STOCK MARKET VOLATILITY AND ITS IMPACT ON ECONOMY

(Submitted in partial fulfillment of the requirements for PGDM)

BY

SHUBHAM SHUKLA DM1214181 BATCH OF 2012-14

ACCURATE INSTITUTE OF MANAGEMENT & TECHNOLOGY, PLOT NO 49, Knowledge Park 3, GREATER NOIDA-201306 (UP) August 2013

TO WHOM IT MAY CONCERN

This is to certify that Mr. Shubham Shukla student of PGDM of Accurate Institute of Management & Technology , Greater Noida, has undertaken the project titled

STOCK MARKET VOLATILITY AND ITS IMPACT ON INDIAN ECONOMY at Axis

Capital from 10th june to 10th of August and has completed the project successfully. I wish him a success in all his future career endeavors.

Industry Guide Name: Varun Kumar Designation: H.R & T.L Organizations Seal ___________________ Signature with Date

CERTIFICATE OF ORIGINALITY 2 3

I Roll No of 2013,is a fulltime bonafide student of first year of PGDM Program of Accurate Institute of Management & Technology, Greater Noida. I hereby certify that this project work carried out by me at Axis Capital the report submitted in partial fulfillment of the requirements of the program is an original work of mine under the guidance of the industry mentor and the faculty mentor s and is not based or reproduced from any existing work of any other person or on any earlier work undertaken at any other time or for any other purpose, and has not been submitted anywhere else at any time

5 6 7 8 9 (Student's Signature) 10 Date: August, 2013 11 12 13 14 15 (Faculty Mentor's Signature) 16 Date: August, 2013

ACKNOWLEDGEMENT

I express my sincere respect to Varun Kumar H.R and Team Leader of Axis Capital Dematerialized Account department , for his valuable guidance , suggestion and encouragement for fulfillment of my project. I would like to express my gratitude to Accurate Institute Management & Technolpgy, for providing me this opportunity where I could learn and experience a lot of things that will benefit me in the future. I would like to thank my respected faculty guide, Prof. Pradeep Verma for providing me the opportunity to prepare a report which has helped me in developing my Knowledge and for his kind guidance and constant support while developing the report without whose guidance the report would not have taken the shape.

Executive Summary With globalization, India has been coming in contact with other economies and all economies when come together; they are called as global market. Not only one economy gets benefit of the opportunities that it may foresee but also get affected when there are changes in other economy. There are variations in the Indian economy as well which is due to various factors such as sub prime lending, FII taking their money back to their countries, change in inflation rate etc. Due to such factors, the prices of the stocks have been fluctuating and as a result there are too many fluctuations or variations in Indian stock market. Wide price fluctuations are a daily occurrence on worlds stock markets as investors react to economy, business and political events. Of late, the markets have been showing extremely erratic movements, which are in no way tandem to the information being fed to the markets. This chaos prevails in the markets with investor optimism at unexpected levels and they have been losing their money due to this. Irrational exuberance has substituted financial prudence. The stock market was at 21000 mark and has crashed down to 9000 mark in recent times and is still struggling to manage and find the stabilizing hold. This has affected the Indian economy as well and various sectors have been badly hit and the demand for goods and services has reduced. The project firstly involves the introduction of Indian economy, stock market and its variations. Then it is followed by the market research in order to find out whether there is any impact of such variations on the Indian economy. The research is conducted in order to find out the sentiments of investors based on the demographic pattern as well as their habit change of investors. The analysis is done on the basis of the data collected and suggestions are made thereof. This will help not only in understanding the movement of stock market but also help in finding to what extent has the Indian economy been affected and what policies have been implemented by the government and the central bank of India, RBI to stabilize the economy. And what should be done in the hour of crisis so as to revive back from the current situation. It will help not only the investors but the market regulators as well to make the markets more efficient.

CONTENTS

S.No.

Chapter Name

Page No.

1 2 3 4 5 References Annexure

Introduction Literature Review Research Methodology Data Findings & Analysis Suggestions & Conclusion

7 16 19 22 62 67 68

INTRODUCTION
Introduction There was a time when India was treated as the land of snake charmers, black magic and epidemics but the revolutionary Indian growth story changed everything. Indian economy at its height compelled the world to change its viewpoint towards India. Now India is considered to be one of the strongest economies not only in Asia but around the world too. Its GDP has been growing on a steady rate. All the sectors, be it manufacturing or industrial sectors have been doing a great job. The exports of our country have risen phenomenally. Out of the several factors which changed the face of modern India; we are going to discuss the most thriving of them i.e. our share market. The earlier reform procedures adopted by India gave India the two most sought after world-class brands i.e. SENSEX and NIFTY. So to analyze the saga of Indian share market, we had two indices to follow: BSE sensex and NSE nifty and we call BSE sensex as the barometer of our economy. Thats why we have followed the BSE sensex. The magical figures displayed by our market turned all the heads on India. And India became one of the most favored places for investment. Indian economy is increasingly exposed to global markets post liberalization in early 90s. As a result we have seen large fund inflows into Indian market from across the world. Most of these foreign funds are large momentum players and their activity in the market results in large volatility in stock markets. Investment decisions of these funds are driven and depend on the development in foreign markets, or their own local markets. As a result, we are seeing our markets are getting more and more integrated with movement in global, especially American, stock markets. Market analysts track these global events and global market movements very closely. So the volatility in US and other economies have badly affected our economy. In the current scenario, we are dealing with the ups and downs in the share market. It has trembled down tremendously which was really not expected. We saw the investors getting overjoyed at 21000 and we saw them crying too when it crashed. They have lost all their money and are running into losses. We saw how the market rewarded the undervalued shares and how
7

the overvalued shares fell down to demonstrate the saying everything which rise more than expected, has to fall. Now the stock market is hovering around 9000 and all the sectors of our economy are suffering specially the manufacturing and financial sector and exports have fallen down. Moreover the stock prices of all the companies have fallen down. The project is aimed at understanding the stock market and its functioning in a descriptive manner. Since there is a global financial crisis, there variations or we can say there is volatility in the stock market and the money of the investors at large is at risk. It really makes it imperative to find out the reasons as to why there is volatility i.e. what really affects the stock market and what are the factors which can help the stock market stabilize. In the project, we will understand Indian economy, stock market, its variations and its aftereffects. We will not only understand about the stock market but will also find out its trend for over a period of 3 years to find out what changes have occurred and what have been the repercussions of the volatility of the stock market. Also, we will try to find out whether the Indian economy is affected by the stock market volatility and what its effect on the economy is. The main objective is to understand about stock market and its trend so as to ascertain what effects that imposes on the Indian economy and by what extent. Stock Market A stock market, or equity market, is a private or public market for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately. The world derivative market size in 2013 $1.2 quadrillion is the socalled notional value of the worldwide derivatives market . To put that in perspective, the worlds annual gross domestic product is between $50 trillion and $60 trillion Participants in the stock market range from small individual stock investors to large

hedge fund traders, who can be based anywhere. Their orders usually end up with a professional at a stock exchange, who executes the order. The purpose of a stock exchange is to facilitate the exchange of securities between buyers and sellers, thus providing a marketplace (virtual or real). The exchanges provide real-time trading information on the listed securities, facilitating price discovery.

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. The stock market is often considered the primary indicator of a country's economic strength and development. 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 security. This eliminates the risk to an individual buyer or seller that the counterparty 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. Stock prices fluctuate widely, in contrast to the stability of (government insured) bank deposits or bonds which makes an individual to possess an ability to manage to risks associated. This is something that could affect not only the individual investor or household, but also the economy on a large scale. Therefore, the risk and return factor holds a key point in ones decision for investment in the stock market.

