergence of other competing economies, particularly in the Asian region, could be

one of the factors that lie behind this slowdown in FDI flows towards India. While

this proposition requires further research, economists and policy experts concur with

the view that there are tangible factors linked to India which could also be

responsible for making foreign investors a little wary for committing more funds.

And amongst these domestic factors, two issues stand out. First is the state of the

macro-economy, which is far from comfortable. With inflation remaining stubbornly

high, growth slowing down due to aggressive monetary tightening by RBI and the

government throwing limited light on how the fiscal deficit target of 4.6 percent for

the current year would be achieved, investors may have been prompted to get into a

wait and watch mode before the domestic situation improves.

Second set comprises factors such as environment sensitive policies being pursued

with respect to certain sectors, slow movement on resolving the land acquisition

problem and issues of governance and corruption that have been grabbing headlines

and showing the country in poor light. As all of these issues have a bearing on the

perception and confidence level of foreign investors, these may have limited FDI

inflows into the country. In this context, it may be reiterated that completion of the

much awaited FDI policy reforms in sectors such as insurance, defense and multi-

brand retail would also give a boost to overall FDI flows into the country. Coming to

portfolio investments, as already mentioned, in 2010-11 portfolio flows totaled US$

31.5 billion and were only a tad below US$ 32.4 billion received in the previous year.

FIIs, which form a major component of portfolio investments, were to the tune of

US$ 29.4 billion in 2010-11 and saw little change from the figure for the previousyear which was US$ 29 billion. While portfolio flows stood higher than FDI flows last


36/62

36

year, the outlook for funds flows on portfolio account going ahead is also not tooencouraging. Given continuous monetary policy tightening by the central bank,

interest rates are on an upswing. This coupled with rising prices of raw materials is

likely to have an adverse impact on the profit margins of firms across sectors

in the year ahead. As this would constrain the capacity of firms to distribute

dividends, FIIs are likely to take a conservative view on India and Indian companies

as they do their return on investment calculations. Signs of this are already emerging

as in a recent survey [June 2011] conducted by the Bank of America Merrill Lynch

amongst global fund managers, India was placed amongst the least favorite equity

market by Asia-Pacific investors.

Additionally, with the RBI contemplating tightening of rules relating to exit of foreign

investors and private equity funds who put their money in Indian firms, investors

sentiments are expected to further weaken. The re-emergence and intensification of

the sovereign debt crisis in Europe and the expected halt of quantitative easing

policy in the US by the end of June 2011 are also downside factors for portfolio flows

for emerging markets including India. It may be mentioned that the Finance Minister

of India, Pranab Mukherjee, tried to allay fears of fund managers and foreign

institutions investors focused on India at recent conference. He urged FIIs to be

optimistic about Indian growth story and to take a long term view on its

performance rather getting disturbed with the short term developments and

statistics. As a measure of assurance, the Finance Minister told fund managers that

the government would continue to take investor friendly policies and has already

started the next generation financial sector reforms such as widening and deepening

of the Indian securities markets, liberalizing the policy on foreign capital flows,

strengthening the regulatory and other institutional architecture and reducing

transaction cost in the securities markets.


37/62

37

These announcements however did little to reduce concerns amongst fund

managers, who are looking for better management of the macro-economy andforward movement on crucial economic reforms.

Forex Reserves

Indias foreign exchange reserves increased as we moved ahead in fiscal 2010-11. As

data given in the table below shows, while in April 2010, Indias foreign exchange

reserves totaled US$ 279.6 billion, in September 2010 this figure had increased to

US$ 292.9 billion. Most recent numbers show that the countrys foreign exchange

reserves have shot up further crossing the US$ 300 billion mark. With this level of

reserves, India is amongst the ten largest holders of foreign exchange reserves in the

world.

