NAVIGATING THE INDIAN STOCK MARKET
Gurubharathi Ravi Kaliakudi
1. INTEGRATION OF INDIAN STOCK MARKET WITH GLOBAL AND MAJOR REGIONAL MARKETS
Raj, J., & Dhal, S.C examined the financial integration of India’s stock market with global and regional markets. They found that the Indian stock market is integrated with global markets like the US and the UK, but less so with regional markets like Singapore and Hong Kong. Integration is stronger when stock prices are measured in US dollars due to foreign investment. The Indian stock market has provided higher returns and outperformed other markets in recent years. The study also highlighted the influence of global and regional markets on India’s stock market, with Singapore and Hong Kong having a significant impact, while Japan’s impact is weak. The US and the UK have different effects on India’s market, indicating a shift in integration.
2. INDIA’S STOCK MARKET BUBBLE 2021
Gupta and Sharma discuss the contrasting conditions of the real economy and the stock market during the COVID-19 pandemic. They highlight the stock market bubble of 2021 and the factors contributing to its growth. The Reserve Bank of India (RBI) has expressed concern about this stock market bubble in its financial report. The stock market in India has seen remarkable growth, with record highs in indices like BSE Sensex and Nifty. The paper points out that key indicators, like the P/E ratio, are at historically high levels, suggesting a high level of risk. RBI warns of the potential for a market crash, with Nifty also reaching record highs. The growth of the Indian stock market is attributed to factors like the COVID-19 vaccination drive, foreign institutional investments, reduced investor interest in China, fiscal stimulus, low-interest rates, and price capping. Despite the economic downturn, the Indian stock market continues to rise, raising concerns about a potential bubble and investment losses.
3. STOCK MARKET INDEX DEVELOPMENT IN INDIA
Govindasamy, P., Mathuraswamy, P., Anithakumari, D., & Manoj aims to clarify the complexities of creating and interpreting stock market indices at international, regional, national, and sector-specific levels. The paper provides insights into various methods for computing indices, including market capitalization weighted index, free-float weighted index, price weighted index, equal weighted index, impact cost, and index management. Market capitalization, which reflects the value of publicly traded company shares, is explained. The paper also discusses different methods for calculating stock market indices. It also highlights the importance of understanding stock market indices and their technical aspects. It mentions various studies related to stock market behaviour and risk assessment. The conclusion emphasises the role of stock market indices in providing information about share price movements and overall market performance, making it essential for investors to grasp these concepts. The paper offers simple models and computations to help investors better understand and navigate the complexities of stock market indices.
4. GLOBAL FINANCIAL CRISIS AND INDIAN STOCK MARKET
Saji & T. G. investigate the relationship between the Indian stock market and major developed markets worldwide during the period 2005-2013, particularly focusing on the impact of the 2008 financial recession. The study employs Granger causality tests and Johansen’s cointegration methodology to assess short-run and long-run interactions among these markets.
The findings suggest that during both pre- and post-crisis periods, there is short-term causality from developed markets to the Indian market. However, in the long run, price integration among markets is not evident after the recession. This implies that the long-term movement of the Indian stock market is not significantly influenced by factors common to other markets, indicating potential diversification benefits for global investors through equity investments in India.
Descriptive statistics reveal that the recession period brought distress to global investors, with the US and Indian markets being the worst performers. In contrast, during the post-recession phase, the Nifty, although more volatile, delivered the highest return. The study suggests that while the Indian market was moving towards better integration with developed markets before the recession, the pace of integration slowed during and after the crisis. Nevertheless, some short-term causality remains, implying that global market sentiments continue to influence the Indian market, albeit temporarily.
The study highlights the potential for global investors to diversify their portfolios by investing in emerging markets like India, as the financial markets of these countries remain somewhat loosely linked with developed markets. However, the findings are specific to India and may differ for other emerging markets. Future research could explore the stock price behaviour of mid-cap and small-cap segments, as well as employ alternative methodologies to further quantify the observed differences.
5. INDIAN STOCK MARKET AND THE INTERNATIONAL STOCK MARKET
Lachhwani, H., Issrani, D., & Ramchandani, V. examines the relationship between the Indian stock market and international stock markets, including the US, Japan, and China, over the past ten years. The goal is to assess interlinkages and potential diversification benefits for investors.