Success factors, challenges and opportunities in each market: It has also become apparent that each exchange has experienced a unique mixture of success factors and challenges, and faces different opportunities for future growth: Educational emphasis: The education of market participants has been a critical ingredient powering an exchange's growth trajectory. As the senior personnel of one participating exchange have stated, it is important to take a "free of charge, anywhere at any time" approach. Education is key not just to increasing usage from a wider range of participants, but is also important in ensuring the sustainability of increased participation through responsible user behavior grounded in a thorough understanding of how the markets can work for mutual gain to hedgers, speculators and arbitrageurs alike. Infrastructural challenge: There is a contrast between those markets which have developed in situations where good physical infrastructure is in place and those which have operated in suboptimal conditions (India in particular). In the case of the latter, but also even to a certain extent
9

in the former, the exchange has shown itself to be a catalyst for rapidly stimulating the condition of the enabling infrastructure in which the market functions. Political environment: The political-regulatory environment in which an exchange operates has a large bearing on the range of impacts that it can offer. The government has an important enabling role to play, through the regulatory framework, the wider legal-economic environment and the physical infrastructure. Government can further boost the markets by directly using them for its own agricultural policy interventions or being committed to upholding the integrity of the exchange pricing mechanism Government can also impose a tight set of political and regulatory restrictions which constrain an exchange's potential scope for impact. Whilst this may be necessary and beneficial, it may also on occasion yield sub-optimal or even adverse consequences for an exchange looking to increase its utility to the underlying commodity sector. Indian stock market Indian stock market is a marketplace like other stock markets where the securities can be exchanged between the buyers and sellers. It is a volatile market where the shares of the companies are subjected to changes at any point of time. The major stock indices used in the Indian Stock Market Analysis are NSE S&P CNX Nifty 50 index, BSE SENSEX, and others. From an analysis of the share market of India, investors and traders can decide whether the market is a Bull Market or a Bear Market before investing on the shares of their desired companies. There are about 22 stock exchanges in India which regulates the market trends of different stocks. Generally the bigger companies are listed with the NSE and the BSE, but there is the OTCEI or the Over the Counter Exchange of India, which lists the medium and small sized companies. There is the SEBI or the Securities and Exchange Board of India which supervises the functioning of the stock markets in India. Other than some restricted industries, foreign investment in general enjoys a majority share in the Indian stock market. Foreign Institutional Investors (FII) need to register themselves with the SEBI and the RBI for operating in stock exchanges of India. In the Asset Management Companies and Merchant Banking Companies also foreign investments are welcomed. In fact

10

from the Indian Stock Market Analysis it is known that in some specific industries foreigners can have even 100% shares. They can invest in Euro issues of the Indian companies and also in the Indian funds that is floated abroad. In the last few years with the facility of the Online Stock Market Trading in India, it has been very convenient for the FIIs to trade in the Indian stock market. Reliance Money, Geojit, Sharekhan, Kotak Securities, ICICI Direct are some of them. From an Indian Stock Market Analysis it can be said that the increase in the foreign investments over the years no doubt have accentuated the dynamism of the Indian stock market. Indian Stock Market Analysis is about the correct measurement of the trends of various stocks of the leading companies topping the BSE and NSE stock charts. The Indian Stock Market Analysis reports the most heavyweight company to be the Reliance Industries, followed by, the IT majors like Wipro, Infosys Technologies, Tata Consultancy Services etc. In India, market efficiency has an influence on the investment strategy of an investor because if market is efficient, trying to pickup winners will be a waste of time. In an efficient market there will be no undervalued securities offering higher than deserved expected returns, given their risk. On the other hand if markets are not efficient, excess returns can be made by correctly picking the winners.

Monthly turnover at BSE This shows that the people associated with the stock market like investors, brokers etc earn good amount provided the market is going good in the upward direction. It can be seen that in both BSE and NSE the income keeps fluctuating but there are chances of making profits as well. Stock Market Variations Variations is an inherent part of stock market investing which indicates there are wide fluctuations in the market and investors need to keep in mind that market gyrations tend to be

11

more pronounced over the short term. Increased or variations over the near term could be due to a plethora of factors liquidity, earnings expectations, speculation, etc. A stock market variation is an important concept for understanding the investors' responsiveness, and thereby it facilitates to work on investment strategy. If it is not considered while taking investment decisions, it may prove fatal for the investors as they may loose all their savings and run into losses. The stock market variations and volatility in the market reached nauseating levels in 2012. As it is said that everything that goes up eventually goes down -- especially in the stock market, where investors throughout the world recently saw their portfolios suffer a major blow after registering strong performances for several months. The appetite for risk that players in the market had acquired in a risk-free environment wound up leading to indigestion because of uncertainties created largely in the United States, China and Japan. It is believed that these shocks have given investors a chance to take some profits after enjoying a period of continuous price increases. They also contend that the recent plunge is merely a healthy correction, and that the market will once again provide attractive opportunities. It is seen that the volatility and the change in the market trend would be beneficial for the economy. The background for the current global volatility and variations lies in the fact that a majority of investors across the globe were hoping for a goldilocks economic scenario and this was reflected in historically low volatility levels as measured by various indices. History is replete with examples of such hubris leading to painful reality checks. As sub-prime mortgage problems in the US and fears of a sharp unwinding of yen carry-trade came to the fore, investor sentiment took a turn for the worse and global markets witnessed a synchronous sell off. While markets have bounced back after the correction, it is too early to rule out further volatility. The rise and fall of share prices depend on various market forces and the factors that affect stock markets have increased significantly over the last one decade due to globalization and technological advancements. Variations and volatility is treated as a synonym with risk. Volatility is an important consideration while computing risk, and hence the returns expectation from investments in the market. These are some market forces that directly or indirectly drive the stock market variations.
12

Global factors A major factor that is driving market volatility globally over the last few months is the US subprime crisis. Recently, the credit issues again triggered negative sentiments in the US market and the fear percolated down to markets worldwide. According to analysts, there is a growing concern that the depth of credit issues is still unknown and not quantified. Many leading financial services companies in the US have revised their top line forecasts downwards. There is a strong feeling in the market that the US economy will go through a recession phase in 2012. Since the US is the largest economy in the world, people are not clear about its impact on world economy and markets. The US dollar is weakening against all major currencies in the world. Crude oil prices have reached around USD 100 per barrel. This is another sentiment dampener in the global markets. Domestic factors Domestic markets have been the biggest out-performers as compared to other Asian markets. Even during the recent fall in global markets - most foreign markets have already corrected by 10 to 15 percent from their peaks - the domestic markets were still quoting around their peak levels. Foreign institutional investors (FII) have been net sellers in the last couple of weeks. Currently, it looks like FIIs are sitting on huge profits and are booking profits to reward their investors. The rupee has seen sharp appreciation of 12 percent in last one year or so. This has made exports uncompetitive with respect to other global competitors. Market announcements like SEBI's proposal on restriction of further investments through the participatory notes (PN) route created panic in domestic stock markets last month. The Sensex crashed heavily after this announcement, but later recovered after a clarification by SEBI. The stock markets are quoting at very high levels (the Sensex is around 19,000 and Nifty around 5,700). Even a one percent rise or fall shows up as a 200 point movement in the Sensex. Domestic Political Scenario

13

The political scenario has been volatile due to the coalition government. However, looking at the market trends over the last few years, the large market players are not very concerned with the political situation. The large investors believe in the long-term India growth story. The recent fall in the Indian markets has come about after a strong rally and in that sense, it was to be expected. Apart from the global factors, domestic developments such as sector-specific measures in the Union budget also had an impact on investor sentiment. Also weighing on the markets could be tightening liquidity as the Reserve Bank of India looks to stem inflation through various monetary measures and the rising risk premium due to the rising yields in the debt markets. Fundamental factors Macroeconomic stability there is volatility of GDP growth and whether there should be policies meant for stabilizing or destabilizing monetary policy or the fiscal policy. Competition on markets higher the competition means more uncertain earnings so there are chances of variations. Leverage of firms may also bring about variations. Indian firms that graduate into MNCs and crises such as currency crisis, political crises may occur. Factors internal to the securities markets Liquidity of the market whereby we should be able to absorb shocks to the order flow or securities trading issues: means there should be adequate supply of rational traders i.e. individuals, hedge funds, arbitrageurs. Crises such as payments crisis, scandal on the market, regulatory crackdown giving adverse shocks to liquidity may occur. Managing Variations
In order to contain excessive variations, the stock exchanges adopt various measures as part of their market surveillance mechanism. Historically, two measures have been taken specifically with the aim of reducing variations: banning badla in 1994 which did result in reduced volatility and banning short sales for a few days in 1992; this was a temporary measure as it was empirically observed that this did not destabilize volatility. Further, SEBI has been imposing volatility margins and concentration margins whenever volatility has been excessive. Apart form these measures; there are three important tools that are being widely used by most markets, including India, for managing market volatility.

Price Bands
14

Circuit Filters Trading Halts

Price bands: In India, the price limits were first introduced by NSE in 1995 and were subsequently enforced on all stock exchanges by SEBI. Initially, the price of any scrip was not allowed to move beyond 0% in a day and 25% in the weekly trading cycle. These were revised to 8% in a day and the weekly band was abolished. With effect form May 2002, SEBI has amended guidelines to allow for price movement in either direction to the extent of 16% in a day for select 200 scripts. Trading Halts: suspend trading in individual securities during normal market hours to allow for dissemination of information, news of an extraordinary corporate action, or in case of excess volatility. Circuit Filters: are a market wide approach to managing variations by stopping trading in the entire market during normal business hours. Generally, investor protection is the main concern behind imposition of the last two measures. The trading halts and circuit filters are mainly of two types: Information based halts that are used to release information to the investors, clarify rumours regarding a company, suspend trading in a security that has broken rules, or to communicate any other price sensitive information.