Foreign Exchange Reserves in US$ Million

Forex Reserves

Apr-10 279,633

May-10 273,544

Jun-10 275,710

Jul-10 284,183

Aug-10 283,142

Sep-10 292,870

Oct-10 297,956

Nov-10 292,389

Dec-10 297,334

Jan-11 299,224

Feb-11 301,592

Mar-11 305,486

Apr-11 313,671

Source Reserve Bank of India


38/62

38

The increasing size of our foreign exchange reserves has drawn attention of thepolicymakers. As mentioned in our previous report, just some time back, Dr. Kaushik

Basu, Chief Economic Advisor, Ministry of Finance, had raised the question of India

to consider having a Sovereign Wealth Fund. In more recent times, a few

independent analysts have opined that a part of these huge reserves be deployed to

import commodities which are or could be in short supply in the economy. This last

suggestion was made in context of managing the stubbornly high inflation by

bridging the demand supply mismatch.

Exchange Rate

Most recent trends in the movement of the INR vis--vis major vehicle currencies

show that the Indian Rupee has depreciated against all the major global currencies.

As the data given in the table below shows, the Rupee depreciated against the US$

by 1.2 percent between April 2011 and May 2011. During the same time period,

while the value of the Rupee went down against the Pound Sterling by 1 percent,

Rupees depreciation against the Japanese Yen was of a much larger magnitude 3.8

percent. Against the Euro too we saw the Rupee becoming a little weak and

depreciating by about 0.4 percent between April 2011 and May 2011.


39/62


40/62

40

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

during the period under study.

Regarding the outlook for the Indian Rupee against the US$ in the months ahead, the

majority view amongst analysts and currency strategists is one of depreciation. This

bearish view with regard to the Indian Rupee is based on two factors. First is the

likely deterioration in the current account due to moderation in exports, continuous

rise in imports and a possible slowdown in invisible receipts. Second is the expected

slowdown in funds flows into India. While FDI flows into the Indian market are

already on a slowdown mode, FII flows too are showing signs of anxiety over the

evolving macro-economic situation with inflation remaining high and growth slowing

down.

Money and Banking

Data on money supply growth shows that broad money (M3) registered a growth of

15.9 percent in the year 2010-11. This growth was only a tad lower when compared

to a growth of 16.9 percent registered in the year 2009-10. However, it is important

to note that growth in money supply in 2010-11 was considerably weak when

compared to the growth of nominal GDP that stood at 19.1 percent. Money supply

growth in

2010-11 was driven by growth seen in bank credit to the commercial sector [20.6

percent]. The other important component of money supply, net foreign exchange of

assets of the banking sector, registered a moderate growth of just about 7.4 percent

in 2010-11.

Latest numbers available show that year on year growth in money supply in the

period up to May 21, 2011 was 16.8 percent. Growth in the corresponding period


41/62

41

[up to May 22, 2010] in the previous year was 15.1 percent. Amongst sources of

money supply, while bank credit to the commercial sector registered a growth of21.3 percent in the period up to May 21, 2011, net bank credit to the government

went up by 17.9 percent. Net foreign exchange assets of the banking sector

registered a growth of 7.6 percent during the same time period.

The tightness in the loanable funds market however is expected to ease in the

months ahead. And this is on account of both an expected slowdown in the credit

growth rate and an improvement in the deposit growth rate.

With RBI continuing with its tight monetary policy stance, interest rates in the

economy have been going up and have reached a stage where these have started

hurting both investment and consumption demand. Already many corporate have

indicated that it is becoming difficult to fund investment plans at current interest

rates. Also, with demand for automobiles, commercial vehicles and realty

moderating, one can expect credit growth to taper off in the coming months.

As regards deposits, in the year 2010-11 we saw that deposit growth was weak in the

first half of the year and then it started going up as banks increased the card rates.

Data available for the current year shows that the uptick in deposit growth continues

and with deposit rates expected to remain at current levels and the outlook for the

equity market being not too encouraging, banks should see greater mobilization of

deposits.

Fiscal Situation

The provisional data for fiscal indicators of the central government for the year

2010-11 was released by the Controller General of Accounts during the first week of

June 2011. These provisional estimates for various fiscal variables show a definite


42/62

42

improvement over the revised estimates (RE), with a more than anticipated rise in

revenue collection and reduction in expenditure during 2010-11. The striking featureof the new estimate is the reduction in fiscal deficit number compared to the revised

estimate given during presentation of the union budget. This depicts the

comfortable fiscal position the country enjoyed in the previous fiscal. A look at

receipt trends of the central government shows that the total receipts increased by

almost 37 percent in 2010-11 over 2009 10. While revenue receipts, the major chunk

under the receipts head, increased by 38.7 percent, non- debt capital receipts, the

other component, showed only a marginal increase of 7 percent during 2010-11 over

the previous year. Again, within revenue receipts, though non- tax revenue

contributed less than tax revenue in absolute terms, the former showed a growth

rate of a whopping 90.5 percent. This was due to the huge amount of money

government raised through auction of 3G and BWA spectrum.