The study utilises Unit Root Tests and Engle-Granger Cointegration Tests to analyze daily data from January 2010 to December 2020. The results show that all stock market data becomes stationary after first differencing, indicating the presence of cointegration among the markets.
The study also investigates stock market volatility, finding that India’s Sensex is the most volatile, while China’s Shanghai Composite is the least volatile.
The analysis focuses on the interdependence of various stock markets. Augmented Dickey Fuller Tests are conducted to check the stationarity of the data. Cointegration tests are then performed between Sensex and other markets, namely Nasdaq, Nikkei, and Shanghai, revealing evidence of cointegration between these markets.
In conclusion, the study shows that India’s Sensex is highly volatile, and there is evidence of cointegration among the studied markets. This interdependence can help investors predict one market’s behaviour based on another, providing valuable insights for investment decisions.
6. IMPACT OF EXCHANGE RATE FLUCTUATIONS IN INDIAN STOCK MARKET
Tanted, N., & Agarwal, K, in this study, explore the relationship between exchange rates and Indian stock market indices, aiming to assess the impact of exchange rate fluctuations on market volatility. The research focuses on Indian rupee rates in dollars (INR/USD) concerning Nifty 50, S&P BSE BANKEX, IT INDEX, and S&P BSE SENSEX. The study utilises ten years of yearly closing price data from 2010 to 2021 and employs statistical tools such as correlation, regression analysis, and ANOVA.
The findings reveal a very weak and negligible impact of the INR/USD exchange rate on Indian stock market indices, suggesting that both variables operate independently of each other. The primary goal is to provide guidance to investors, financial managers, and analysts for market trend analysis, risk-minimised investments, and return comparisons.
The research highlights the importance of understanding the dynamic correlation between exchange rates and stock indices in the context of economic development and portfolio decisions. However, the analysis indicates that there is no significant correlation or relationship between exchange rate fluctuations and Indian stock indices returns, based on correlation and regression analysis results.
Furthermore, ANOVA results confirm the lack of a significant impact of exchange rate fluctuations on stock indices. The study concludes that stock indices and exchange rate prices are independent variables, potentially influenced by other sectors and market conditions. Additionally, the study suggests that factors like inflation differentials, interest rates, current account deficit, political stability, and economic performance may affect stock market trends.
7. IMPACT OF EXCHANGE RATE AND VOLATILITY ON INDIAN STOCK MARKET
Sreenu, N., Rao, K. S. S., & Naik, S, in this research focuses on the factors contributing to the volatility of market returns in India, specifically examining the influence of currency exchange rates and inflation rates on the Indian stock market returns. The study utilised annual inflation data and currency exchange rate data obtained from the RBI. Market returns were calculated using data from the Indian stock index, spanning from January 2000 to June 2020. The research employed the autoregressive distributed lag (ARDL) co-integration technique and incorporated the error correction parameterization of the ARDL model to analyse their impact on Indian stock market returns. Additionally, the study used the GARCH model and the corresponding Error Correction Model (ECM) to explore both short- and long-term relationships between Indian stock market returns and exchange rates, as well as Indian stock market returns and inflation rates.
The findings of the research reveal significant long-term relationships, especially between NSE returns and currency exchange rates. In the short run, the variables exhibited negative effects on stock market returns. Furthermore, the variables were found to possess long memory properties, which could be advantageous for investors. The study concludes that the interaction between stock market returns, inflation rates, and exchange rates has a substantial impact on stakeholders’ expected returns. The research provides insights into the long-term associations among these variables, offering valuable information for prospective investors in Indian share markets, particularly the NSE and BSE. Statistical methods, such as the Johansen cointegration test and VECM, were employed to reveal significant relationships, including co-integration and causality, between market returns, inflation rates, and exchange rates. Consequently, fluctuations in the exchange rate (in Indian currency) influence investor behaviour, impacting stock prices in the Indian stock market.