15

LITERATURE REVIEW
Literature R

eview:

This study investigates volatility in Indian stock markets. Specifically, it looks for the possible volatility transmission channel for Indian stock market from the Indian sectoral developments as well as developments in the global market. SENSEX is used as the Indian market index and its response to overseas market indices like Dow Jones, FTSE, BVSP, MerVal, JKSE; further the relationship between SENSEX and domestic sectoral indices have al

so been

explained.
In Past the following work has been done related to my project.
1.Economic Growth and Volatility in Indian Stock Market: A Critical Analysis by South Asian Journal of Management Stock market volatility is an important concept for understanding the investors' responsiveness, and thereby it facilitates to work on investment strategy. This paper examines the volatility in Indian stock market of daily and monthly return for the period from January 1996 to December
16

2011 with three different points of views - volatility of daily return in a year, volatility of daily return in a month, and volatility of monthly return in a year with respect to economic growth. For the analysis, adjusted opening and closing price of the Bombay Stock Exchange listed index BSE 100 have been examined. The study period exhibits a mixed set of economic environment and gives an inside view of Indian economy. 2.Understanding Stock Market Volatility by Sam Hopkins This paper helps us understand market volatility and how its measured and looks at beta which is an individual stock volatility stat. It helps us use it to determine the effects of stock market volatility in the market. Also it explains the measures that should be taken so as to combat the volatility present in the economy.

3.Measuring Stock Market Volatility in an Emerging Economy by International Research Journal of Finance and Economics It is seen that volatility of returns in financial markets can be a major stumbling block for attracting investment in small developing economies. In this study, Autoregressive Conditional Heteroskedasticity (ARCH) models and its extension, the Generalized ARCH model was used to find out the presence of the stock market volatility on Fijis stock market. The analysis was done using a time series data for the period 2001-2011 on specific firms and found out that seven out of the sixteen firms listed on Fijis stock market is volatile. The volatility of stock returns then regresses against the interest rates and the results shows that the interest rates changes have a significant effect on stock market volatility. Using a priori theory and knowledge, the impact of factors like government regulations, low levels of liquidity on volatility are also derived.

4.Stock Market Volatility in US Bull and Bear Markets, Journal of Money, Investment and Banking

17

In this paper we test whether the stock market volatility presents a different behavior in bull and bear phases. Using long range dependence techniques we estimate the order of integration in the squared returns in the US stock market (S&P 500) over the sample period August, 1928 to December, 2012. The results suggest that squared returns present long memory behavior. In general, the estimates of d are above 0 and below 0.5 implying long memory stationary for the volatility processes. The results also show that in many cases the volatility is more persistent in the bear market than in the bull market. 5.Macroeconomic Volatility and Stock Market Volatility, World-Wide The paper says that notwithstanding its impressive contributions to empirical financial economics, there remains a significant gap in the volatility literature, namely its relative neglect of the connection between macroeconomic fundamentals and asset return volatility. We progress by analyzing a broad international cross section of stock markets. We find a clear link between macroeconomic fundamentals and stock market volatilities, with volatile fundamentals translating into volatile stock markets. 6.Analyzing stock market volatility using extreme-day measures in Journal of Financial Research This paper talks about development of a simple measure of volatility based on extreme-day returns and apply it to market returns from 1885 to 2002. Because returns are not normally distributed, the extreme-day measure, which is distribution free, might provide a better measure of stock market risk than the traditional standard deviation. The extreme-day measure more accurately explains investor behavior relative to standard deviation as shown by equity fund flows, and we find evidence that large negative changes appear to influence investor behavior more than large positive changes. 7. Breaks and Persistency: Macroeconomic Causes of Stock Market Volatility, Journal of Econometrics. In the paper we study the relationship between macroeconomic and stock market volatility, using S&P 500 data for the period 1970-2001. We find evidence of a twofold linkage between stock market and macroeconomic volatility. Firstly, the break process in the volatility of stock returns is associated with the break process in the volatility of the Federal funds rate and M1 growth.
18

Secondly, two common long memory factors, mainly associated with output and inflation volatility, drive the break-free volatility series. While stock market volatility also affects macroeconomic volatility, the causality direction is stronger from macroeconomic to stock market volatility.

Research Problem
Research Problem: 1.The prices of stocks of various companies have fallen down. 2.The investors have been losing their investments and the companies are not able to raise funds from the market which is making their capacity utilization as well as expansion plans on hold. Moreover the banks have become strict with giving out of loans. 3. The economy has been badly hit so with this topic, I will be able be able to get new insights about various policies introduced to fight the situation and this research may help the investors and the market regulators to make market more proficient. The objectives of the research are: 1. To understand the volatility of stock market of India. 2. To Analyze the trend of Indian stock market.

3. To study the effect of the variations of the stock market on the Indian economy. RESEARCH METHODOLOGY DATA COLLECTION

19

The data has been collected from Primary and Secondary research which help in the analysis for the completion of the research. PRIMARY RESEARCH QUESTIONNAIRE DEVELOPMENT A well-structured questionnaire was developed after an extensive review of stock market and its volatility literatures. Questionnaire was designed in the simple and easy English language in order to make the respondents who were mainly investors understands the questions clearly. The scales used for making the questions are nominal as well as interval scale. TOOLS FOR PRIMARY DATA COLLECTION The tools for primary data collection were the Questionnaires. Questionnaires were prepared to capture the sentiments of the investor respondents. The questionnaire was designed in such a way that it identifies the demographic pattern of the investors as well as find out the habit change of the investors. The analysis was done in respect of considerations of their risk return factor as well as their preference of investment in current situation where prices of stocks are fluctuating. TOOLS FOR THE SECONDARY DATA COLLECTION The secondary data were collected with the help of information through various websites, searching the materials online, taking the data from the news articles from various books, newspapers and magazines or referring to some research works in journals and encyclopedia. The work was carried for the optimum utilization of the available sources from various articles on Indian economy, stock market and its volatility. SAMPLING DESIGN SAMPLING FRAME- Delhi/NCR SAMPLING UNITS- Who ever invests in the stock market SAMPLING TECHNIQUESSAMPLING SIZE- 100 investors Probability sampling (simple random sampling) and Non-Probability Sampling (convenience sampling)

20

DATA ANALYSIS The responses of the respondents were codified and checked for the consistency of the codification. The data analysis was carried on by using the excel and SPSS. The data was represented graphically or in tabular form wherever thought to be appropriate. The interpretations of the graphs were carried to figure out the result.

TYPE OF RESEACH The research is mainly descriptive research. It includes a questionnaire survey and it is a fact finding survey where by the focus is on finding the sentiments of investors and their investment pattern in current situation.

21

DATA FINDINGS AND ANALYSIS

Data Analysis Result of Primary Research Questionnaire Analysis

The majority of the respondents that were surveyed were from the age group 20-30 years i.e. about 36%. There were 26% respondents from the 30-40 years age group and 20% each from the age group 40-50 years and 50 & above years. Duration of the investment of the respondents

The graph shows that the majority of the age group 20-30 years has been
22

investing for a short duration than other age groups. About 18% of the age group 20-30 years has been investing for a period of up to 3 years. Both age group 20-30 years and 30-40 years did not invest in for more than a period of 9 years. About 12 % of the age group 30-40 invested for a period of 6-9 years. The age group 40-50 years and 50& above years have been investing for a longer period of time i.e. more than 6 years. Change of purchase decision for investment age wise in recent times
age
20-30 30-40 40-50 50 and above

100.0%

80.0%

Percent

60.0%

40.0%

20.0%

0.0% yes no

purchase decision

This shows that the purchase decisions of most of the respondents regarding their investments have changed recently. More than 90% of the respondents of the age group 50 & above years believe that their investments decisions have changed in recent times. About 70% and 56% of the age group 30-40 years and 20-30 years respectively agree that their investments decisions have changed recently whereas about 50% of the age group 40-50 years thinks that there decisions have not changed.

23

Preference for product of investment by different age groups

This graph shows that about 60% of the respondents of the age group 40-50 would like to invest in shares even in the current times and say that there investment decisions have not changed. The majority of the respondents of the age groups 20-30 years and 30-40 years believe that there investment decision has changed and would like to invest in fixed deposits. The age group 50 & above years would like to play safe so they would like to invest in fixed deposits and bonds as well.

Preference for taking risk age wise

24

80.0%

age
20-30 30-40 40-50 50 and above

60.0%

Percent

40.0%

20.0%

0.0% yes no

preference for risk

The graph depicts that the majority of respondents of all the age groups would not like to take risk in the current scenario. They would either invest in safe products such as fixed deposits, bonds etc or would like to retain cash in their portfolio than invest in shares and other risk bearing products. About 60% of the age group 50 & above years said that they would not like to take risk while making investments. About 70% of the age group 30-40 years agreed to it that they will not like to take risk. The age group 20-30 years was willing to take risk and about 50% of the respondents of this age group were willing to take risk and invest in such products in the current scenario. Even the age group 40-50 years agreed to it and the majority of this age group i.e. about 60% was willing to take risk and said they would like to invest in risk bearing instruments as there investment decision have not changed in the current times.