Coming next to the trend in expenditure of central government, it may be noted that

the total expenditure has grown by 17 percent in 2010-11 over 2009-10, much less

than the 37 percent growth in receipts. Within overall expenditure, while the plan

expenditure grew at 24.4 percent, non-plan expenditure showed an increase of 13.9

percent. Excellent tax collection, buoyant non tax revenue and an effective cut down

on expenditure growth helped the government to bring down the fiscal deficit for

the year 2010-11 to 4.7 percent a figure much lower than the revised estimate of

5.1 percent announced by the finance minister in his 2011-12 budget speech. This is

again much lower than the

budget estimate (BE) of 5.5 percent announced during the 2010-11 budget speech.

The revenue deficit for the fiscal 2010-11 is 3.1 percent and the primary deficit for

the same year is 1.7 percent. These are lower than the revised estimate of 3.4

percent and 2 percent respectively.


43/62

43

However, possibilities of higher receipts in 2011-12 look increasingly ambitious. All

the main components under the receipts head - tax, non-tax and non-debt capitalreceipt - may show a moderation in the current fiscal. With no major tax changes

announced in the budget for 2011-12, the government was banking on strong

growth in the economy and industry, good corporate performance and a rise in

wages and salaries to translate into high growth in tax collections. Now that there

are clear indications of an economic and industrial slowdown and fiscal strains

building up in the corporate sector, even senior government functionaries have

started doubting the feasibility of sticking to the budgeted targets for revenues.

Union Finance Minister, Mr. Pranab Mukherjee, shared these concerns recently

while addressing senior officials of the Central Board of Excise and Customs (CBEC).

He warned that the task of meeting the revenue target is very challenging and will

require sustained and strategic efforts

throughout the financial year. Further, CBEC Chairman, SD Majumdar, also hinted

that they will have to see if a midcourse revision in revenue targets is required.

Earlier, Finance Secretary, Sunil Mitra had indicated that amidst slowdown in tax

collections, the Finance Ministry may go slow on disbursal of pending income tax

refunds.

While this is the case with tax collections, governments other revenue raising

sources like auction of the remaining 3G spectrum and disinvestment of select PSUs

may also not fetch anticipated revenues as there may not be enough takers given

the tough market conditions.

On the expenditure front, government has estimated a very small increase of 3.4

percent in its overall expenditure for the year 2011-12. In all probability this estimate

will be exceeded in the current year mainly because of expenditures under the heads

of MGNREGA, food, petroleum and fertilizer subsidy. While increased wage rate will


44/62

44

push up the MGNREGA expenditure, international price of oil and fertilizer will push

up petroleum and fertilizer subsidy. Also, the food subsidy bill will see a rise with theintroduction of Food Security Bill and the associated high cost that would have to be

incurred for collecting and storing much larger amounts of food grains. Considering

this mismatch in revenue expenditures, some analysts fear that the fiscal deficit

this year may eventually go up to anywhere between 6 to 7 percent. The only way to

rectify the expected dent in revenue collections is to improve efficiency in tax

collections. The tax departments of the government should leverage information

technology tools and evolve a process wherein refunds become automatic. Further,

steps should be taken to widen the tax base in the country. Today, just about 3

percent of the people in the country file tax returns. Efforts of the government

should be geared towards increasing this base of tax payers and curbing tax evasion.

This would automatically lead to a jump in tax revenues. Further, the government

should go ahead with reforms like decontrolling diesel and LPG prices to augment

revenue.


45/62

45

4.0 ABSTRACTS & FACT FINDINGS

ASIAN MARKETS

Asian markets were trading firm. China's Shanghai Composite was up 0.11% or 2.99

points at 2,768.88.

Hong Kong's Hang Seng gained 1.32% or 289.89 points at 22,277.18.