8. COVID-19 PANDEMIC AND STOCK RETURNS IN INDIA
Dharani, M., Hassan, M. K., Huda, M., & Abedin, M. Z. in this study investigates the impact of the Covid-19 pandemic on stock returns in India, focusing on whether this impact is consistent or varies across different sectors. The research utilises panel data comprising 1,318 companies listed on the National Stock Exchange of India (NSE). The study finds that the daily growth rates of Covid-19 cases and Covid-19 deaths are negatively correlated with stock returns. In other words, as the number of Covid-19 cases and deaths increases, stock returns tend to decline. Interestingly, during Lockdown 2, average stock returns were positive and highly significant, suggesting a partial recovery in the stock market during this period. However, returns during Lockdowns 3 and 4 were negative, indicating ongoing challenges. Furthermore, the research reveals variations in stock returns among different industries. The chemical, technology, and food and beverage sectors experience higher returns, while the banking and finance, automotive, services, and cement and construction sectors yield lower returns throughout the study period. Notably, all industry categories show positive returns during the lockdown period, with the chemical, technology, automotive, metals and mining, and food and beverage sectors generating higher returns.Overall, this study supports the notion that the Covid-19 pandemic had a heterogeneous effect on the Indian stock market, with varying impacts on different industries and over different lockdown periods.
9. MICROSTOCKS IN INDIAN STOCK MARKET
Balakrishnan, A., & Maiti, M. in this paper examines the performance of micro stocks in the Indian stock market, specifically focusing on whether these micro stocks exhibit any patterns of significant mean excess returns. The study also tests the effectiveness of two asset pricing models: the Capital Asset Pricing Model (CAPM) and a two-factor model (market and size) in explaining the average returns of portfolios formed based on company size. The empirical results reveal a strong size effect, particularly within the micro stock category, indicating that micro stocks tend to have notable differences in their returns. This size effect is consistently observed across various size measures, including total assets and enterprise value. Moreover, the study finds that the two-factor model (market and size) outperforms the CAPM in explaining stock returns. The two-factor model accounts for a more significant portion of the average returns on portfolios compared to the CAPM, indicating its superior ability to capture the variations in stock returns, especially in the context of micro stocks.
One limitation of this study is that it does not consider other size measures such as gross working capital, net working capital, and total sales. Overall, the research provides valuable insights for investors, fund managers, and financial analysts, suggesting that the two-factor model may offer a better framework for understanding and predicting average returns in the Indian micro stock market.
10. EFFICIENCY OF INDIAN STOCK MARKET DURING THE COVID-19 PANDEMIC
Luniya, K., & Basarkar, M state that the purpose of this paper is to assess the market efficiency of Indian Stock Markets during the COVID-19 Pandemic, specifically testing for Weak Form Efficiency. Market efficiency is important for various market players to make informed investment decisions.
The study collected daily data for 10 indices over a period of 15 months from March 2020 to May 2021. Several tests, including the Runs test, Autocorrelation Functions, Correlograms, and Box Pierce test, were employed to evaluate market efficiency.
The findings suggest that Indian Stock Markets are not weak form efficient during the period under study. This implies that stock prices do not fully reflect available information and are mispriced, allowing opportunities for generating abnormal returns through technical analysis, trading rules, and fundamental analysis.
However, there are some limitations to the study, such as its focus on only 10 indices, a relatively short 15-month data period, and a lack of exploration into the causes of weak form inefficiency and behavioural aspects.
In conclusion, the study reaffirms that Indian Stock Markets were not weak form efficient during the COVID-19 Pandemic, indicating that prices were not entirely reflective of all available information. This can be beneficial for investors who can use various strategies to take advantage of the market’s inefficiency and generate abnormal returns
CONCLUSION:
Summarising, A series of studies examined various aspects of the Indian stock market. One study investigated the integration of the Indian stock market with global and regional markets, finding stronger integration with the US and the UK compared to Singapore and Hong Kong. Another study highlighted the stock market bubble of 2021, driven by factors like foreign institutional investments, fiscal stimulus, and low-interest rates, raising concerns of a potential market crash. A separate study focused on stock market index development in India, emphasising the importance of understanding and interpreting indices. The impact of the global financial crisis on the Indian stock market was also explored, revealing both short-term and long-term influences from developed markets. Another study assessed the interlinkages between the Indian stock market and international markets, finding evidence of cointegration and volatility. The impact of exchange rate fluctuations on Indian stock market indices was examined, with results indicating a weak relationship. Additionally, the influence of exchange rates and inflation on Indian stock market returns was explored, highlighting long-term relationships and their significance. The COVID-19 pandemic’s effect on stock returns was found to be heterogeneous across different industries. Microstocks in the Indian market exhibited notable variations and were better explained by a two-factor model. Finally, market efficiency during the pandemic period was evaluated, revealing that Indian stock markets were not weak form efficient, suggesting opportunities for generating abnormal returns through various strategies.
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