Change of saving pattern by different age groups in current scenario

25

100.0%

age
20-30 30-40 40-50 50 and above

80.0%

Percent

60.0%

40.0%

20.0%

0.0% yes no

change in saving

This graph shows that almost all the respondents echoed that there saving pattern have changed in recent times. About 85% of the respondents of the age group 30-40 years said that there savings have changed and they would rather retain cash and save money rather than making investments in the market. The age group 40-50 years followed them and about 80% of the respondents said that there savings have increased. About 45% respondents of the 20-30 age group said that they will not like to change their saving pattern and will continue to invest in the stock market. About 30% of the age group 50& above years said that their savings have also not changed as they have been investing in safer products like FD, bonds etc.

Saving preference by different age groups out of income of Rs.100

26

40.0%

age
20-30 30-40 40-50 50 and above

30.0%

Percent

20.0%

10.0%

0.0% up to 15 15-30 30-45 45 and above

savings

When asked about the preference of people for saving what amount of money out of income of Rs. 100, 30% of the people from age group 20-30 said that they will save Rs.45 and above whereas about 25% people from the same age group said that they will save up to Rs 15 only. People from age group 40-50 i.e. about 40% said they will save only up to Rs. 15 only whereas 30% people of the same age group said they will save more than Rs.45. About 30% respondents of the age group 30-40 years said that they save Rs.30-45 and 30% said they will save more than Rs.45. About 40% from the age group 50& above years said that they will save up Rs. 30-45 and invest rest of the money in safe and risk free products of investment.

Preference of equity percentage in current portfolio

27

60.0%

age
20-30 30-40 40-50 50 and above

50.0%

40.0%

Percent

30.0%

20.0%

10.0%

0.0% up to 20% 20-40% 40-60% 60 and above

equity

When asked what percentage of equity will the people hold in their portfolio, about 50% of both age groups 40-50 years and 50& above years said that they will keep a risk free portfolio as far as possible and would keep equity up to 20% only. The people from age group 20-30 years i.e. about 52% think that they would like to keep about 20-40% equity in their portfolio and about 7% said that they will like to hold equity of about 60% and above of their portfolio. The age group 30-40 years respondents i.e. about 40% were bold enough to say that they would like to hold 40-60% of equity in their portfolio in the current times. But about 38% of the people from the same group were cautious and said that they will hold equity in the least percentage possible i.e. up to 20%.

Preference of different age groups for retaining cash

28

age
20-30 30-40 40-50 50 and above

60.0%

Percent

40.0%

20.0%

0.0% yes no

retain in cash

When asked if they will keep more cash in their current portfolio, about 70% of the respondents of age group 40-50 years said that they will not keep more cash in their portfolio and would like to be cautious investors while investing in the market. About 65% of the respondents of the age group 20-30 years said that they will like to retain more cash in their current portfolio. About 60% of the people from the age group 30-40 years also agreed and said that they will like to retain cash in their portfolio so as to be on the safe side in the volatile and uncertain market. About 60% of the people from the age group 50& above years also said that they will invest some part of the money in products like FD and keep the major part of their portfolio as cash so that they do not lose any money in the volatile market in current scenario.

Change in net worth of investors of different age groups

29

80.0%

age
20-30 30-40 40-50 50 and above

60.0%

Percent

40.0%

20.0%

0.0% yes no

net worth

When asked whether volatility had affected their net worth, about 78% of the respondents from age group 30-40 said that there net worth has been affected and have lost their money in the current market situation. About 50% of the people of the age group 50& above years said that their net worth has also been affected since the interest rates have been fluctuating of late. 55% people of the age group 20-30 years said that there net worth has not been affected as they have been investing cautiously. About 60% of the respondents from the age group 40-50 years have also been affected by the changes in prices of various stocks and commodities that they have been investing in but the rest of them feel that there net worth is not affected and they will continue to invest in the market.

30

Rate of return expected __ When asked about the rate of return the respondents expect from their current investments, 30% from all the age groups echoed that they expect up to 10% return in the current scenario as most of them believed that their net worth has been reduced. About 50% from the age group 50& above years and 30% from the age group 30-40 years declared that they are expecting about 2030% rate of return on their investments since they have been investing in safer products of investment. 42% of the age group 20-30 years and 23% of the age group 30-40 years was confident that they will be earning about 30-40% rate of return on their decent decisions about their investments. As the age group 40-50 years thought of investing money rather than holding it have high expectations as far as the rate of return is concerned as about 30% of the same age group think that they will be getting 40% and above return on their investments. Safety of Investments in current scenario

31

80.0%

age
20-30 30-40 40-50 50 and above

60.0%

Percent

40.0%

20.0%

0.0% yes no

safe to invest

The majority of respondents of age group 20-30 years i.e. about 70% pronounced that it is safe to invest in the market but the only thing that has to be taken into account is that money should be invested cautiously with proper study of the market and the company of which an individual is buying shares. But about 40% of both the age groups i.e. 30-40 years and 40-50 years believe that recession is the best time to invest as the prices are low and once the market recovers, they will gain profits. About 70% of the people from the age group 50& above years said that it is not the time to invest in the market or rather invest in some fixed tenure and interest rate products like FD. People from both age groups namely 30-40 years and 40-50 years also believed that it is not safe to invest in the market at this time.

Reasons for Variations for different age groups

32

50.0%

age
20-30 30-40 40-50 50 and above

40.0%

Percent

30.0%

20.0%

10.0%

0.0% global recession FII regulations others

reasons of volatility

Most of the respondents held global recession responsible for the wide fluctuations in the economy. About 45%, 41%, 40% of the age group 30-40 years, 20-30 years and 50& above years respectively confirmed that it is due to global recession that the Indian economy has been facing such wide fluctuations. About 40% of the age group 40-50 years declared that it is due to the FIIs that the economy has been suffering. About 30% of the respondents of the age group 50& above years said that it is due to other factors like oil prices, shortage of demand etc that is responsible for the variations experienced by the Indian economy. About 25% and 20% of the age group 20-30 years and 50& above years believe that is due to the regulations introduced by the government as well as by RBI that has affected our economy.

33

Result of Secondary Research Trend of Indian stock market Year 2012 at a glance In the secondary market, the uptrend continued in 2012-12 with BSE indices closing above 14000(14,015) for the first time on January 3, 2012. After a somewhat dull first half conditions on the bourses turned buoyant during the later part of the year with large inflows from Foreign Institutional Investors (FIIs) and larger participation of domestic investors. During 2012, on a point-to-point basis, Sensex rose by 46.7%. The pickup in the stock indices could be attributed to impressive growth in the profitability of Indian corporate, overall higher growth in the economy, and other global factors such as continuation of relatively soft interest rates and fall in the international crude prices. BSE Sensex (top 30stocks) which was 9,398 at end-December 2012 and 10,399 at end-May 2012, after dropping to 8,929 on June 14, 2012, stabilized soon thereafter to rise steadily to 13787 by end-December 2012. According to the number of transactions, NSE continued to occupy the third position among the worlds biggest exchanges in 2012, as in the previous three years. BSE occupied the sixth position in 2012, slipping one position from 2011. In terms of listed companies, the BSE ranks first in the world. In terms of volatility of weekly returns, uncertainties as depicted by Indian indices were higher than those in outside India such as S&P 500 of United States of America and Kospi of South Korea. The Indian indices recorded higher volatility on weekly returns during the two-year period. January 2011 to December 2012 as compared to January 2004 to December 2011 The market valuation of Indian stocks at the end of December 2012, with the Sensex trading at a P/E multiple of 22.76 and S&P CNX Nifty at 21.26, was higher than those in most emerging markets of Asia, e.g. South Korea, Thailand, Malaysia and Taiwan; and was the second highest among emerging markets. The better valuation could be on account of the good fundamentals and expected future growth in earnings of Indian corporate
34

Liquidity, which serves as a fuel for the price discovery process, is one of the main criteria sought by the investor while investing in the stock market. Market forces of demand and supply determine the price of any security at any point of time. Impact cost quantifies the impact of a small change in such forces on prices. Higher the liquidity, lower the impact cost will be.