Japan's Nikkei rose 0.86% or 86.17 points at 10,096.56.

Singapore's Straits Times advanced 0.86% or 26.87 points at 3,165.38.

South Korea's Seoul Composite surged 0.56% or 12.06 points at 2,157.10.

Taiwan's Taiwan Weighted added 0.45% or 39.10 points at 8,756.24.

Credit Rating Agency Standard & Poor's Has Downgraded

America

Washington, Aug 6 (IANS) : For the first time in history, credit rating agency Standard& Poor's has downgraded America's top notch credit rating, stripping the world's

largest economy of its prized AAA status.

'We have lowered our long-term sovereign credit rating on the United States of

America to 'AA+' from 'AAA,'' S&P said Friday in a stunning blow to the country, that

has enjoyed the top rating for 70 years, and its political leadership.

In July, S&P, one of the three major agencies that assign grades the credit of

companies and governments, placed the US rating on 'CreditWatch with negative

implications' as the debt ceiling debate devolved into partisan bickering.

To avoid a downgrade, S&P said the US needed to not only raise the debt ceiling, but

also develop a 'credible' plan to reduce the federal debt by at least $4 trillion over

the next decade.

Earlier this week, Congress instead passed a plan to reduce the debt by at least $2.1

trillion.


46/62

46

In its report Friday, S&P ruled that the US fell short: 'The downgrade

reflects our opinion that the ... plan that Congress and the Administration recently

agreed to falls short of what, in our view, would be necessary to stabilize the

government's medium-term debt dynamics.'

S&P also cited dysfunctional policymaking in Washington as a factor in the

downgrade. 'The effectiveness, stability, and predictability of American policymaking

and political institutions have weakened at a time of ongoing fiscal and economic

challenges.'

The other rating agencies, Moody's and Fitch, have said they have no immediate

plan to downgrade the US credit rating, giving the government more time to make

progress on debt reduction.

The split verdict limits the impact of the S&P downgrade as many consequences

would be set off only by a reduction by two agencies, the New York Times said.

But the lowering of the country's rating could rattle confidence and raise borrowing

costs for the government and consumers, impeding the already fragile recovery, it

said.

The announcement by S& P came after a week of turmoil on Wall Street not seen

since the days of the financial crisis. After plunging around 5 percent Thursday,

stocks bounced up and down Friday and closed relatively flat.

The European Central Bank stepped into bond markets

(Reuters) - The European Central Bank stepped into bond markets on Monday,

backing up a pledge to support Spain and Italy with the aim of averting financial

meltdown in the euro zone, while the G7 and G20 offered soothing words to

investors shaken by a historic downgrade of the U.S. debt rating.

Spanish and Italian bond yields fell as traders said the ECB was broadening its bond-

buying program to include debt issued by the bloc's third- and fourth-biggest

economies, in the latest effort to staunch Europe's sovereign debt crisis.

"They're doing 20 to 25 million (euro) clips and they're spreading it around the

market," said a trader. "We expect them to do billions today."

Equity markets that had been in headlong retreat in Asia turned positive in Europe as

G20 finance chiefs and central bankers pledged to take all necessary measures to

support financial stability, growth and liquidity.


47/62

47

"It does seem that policymakers globally are swinging into action," said

Shane Oliver, head of investment strategy at AMP Capital Investors, one of

Australia's biggest fund managers.

"A move to now start buying Italian bonds could be very positive in helping to calm

fears about a further escalation of European debt problems," said Oliver, speaking

before the ECB made its move in the markets.

"Speculators will now have to think twice about selling or shorting Italian and

Spanish bonds knowing the ECB will be acting against them."

Spreads of Italian and Spanish bonds over German debt narrowed sharply, credit

default swaps fell and Spanish and Italian stocks jumped more than 3 percent. The

euro also extended gains.

It marked a reversal of mood from the fear that had gripped Asian markets earlier in

the day, when similar pledges in a G7 statement had failed to calm investors who

drove safe haven gold to a record atop $1,715 an ounce, while share markets were

again colored red.

Investors also turned their attention to what the Federal Reserve might say at its

policy meeting on Tuesday, fuelling speculation it might soon have to consider a

third round of quantitative easing to resuscitate the world's richest economy.