An overview of year 2012 During December 2011, the greatest demerger of Indian history between the Ambanis paved the way for 9000. And the sensex entered the year 2012 with a 9000 + figure on Feb. 10 th 2012, we saw two roaring figures, both sensex and sachin tendulkar crossing 10000 mark. But the reason behind roaring sensex was not Sachins records in cricket rather it was rallied by strong FII inflows and robust data. The government forecasted a GDP growth of 8.1% in current year, with manufacturing and the agriculture sectors estimated to grow at 9.4% and 2.3% respectively. The 238-point rally was contrary to expectations as it came despite negative news flow about a fresh tussle between Ambani brothers over transfer of ownership of the four companies demerged from erstwhile RIL. Sensexs surge to 11000 points on 21 st march 2012 was prompted by PM Manmohan Singhs announcements on Capital Account Convertibility. On Saturday, Prime Minister Manmohan Singh hinted at moving toward a free float of the rupee and on Tuesday, the BSE responded by crossing the 11,000 mark in a lifetime intraday high. The new trading high was reached 29 days after Sensex entered the elite 10,000 club on February 6. Only Nikkei, Hang Seng and Dow
35

Jones could boast of being above 10,000 at that time. Since full convertibility was expected to attract more foreign money and also allow local companies to tap foreign debt markets more easily, it was evident that the move will encourage investors and boost the confidence of the markets. RBI said it constituted a panel to thrash out the contours for full convertibility. Although the index later ended lower with investors wanting to book gains, participants said it was evident the markets had sent out a message - that the growth story of Asias third largest economy is intact and that liquidity flows into the bourses would continue to remain firm.

After hitting a high of 11,017.25 points in mid-afternoon trade, Sensex lost 35.91 points to close at 10,905.20, fluctuating 153 points, with most of the volatility coming in the last hour of trading. The rise in share prices was partly attributed to a fall in oil price. The US April crude oil prices plunged 3.7% or $2.35, to settle at $60.42 a barrel, on the New York Mercantile Exchange due to ample US inventories.

After falling by 307 points on 12 th April 2012 on account of Heavy selling by FIIs in both cash and futures markets and a move by stock exchanges to raise margins on share transactions by about 250 basis points, the 131-year-old BSE on Thursday, April 20, 2012 crossed yet another milestone when it breached the 12,000-point mark, backed by strong corporate earnings, higher liquidity and robust economic growth. The index was being driven by the strong flow of liquidity. Earlier, it was based on the expectations that (corporate) results would be great...and by the first few companies were more than matching those expectations. Although, Sensex was beaten to the 12,000 mark by various global indices, the time it took to breach this milestone has been one of the fastest. Traders point to the fact that foreign investors, buoyed by a booming economy, have chosen India as one of their top investment destinations. Now, everything was going fine. Perhaps it was the lull before the storm. Suddenly the Dalal Street experienced its worst single day crash on Thursday, 18th may 2012 as an ambiguous Government circular on taxing investment gains prompted foreign funds to book profits, knocking the bottom off the jittery stock market. Opening amidst weak global markets and reports of rising US interest rates, the BSE-30 Sensex went on to close 826.38. However the Dealers said the fall was accentuated by large-scale selling of client positions by broking firms
36

due to margin calls or the lack of margins. The May crash saw the Sensex shedding its market capitalization by as much as 14% in just one month. Benchmark stock indices vaulted to new highs on Monday, Oct 30 th 2012 driven by a heady cocktail of strong corporate earnings, a rapidly growing economy and relatively stable crude oil prices. The Sensex ended at its highest closing level of 13024.26, a gain of 117.45 points or 0.9%. Marauding bulls defied the weak trend globally, which was sparked off by weak US GDP growth figure, pointing to a slowdown.

Back home, the mood was upbeat even as some expect that the RBI may raise interest rates by 25 basis points in its mid-term credit policy on Tuesday. Market watchers said sentiment could be affected only if the hike is more than 25 basis points, which is unlikely. Higher interest rates drive up borrowing costs for corporate as well as the retail consumer, who could then cut back on their investments and spending, in turn causing a slack in domestic demand. The benchmark 30-share sensex briefly crossed the psychological 14,000-mark on Tuesday, December 5, 2012. While foreign institutional investors have been aggressive buying stocks over the past few months, the response of domestic mutual funds has been guarded. In the last two months alone, FIIs bought net stocks worth Rs 17,001 crore while local mutual funds have pumped in a net Rs 638.07 crore. Year 2012 at a glance In the secondary market segment, the market activity expanded further during 2012-2012 with BSE and NSE indices scaling new peaks of 21,000 and 6,300, respectively, in January 2012. Although the indices showed some intermittent fluctuations, reflecting change in the market sentiments, the indices maintained their north-bound trend during the year. This could be attributed to the larger inflows from Foreign Institutional Investors (FIIs) and wider participation of domestic investors, particularly the institutional investors. During 2012, on a point-to-point basis, Sensex and Nifty Indices rose by 47.1 and 54.8 per cent, respectively. The buoyant conditions in the Indian bourses were aided by, among other things, India posting a relatively higher GDP growth amongst the emerging economies, continued uptrend in the profitability of

37

Indian corporate, persistence of difference in domestic and international levels of interest rates, impressive returns on equities and a strong Indian rupee on the back of larger capital inflows. The BSE Sensex (top 30 stocks) too echoed a similar trend to NSE nifty. The sell-off in Indian bourses in August 2012 could partly be attributed to the concerns on the possible fallout of the sub-prime crisis in the West. While the climb of BSE Sensex during 2012-2012 so far was the fastest ever, the journey of BSE Sensex from 18,000 to 19,000 mark was achieved in just four trading sessions during October 2012. It further crossed the 20,000 mark in December 2012 and 21,000 in an intra-day trading in January 2012. However, BSE and NSE indices declined subsequently reflecting concerns on global developments. BSE Sensex yielded a Compounded return of 36.5 per cent per year between 2002 and 2012. In terms of simple average, BSE Sensex has given an annual return of more than 40 per cent during the last three years. An overview of year 2012 After touching 14000 mark on December 5th 2012, sensex entered into 2012 with a promising figure of 14000+, though the year started on a rather tentative note with a marked slowdown being observed in the FII inflows into the country. The inflows received from FIIs in January and February 2012 was 48 per cent less than what was received during the same period in 2012. The return provided by the BSE Sensex for 2012 turned into negative territory following the 389point tumble on Friday, February 23 rd; the year-to-date return generated by the Sensex was negative 0.97 per cent.

38

FIIs have pressed substantial sales over those days in contrast to an intermittent surge in inflow in February 2012. As a result, the sensex which closed at 14201 on January 31st closed at 12938 on February 28th. As per provisional data FIIs were net sellers to the tune of Rs 613 crore on Friday 2 March, the day when Sensex had lost 273 points. Their net outflow was worth Rs 320120.80 crore in four trading sessions from 26 February to 1 March 2012. Market continued to reel under selling pressure on 5th march 2012 taking cue from weak global markets and heavy FII sales as a result of fall over 400 points, all the indices were in red. On April 24th, The Sensex again crossed the 14000 mark and was trading at 14,150.18 having gained 221.85 points or 1.59%. The midcap and smallcap indices were rather moving slow indicating that the actual movers are the large cap stocks but at the month end it finally closed at 13872. Further we can see May and June having month end figures at 14544 and 14651 respectively. The benchmark BSE 30-Share Sensitive Index (Sensex) breached the 15,000-mark, to reach a record high of 15007.22, for the first time intra-day on Friday, July 06 2012 before closing at 14964.12. Despite weak global cues, Indian stocks were in great demand, especially auto, pharma, IT and metals stocks. On Friday, this lifted the Bombay Stock Exchange's benchmark 30-share Sensex past the magical 15,000-mark. The Sensex took 146 sessions to cover the 1,000

39

point distance from 14,000 till 15,000. This is the highest since the index took 371 trading sessions to move up from 6,000 to 7,000. The sensex experienced its second bigger ever fall on 2nd august 2012. The fall came in after the Fed Reserve cut its discount interest rate at an emergency meeting and JPMorgan Chase agreed to buy Bear Stearns for USD 2 a share. Sensex closed down 951.03 points or 6.03% at 1482012.49, When FIIs were pumping money in stock market and were Net Buyers of Equity worth Crores; the Sensex was moving Up , Up and Up on weekly basis. Many thought that FIIs were playing blind in Indian stock market. But when FIIs have turned Net Sellers of Equity and have started booking profit backed by massive sell off of shares in global markets; Sensex has to go down. As expected; the Sensex plunged by 600 Points in early trading on 16th August and most of the shares were down by 4 to 5 per cent. But very soon the sensex surpassed the gloomy days and Stock markets on Wednesday, September 19th, 2012 gave thumbs up to the decision of the U.S. Fed Reserve to reduce the rates by 50 basis points, as the benchmark 30-share BSE Sensex moved up sharply by 653.63 points or 4.17 per cent at 16322.75. By staying well above the 16000-mark, it outperformed most Asian peers and it was the biggest single day gain. This trend shows that global cues had an influential effect on our market. On the auspicious occasion of Ganesh chaturathi, India experienced a flow of good news. The festive spirit did not end with the immersion of Ganapati. On Wednesday, it boiled over to the streets of Mumbai and its financial district, the Sensex touched the magical 17,000 number. It took Dalal Street just 5 days to travel 1,000 points. Suddenly, tech stocks, which were the whipping boys till Tuesday, became hot favourites. Why? Hopes that the rupee will soften as a result of RBI's latest announcements to allow more outflow sparked a rally in tech stocks, pushing the Sensex to a new high of 17,073.87 during the day. At the end of the day, RBI's measures may not be enough to rein in the rupee. But there were no takers for this. The bellwether index finally settled at 16,921.39. On October 9th, 2012, Sensex hits a record high of 18,280 on the back of eye-popping rallies in Reliance & Reliance. At the height of the dotcom mania in 1999-00, the easiest way to maximize
40

returns was to buy into any stock with the suffix Software or Technologies. Eight years on, the same seems to hold true for any stock with the prefix Reliance, given their baffling run-up over the past one month. Eye-popping rallies in Reliance Industries, Reliance Energy and Reliance Communications lifted the 30-share Sensex to a record high of 18,327.42 intra-days. On October 15th 2012, amidst heavy buying by investors, the bull roared to breach the 19000 mark in just 4 sessions Sensex was up by 639.63 points or 3.47 per cent at 19058.67. This rise came on the back of some strong sectors for which the macro picture is quite bright power, capital goods, infrastructure and telecom. Foreign Institutional Investors were pumping in huge money in the equity market and this too was pushing up the index. Since September, they nearly pumped in more than Rs. 30,000 crore in the cash market. After the U.S. Federal Reserve cut interest rates by 50 basis points, a rerating of the emerging markets had been seen wherein liquidity flows were quite robust. Then suddenly happened the second biggest crash the sensex ever experienced when the sensex crashed by 1743 points on 17th October 2012 within minutes of opening, prompting suspension of trade for hour fallout of regulator Sebi's move to curb Foreign Institutional Investors. In a knee-jerk reaction to the cap proposed by the market regulator for the Participatory Notes, an overseas derivative instrument (ODI), used by foreign institutional investors (FIIs), the stock market crashed by 1743 points in intra-day, but recovered substantially later to close with a loss of 336.04 points or 1.76 per cent at 18715.82. But it was followed by a huge one-day gain as on October 23 when the BSE barometer rose 878.85 points after market regulator SEBI allowed sub-accounts of Foreign Institutional Investors (FIIS) to trade It took the index a little over 20 years to reach the first 10,000 mark, but just a little over 20 months to double that score and the sensex made history with touching the 20000 mark on October 29 2012. Significantly, it was the local institutions that were in the drivers seat. As per BSE data, foreign funds have net sold over Rs 1,100 crore worth of shares over the last three trading sessions while local funds have net bought over Rs 2,300 crore worth of shares. Sceptics point to the fact that there were only a handful of stocks that was driving the market higher. On 13th November, BSE Sensex registered its biggest ever gain in a single of 893.58 points to settle at the third-highest level ever on buying by investors in bank counters and blue chip companies such as Reliance Industries. The market gain was because of global cues. Besides, the
41

political development also gelled well with the sentiment. The rally was driven by short covering, strong buying by domestic investors. However, there was not much involvement of foreign investors. But in December 2012, sensex again experienced a black Monday on 17th December. The market succumbed to profit booking, that came in due to weak global cues as well as profit booking by FIIs in the holiday season. The Sensex ended losing 769 points from the previous close, at 19,261. Sensex during year 2012 After scaling new heights of 20000+, sensex entered year 2012 with rosy pictures. The trade pundits, brokers and even investors predicted new heights for the year. And they felt their predictions coming true when sensex touched the 21000 mark on 8th January 2012. Its interesting if one sees in terms of flows; the journey from 20,000 to 21,000 is dominated by domestic institutional investors; FIIs were negative sellers, they sold in the cash market to the tune of USD 45 billion. So if one has to take out some pointers from this journey from 20,000 to 21,000, it is the longest journey which we have seen in the last 5,000 marks, the midcaps and smallcaps have been outperformers and in terms of flows, it has been domestic institutional investors which have been really putting the money. But the rosy picture soon turned gloomy. The skyrocketing sensex suddenly started heading south and Sensex saw the biggest absolute fall in history, shedding 2062 points intra-day. It closed at 17,605.35, down 142012.35 points or 7.4 per cent. It fell to a low of 16,951.50. The fall was triggered as a result of weakness in global markets, but the impact of the global rout was the biggest in India. The market tumbled on account of a broad based sell-off that emerged in global equity markets. Fears over the solvency of major Western banks rattled stocks in Asia and Europe. After the worst January in the last 20 years for Indian equities, February turned out to be a flat month with the BSE sensex down 0.4%. India finished the month as the second worst emerging market. The underperformance can partly be attributed to the fact that Indian markets outperformed global markets in the last two months of 2012and hence we were seeing the lagged impact of that outperformance. In the shorter term, developments in the US economy and US

42

markets continued to dominate investor sentiments globally and we saw volatility move up sharply across most markets. The Bombay Stock Exchange (BSE) Sensex fell 4.44 percent on Monday, 31 st march the last day of the financial quarter, to end the quarter of March down 22.9 percent, its biggest quarterly fall since the June 1992 quarter, as reports of rising inflation and global economic slowdown dampened market sentiments. Financial stocks led the Sensex slide along with IT. According to market analysts, IT stocks fell on worries about the health of the US economy. Indian IT firms depend on the US clients for a major share of their revenues. Year BSE 2012 Jan 17,648.71 Feb. Mar Apr May June July Aug Sep Oct Nov Dec 17,578.72 15,644.44 17,287.31 16,415.57 15,461.60 16,355.7 5 17,564.5 3 18,860.4 3 17,788.0 6 18,092.7 2 18,647.31

Reasons for the slowdown (Q1, FY 2011-12) The first month of the financial year 2011-12 proved to be a good one for investors with the month ending on a positive note. The BSE sensex showed a gain of 10.5% to close at 17287

43

points. A combination of firming global markets and technical factors like short covering were the main reasons for the up move in the markets. Though inflation touched a high of 7.57% against 6.68% in march 2012 as a result RBI hiked CRR by 50 bps to take the figure to 8%, still emergence of retail investors was also seen; a fact reinforced by the strong movement in the midcap and small- cap index that rose 16% and 18% respectively. So April was the last month to close positive. Then after that nobody saw a stable sensex even. Sometimes it surged by 600+ points, but very next day it plunged by some 800 odd points and this story is still continuing. Every prediction, every forecasting has failed. The sensex is dancing on the music of lifetime high inflation rates, historic crude prices, tightening RBI policies, weak industrial production data, political uncertainties and obviously the sentiments of domestic as well as FIIs. The only relief came in the form of weakening Indian rupees which enlightened the IT sector and most recently the UPA gaining vote of confidence. Presently it is revolving around the figures of 14000 and no one knows what next? The 30-share BSE Sensex fell 117.89 points or 0.67% at 17,373.01 on Tuesday, 6 May 2012. The key benchmark indices ended lower as investors resorted to profit booking due to lack of positive triggers in the market. On 30 th May an imminent hike in domestic retail fuel prices due to soaring crude oil prices weighed on the market last week. Foreign institutional investors sold close to Rs 2204 crore in the first three trading sessions of the week which accentuated the downfall. However better than expected Q4 gross domestic product figures provided some relief to the bourses on Friday. IT stocks gained on slipping rupee. BSE Sensex rose in two out of five trading sessions. In May, Indian inflation stood at 8.2%. The market declined sharply as a hike in fuel prices by about 10% announced by the Union government on Wednesday, 4 June 2012, triggered possibility of a surge in inflation to double digit level. The BSE Sensex declined 843.39 points or 5.14% to 15,572.18 in the week ended 6 June 2012. The S&P CNX Nifty fell 242.3 points or 4.97% to 4627.80 in the week. On 6 June 2012, local benchmark indices underperformed their global peers , hit by rumours that the Reserve Bank of India (RBI) may hike cash reserve ratio (CRR) or interest rate later in the day to tame runaway inflation. The 30-share BSE Sensex declined 197.54 points or 1.25% to settle at 15,572.18.