COUNTING ON ECB, FED

After a rare Sunday night conference call, the ECB welcomed announcements by Italy

and Spain of new deficit cutting measures and economic reforms as well as a Franco-

German pledge that the euro zone's rescue fund will take responsibility for bond-

buying once it is operational, probably in October.

"The Euro system will intervene very significantly on markets and respond in asignificant and cohesive way," a monetary source said.

The central bank had been reluctant to step up its buying of distressed debt, fearing

it would be seen as a blank check to spendthrift governments.

Since the program began in May last year it has bought just 80 billion Euros of bonds,

while Italy and Spain alone issue around 600 billion a year. Dealers said it would take

a pledge to buy several hundred billion Euros of debt to get ahead of contagion

fears.


48/62

48

At the same time the G7 -- the United States, Britain, Canada, France,

Germany, Italy and Japan -- said it would take joint action if needed in foreign

exchange markets because "disorderly movements ... have adverse effects for

economic and financial stability."

The G20 communiqu followed shortly after European markets opened.

The Japanese intervened to restrain their currency last week while the Swiss

National Bank surprised with a new round of easing as it fought a rapidly rising franc.

Pressure is now growing on the Fed to try further easing -- dubbed QE3 by the

market -- though few expect anything dramatic as early as Tuesday's policy meeting.

"We are probably a little bit closer. But I don't think we're there yet," said Nomura'schief global economist Paul Sheard. "I think the Fed would have to get a little bit

more concerned that financial markets were spinning out of control before accepting

with QE3."

CHINA NOT HAPPY

None of which was enough to reassure Washington's single biggest creditor, China.

"It must be understood that if the U.S., Europe and other advanced economies fail to

shoulder their responsibilities and continue their incessant messing around over

selfish interests, this will seriously impede stable development of the global

economy," said a commentary in the People's Daily newspaper, the mouthpiece of

China's ruling Communist party.

China holds well over a trillion dollars worth of U.S. government paper and was thus

not pleased when Standard & Poor's cut the U.S. debt rating to AA-plus from AAA --

a move that also angered Treasury Secretary Timothy Geithner.

In an interview on NBC and CNBC television, Geithner said the rating agency "has

shown really terrible judgment" and claimed its downgrade meant nothing and

wouldn't affect investors' faith in U.S. debt.

Japanese Finance Minister Yoshihiko Noda put a brave face on it on Monday, saying

that market trust in the dollar and U.S. Treasuries has not wavered and indicated

Tokyo's readiness to maintain its massive holdings of U.S. government bonds.


49/62

49

Wall Street drops as economic, European worries weigh

US stocks sank on Thursday as data fuelled worries the economy was weakening and

bank shares tumbled on fears the European financial crisis could spread havoc to

other parts of the world.

The losses extended a slide in stocks that began in late July, with the S&P 500 now

off 15.7% from its April 29 highs, as economic worries both here and abroad have

caused investors to exit risky assets.

Factory activity in the US Mid-Atlantic region as surveyed by the Philadelphia Federal

Reserve Bank plummeted in August, falling to the lowest level since March 2009.

Bank shares contributed to the market's slide. While a Federal Reserve official said

the Fed scrutinizes US banks and the American units of European banks equally, a

Wall Street Journal report said regulators are questioning the US units of Europe's

lenders more closely.

In the broad selloff, sectors associated with growth were also hit hard. Top drags on

the Dow included shares of IBM, down 4.8% at USD 163.25 and United Technologies,down 5.3% at USD 68.21. On the NASDAQ, shares of Oracle fell 7.8% to USD 25.34.

"Europe is dealing with an escalating fiscal crisis," said Robert Van Batenburg, head

of equity research at Louis Capital in New York.

"In the United States the momentum is slip-sliding. You've got a lot of corporations

that also came out with very worrisome comments that by the end of the quarter

things really started to slow down."

The Dow Jones industrial average was down 419.63 points, or 3.68%, at 10,990.58.The Standard & Poor's 500 Index was down 53.24 points, or 4.46%, at 1,140.65.

The NASDAQ Composite Index was down 131.05 points, or 5.22%, at 2,380.43.