44

On 9th June 2012, Bombays Sensex index closed 506.2012 points down at 15,066.10, having earlier fallen 4.4% and slipped below 15,000 for the first time since March. Oil prices surged to record levels, fanning fears that they will keep climbing and hurt world growth. Central banks across the globe warned that interest rates may have to rise as they look to keep inflation under control, despite the fact that economic growth is slowing in key nations such as the US and UK. On the week ending 27th June 2012 Sensex declined 769.07 points or 5.28% to 13,802.22. The S&P CNX Nifty lost 210.90 points or 4.85% to 4136.65 in the week. Equities extended losses for the fifth straight day on 24 June 2012 with the barometer index BSE Sensex falling below the psychologically important 14,000 mark for the first time in 10 months since late August 2012. On 25 June 2012, equities staged a solid rebound after touching fresh calendar 2012 lows in early trade. The initial jolt was caused by the Reserve Bank of India's move to hike the key lending rate. A setback to stocks in Asia and US, sharp spurt in crude oil prices and political uncertainty due to Indo-US nuclear deal rattled bourses on 27 June 2012. On July 15th 2012, Indian shares fell 4.9 per cent to their lowest close in 15 months, joining a world equities rout as investors dumped financials on concerns about the fallout from worsening global credit turmoil. Although Indian banks have no direct exposure to the US subprime mortgage sector, the global financial sector turmoil impacts sentiment in the local market and raises worries of more withdrawals by foreign funds. An 800+ point surge was experienced in the market on the day following UPA gaining vote of confidence but the very next day market couldnt maintain the momentum and since then its in a doldrums position. Presently, we can see market plunging after the RBI announced further hikes in Repo rate as well as CRR both increased to 9%. Also, the serial blasts at Ahmadabad and Bangalore adding to the worries and enhancing the negative sentiments . And above all we can't see any positive trigger that can dilute the flow of negative news. Three year composite trend

45

This graph where three year BSE sensex data is shown in a composite line graph clearly shows that there has been wide fluctuation in the market in the recent times. There has been rise and fall in prices of the stocks in quick succession since couple of years. The year 2012 had been slightly better where the market was steady and at the same time was moving towards 13000 mark from 10000 mark as it can be seen that in January sensex was at 10000 and it started increasing in the latter half of the year i.e. since July the market has been improving. And the market reached about 14000 in quick succession which added to the joy of investors. In the year 2012, the rising of the stock market continued and it reached the record breaking 20000 mark in the month of December. But since then it continued to fall down. Everyone was overjoyed be it the investors or the sectors as they had been registering profits and flourished. In the year 2012, the market reached 17000 mark and it kept falling since then. First market reached 15000 in mid year and then it fell down to around 10000 in the month of October. The market just could not be stabilized and crashed down below 10000 in November. Now the stock market has been struggling to maintain itself even at this level which is a depressing sign for investors, corporate and all the sectors as they have been showing negative outcome.
46

This shows that there has been volatility in the stock market in recent times. As the market was at 9000 mark at one time and then shifted to 15000 mark and then reached its pinnacle and touched 20000 mark much to the surprise of the market. It was a delightful experience for everyone and everything was moving in the right direction. But then in the year 2012, everything was moving in the wrong direction and the investors were losing their money. Strict policies were undertaken so as to fight the rising inflation. The market crashed down to 9000 mark after reaching the highest level of 20000 and since then has been struggling to maintain at this level too. This has been a sign of worry for the government and RBI as they have to take various steps to keep the economy moving at a positive growth rate. Current scenario After so many endeavors, the economy is on its path to be stable but still a lot of efforts have to be made for that. The year till date has not been particularly encouraging for equity investors with the Sensex down about 14% and the mid and small cap indices by a steeper 20% or thereabouts. Various strict policies have been implemented by RBI to stabilize the economy and bring in adequate liquidity so as to make the economy function better. The inflation reached to double figure and the prices of all the commodities, products and services rose convincingly where as the real income of people remained same. All the sectors have been affected badly. Financial and manufacturing sector specially have been badly hit. The exports have reduced tremendously. Hence, the common man suffered the most and had to make lot of amendments as to make his budget sufficient to feed himself and his family. Inflation The official inflation now has been brought down to 0.44% which indicates that India may be staring at deflation. It is the lowest rate since 1977. Other countries like Japan, China etc have already registered negative inflation rates. Fall in prices means ominous sign of a collapse in demand in the economy. This indicates that the productivity has not gone down but the demand has gone down and there are no takers in the economy for the products and services. So the companies are badly affected. This may weaken economic activity as there is no growth. The investments are discouraged which affects the economy in the longer term.

47

The fear about investments not materializing is aggravated by the fact that nominal interest rates are at relatively high levels. When the prices are falling, it means the real interest rates which is the difference between nominal rate and rate of inflation are becoming very high for producers making it impossible for them to raise funds which makes the funds costlier. Though the prices are falling down, there are sectors which have been getting expensive irrespective of the inflation. The food bills have gone up by 15% since 2012. The food articles inflation rate is 7.4% from 8.3%. Though it is 1% less than the last year, but rise in the prices of food items affects the poor more than the rich people since they spend all or majority of their income on the food consumption only as food items are meant for survival and are the basic needs that one wants to fulfill whereas the rich people are not affected by the rise in price of food articles since they spend more on the luxurious items of which prices have gone down. The price rise have put the consumers in a tight spot as it becomes difficult to manage the budget which is fixed in a middle class family. Prices of sugar, dal and various other food items have gone up. The prices of sugar and dal (arhar) have raised up to 11% and 15-17% respectively. The agricultural output in Asias third largest economy fell 2.2% last quarter as compared to last fiscal year. The other sectors which are badly affected are financial, manufacturing sector etc. as the productivity has gone down and there is no demand in the economy. Moreover they are not able to raise funds from the market and there are no chances of capacity utilization or expansion. The other sector which is among the worst hit is real estate sector as the loans were given against property and there was subprime lending. There are no purchasers in the market and no one is willing to take loans. The prices of the property have crashed down due to subprime lending. Indias $1.2 trillion economy is faltering as worst financial crisis to hit the global economy since the Great Depression saps demand for nations export. Poor harvest may further weaken growth that is already at a 6 year low.

Policies by RBI

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Cash reserve ratio which is the percentage of deposits that banks have to maintain with RBI was changed accordingly seeing the liquidity situation of the market. Earlier it was raised to about 9% but now it has been reduced to 5% since mid- October seeing the current situation of economy. Repo rate is the rate at which banks borrow from RBI has also been reduced to 5% since march 202012 and reverse repo rate is a risk-free rate at which banks park their surplus funds with RBI which has also been brought down to 4%. The lending rates have not been reduced as other rates. It is due to the slowness of credit demand, high credit risk and expectations of increase in non performing loans make banks take such action. The largest lender, SBI, has reduced its benchmark lending rate only by 150 basis points from 13.75% to 12.25% between October and now. While the countrys largest private bank, ICICI Bank, has reduced its prime lending rate (PLR) only by 50 bps from 17.25% to 16.75%. Other PSU banks such as Union Bank, BoB and Bank of India have announced their plans to lower the PLR to 12% from April 1, 202012. But as of now, their PLR stands at 12.5%, which indicates a reduction of 150 bps from 14% PLR that was prevailing in October. Currently, PNB charges the lowest rate in the industry at 11.5%, indicating a reduction of 250 bps since October. It is being noticed that the banks are giving loans only after following strict covenants. The banks have been giving loans to builders especially with strict loan covenants seeing the real estate sector crashing down. But recently banks have come up with a policy that if the investors have problem of repayment of home loan because of salary cut or losing of job, they will be willing to help the borrowers by reducing the EMI or extend loan tenure. Banks plan to restructure the loans if the borrower has been a regular with payment but faces problems now. Even the students who have taken educational loan may also get relief. The date from which repayment must begin may be extended or duration over which the loan has to be repaid may be expanded. Moreover in the current interim budget announced in February 20 2012, the government has announced some measures and policies. These policies have been brought about just to stabilize the economy. Policies like reducing of service tax will help in reducing the cost of goods and services. For example, the reduction of service tax in the telecom sector means that the consumers will be able to have more talk time on every easy recharge. The petrol and LPG prices