As the Dow fell more than 520 points early in the session, US Treasury debt prices

soared and spot gold rallied to a record USD 1,825.29 an ounce, evidence investors

were headed for safer assets.

Traders were on the defensive, paying more for protection as US stocks tumbled on

disappointing economic data and renewed bank worries. The CBOE Volatility Index,

Wall Street's favorite pulse of investor sentiment, rose 29.4% to 40.87.


50/62

50

"This jump in the VIX has caught people off guard and they are now scrambling for

protection," said option Monster analyst Chris McKhann. Although risk perceptionsrose Thursday, Wall Street's "fear gauge" is still below the 15-month high set at the

close of trading on August 8.

Puts on the SPDR S&P Trust were active, with more than two trading for every call.

The fund fell 3.8% to USD 115.01.

In SPY options, the soon-to-expire August out-of-the money USD 110 puts were

among the most popular as 77,566

contracts traded. The August USD 115 SPY strike was the busiest, with 178,500contracts traded, Trade Alert data showed.

Among banks, Citigroup Inc was off 7.7% at USD 27.54 and Morgan Stanley was

down 6.4% at USD 15.92.Shares of luxury retailer Tiffany & Co dropped 7.4% to USD

59.52.

Economists at Morgan Stanley lowered the outlook for global growth and said the

United States and euro zone are "dangerously close to recession."

India can have third largest GDP by 2025: PRIME MINISTER

Kolkata, Aug 22 (IANS) India could have the world's third largest GDP by 2025 if the

country maintained its present growth rate, Prime Minister Manmohan Singh said

Monday while conceding that the target of nine percent growth for the next five

years was 'very ambitious' given the current state of the global economy.

Addressing the golden jubilee celebrations of the Indian Institute of Management-

Calcutta, the prime minister cautioned that while the 'rosy future' was within the

nation's reach, it was not an assured outcome.

Manmohan Singh, who is regarded as the architect of India's economic reforms for

having initiated them as finance minister between 1991 and 1996, said the reforms

programme had courted controversy in the early years but all regimes at the centre

had carried them forward.

'There have been differences of emphasis but the direction has remained the same.

Most state governments have also acted in the same spirit.

'Because of our gradualist approach, it took time for the economic reforms to have

an impact. However, it is now clear that their impact has been remarkable.'


51/62

51

'If we can continue to grow at this rate, we are well positioned to be the country

with the third largest GDP in the world by 2025.'

He referred to the nine percent growth target fixed for the 12th Five Year Plan

(2012-17), and said: 'Since we have already achieved about 8.2 percent in the 11th

plan period, it may seem that a transition to 9 percent growth is not difficult.'

'However, it is in fact a very ambitious target given the current global economic

situation, which is full of uncertainties about the prospects in industrialized countries

and their implications for global capital markets,' he added.

A downgrade of US sovereign debt coupled with fears of another bout of recession in

the world's largest economy and in Europe has sent shivers down the spines of

investors across global stock markets and the likelihood of a demand slowdown is

gaining strength.

'Our own economy has also slowed down compared to last year, and this year's

growth may be around eight percent or a little more, at best,' said Manmohan Singh,

alluding to the effects of the crisis.

'Despite this sobering environment, we should aim at nine percent growth. This is

because we are not planning for today, or even for the rest of this year. We are

planning for the five year period from 2012-13 to 2016-17.'

Referring to the high growth trajectory of Asian countries like Japan and South Korea

in the past, and China's fast-paced economic expansion in the last two decades, the

prime minister said India too could grow at a rapid rate provided it could scale up

infrastructure and bring out wide-spread reforms.

'India is now capable of repeating the performance of this group of Asian countries.

But we must remember that it will not happen automatically, by simply proceeding

on a business as usual basis. There are many difficult challenges we must overcome

to achieve the transition to nine percent growth.'


52/62

52

5.0 QUESTIONNAIRE

1. Name:

2. Age:

3. Occupation

a. Service Business

b. Student Other

4. Are you investing in Equity market?

a. Yes b. No

5. What percentage of your investment is invested in equity market?

a. Less than 25% b. 25-50%

c. 51-7

stock market and indian economy

Documents