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have also been reduced which will help the middle class people to have a control over their budget and are able to satisfy their basic needs. Rupee and FIIs The rupee is down another 6% year to date and the foreign institutional investor has continued the selling spree with around $2 billion of net sales in 20 2012 till date following the $13 billion of sales in 2012. Now the rupee has been depreciating as compared to dollar and is hovering around Rs.51 which means that rupee has reached to the lowest level of value in the recent areas. Due to which the exports have been falling down. Also the FIIs have been withdrawing money and taking into their own country. This means that there needs to be a careful monitoring of the assessment made by the fund managers about the Indian economy in the days ahead. But it is believed that the currency depreciation should not be a major cause for concern in the short run for it provides an opportunity to the exporters to become more price-competitive. At the same time, the weakening of the currency would provide an added dose of protection to the domestic enterprises, especially at a time when these enterprises are smarting under the growing threat of imports from some of Indias major trading partners. It is a fact that currency depreciation would increase the cost of debt servicing. This dimension needs attention particularly since Indias external debt, which has been creeping up since 2012, has increased by more than a quarter in the first six months of the current fiscal. Merger and acquisitions With the variations in the markets, the merger and acquisition (M&A) deals have been affected too especially the deals done by listed Indian companies over the last three years. The report submitted by SMC Capitals have shown that M&A deals have been hit and are running at the collective loss of over USD 25 million. It is believed that the deals struck since 2011 have been halved in value. Over this period, India Inc finalized 54 M&A deals, together worth 45 billion dollars. The notional value of these deals has now fallen by a whopping USD 25 billion to just USD 20 billion. The report says that 85 percent of the USD 100-million plus' M&A deals by listed companies are currently sitting on huge notional valuation losses. Only eight of the 54 deals are
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currently 'in-the-money'. Of these, three are in the energy sector, two in manufacturing, two in oil & gas, and one in telecom. The 54 deals studied include some high-profile cases: The TATA-Corus deal, which was sealed for USD 12 billion, has a current Mark-to-Market value of just over USD 3.7 billion. The value of the Kingfisher-Air Deccan deal has fallen over 60% to USD 89 million. The USD 345 million Jet Airways-Air Sahara deal is now worth just USD 86 million. The Suzlon- RePower deal now worth USD 1.7 billion dollars is down 85% from its original valuation. However, the silver lining is that most M&A deals deliver synergies only over the long term, and so, this fall in valuation may not be as bad as it looks. So in the short term perspective, such deals may have been hit and may be valued half due to the current market situation but over a long period of time with collective efforts and the better position of the economy, such deals will be worth and will start earning profits and try to fulfill the objective with which such deals are struck. Credit Card Business Since the purchasing power of people has gone down and the investment has also reduced, there are possibilities of credit card default i.e. the customers may not be in a position to pay for the credit card and arrears may rise. Therefore the customers themselves surrender the credit card saying that they do not want it. They have a fear of loosing job as well so they have made up their minds and it is a psychological effect that they surrender their cards saying they do not want it. Though credit card business is a vital constituent of Indian banks growth but now it has been losing its shine in recent months thanks to prudence by customers and banks themselves. 22 lakh credit card have gone out of circulation from april 2012 to December 2012 either due to cancellation or non- renewal, therefore the growth in this segment have gone down for Indian banks in the near term. Also it has been found that credit card spends have reduced in this period when subprime inferno was in full blast. The withering spend is more sharp after subprime crisis deepened since last October. Before the crisis descended, spending had grown by around 30% on a compounded basis.

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While many factors have been at work, the main reason why few new cards are being issued is that the banks have turned cautious and are applying more strict norms for new applications. Credit Information Bureau (Cibil) which is an RBI registered entity that manages a shared database of borrower profiles has become operational and now banks are finding it easy to find out about the credit worthiness of the borrower on the basis of credit scores supplied by Cibil. Moreover now banks have turned active in cancelling dormant cards. The customers also behave differently and prefer few cards in their wallet which may be an outcome of dip in disposable incomes as in many sectors like IT or BPO have either salary cuts or job loss. Months April May June July August September October November December 2011-2012 235.03 241.29 243.98 244.89 249.48 251.4 256.16 258.74 262.45 2011-2012 283.12 267.34 270.16 268.68 267.33 268.2 266.75 265.74 261.53 No. in lakhs Source -RBI

Operational credit cards as per RBI data have fallen 7.6% from 2.83 crore in April 2012 to 2.61% crore in December 2012. Last year the figures indicated that banks added 27 lakh cards in the same time period- 11.6% rise. Consequently credit card spends too fell 5.3% in April to December against 25.9% rise in the same period last fiscal. There has been a shift from the growth phase to consolidation phase. Banks are also shifting from the lower to high end of cards segment. Bad debts have increased from 6-7% last year to 10 % this year which means that banks may further put strict policies like to evade risk, there are chances of high interest rates in over dues coming up.

Financial crisis taking a toll on IPOs It has been found that the stock market variations and the continuous downfall have proved to be dreadful for the companies who have decided to raise money from the public. The Initial Public
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Offers (IPO) launched by various companies has failed and have been yielding negative returns on current MTM (mark to market) basis. It has been witnessed that due to the rough conditions of the market, the overall till-date-return on aggregate IPO universe from 2010 to 2012 (on volume basis) is down 14.32%, aggregating a loss of $ 3.60 billion. Due to the breakdown of the market, public issues launched in 2009, 2010, 2011 and 2012 are generating negative proceeds. Despite severe correction of capital markets in the recent past, long term investors in IPOs of 2004 are having positive returns of about 58% on current MTM basis. An IPO round-up conducted by SMC Group, Indias fourth largest share brokering firm states that "The primary market is a clear reflection of what is been happening in the secondary markets. If one considers 41 public issues launched in 2012, only 4 issues have made money for investors; the remaining 34 are currently scripting huge losses (over 58% lower on current MTM basis). Investors should do their due diligence before buying beaten down (recent IPO) stocks," If one carries out a sectoral analyses of public issues, only companies falling under pharmaceutical segment have managed to post positive returns for investors. Anu's Laboratories have appreciated over 28% since the company's debut in June. IPOs falling under BFSI and manufacturing sectors (IPOs down by an aggregate 79%) have been performing the worst since listing. It has been observed that IPO investors holding shares in companies like Niraj Cement, Porwal Auto, Chemcel Biotech and First Winner Industries will be ruing their fate. Just a few IPOs, four of them in fact, such as tech firm Vishal Info, Pharma Company Anus Labs, Alkali Metal and Gokul Refoils have managed to give positive returns. Just as in secondary market, the bear market has also taken its toll on primary market activities. Year 2012 witnessed capital mobilization of only Rs 16,927 crore, representing a fall of 63% over Rs 45,137 crore that was raised in 2012, through public equity issues, comprising both IPOs and Follow on public offers (FPOs). In this calendar year, according to Prime Database, there were only 2 issues of over Rs 1,000 crore each compared to 6 in the preceding year. As many as 22 of the 38 issues were of less than
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Rs 100 crore, of which as many as 14 were of less than even Rs 50 crore. The year continued to witness very few small issues; there was only 1 issue of below Rs 10 crore, quite like 2011 which had just 1 such issue or 2012 which had no such issue.

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55

It has been examined that due to extreme bearishness, response from the public to the issues of the year, unlike 2012, was very subdued. Only 6 of the 37 IPOs (16%) received oversubscription of more than 10 times, compared to 50 out of 101 IPOs (50%) in 2012. In fact, as many as 14 issues barely managed to get a one-time subscription. Worse, 3 IPOs had to be canceled because of lack of response, including the Rs 5,436 crore issue of Emaar MGF and the Rs 564 crore issue of Wockhardt Hospitals. NHPC have decided to delay their IPO till the time the market conditions become better. ICICI Securities have also put their IPO on hold, Tata communications have decided not to raise funds and have dropped rights issue option as well. Bharat Oman Refineries have also decided to defer their plans of raising money by way of IPO. Figures of IPOs launched It has been viewed in a study that IPOs made in the last four years are showing negative returns on an aggregate basis, and only those made in 2004 and those made by state-owned units are still in the green and are showing positive returns. In a study conducted which calculated the returns of IPOs made in the last five years - 2007 to 2012 - on the basis of mark-to-market (MTM) prices, found that the 19 IPOs made in 2007, with a total investment of $6.2033 billion (Rs 248 billion), have a MTM of $8.493 billion (Rs 339.7 billion), representing a return on investment of 36.92 per cent. This is despite the fact that of the 19, as many as 10 or 47 per cent are showing losses and only nine or 53 per cent are in the green. IPOs made in the rest of the years - 2011 to 2012 - are showing negative returns on an aggregate basis. In 2011, there were 39 IPOs with a total investment of $2.262 billion (Rs 90.48 billion). Their MTM is now $1.753 billion (Rs 70.12 billion), representing a negative return of 22.52 per cent. Of the 39, 14 or 36 per cent are in the green while 25 or 64 per cent are in the negative zone. In 2012, there were 79 IPOs with a total investment of $4.421 billion (Rs 176.84 billion). Their MTM is now $2.874 billion (Rs 114.96 billion), representing a negative return of 34.98 per cent. Of the 79, only nine or 11 per cent are in positive territory, and as many as 70 or 89 per cent are in the red.

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In 2012, there were 103 IPOs with a total investment of $8.182 billion (Rs.327.28 billion). Their MTM is now $3.536 (Rs 141.44 billion), representing a negative return of 56.79 per cent. Of the 103, only nine or 9 per cent are showing positive returns and as many as 94 or 91 per cent are in the red. In 2012, there were 37 IPOs till date with a total investment of $4.046 billion (Rs 161.84 billion). Their MTM is now $1.403 billion (Rs 56.12 billion), representing a negative return of 65.32 per cent. Of the 37, only three or 8 per cent are in profit and 34 or 92 per cent are showing negative returns. Year No. of IPOs Investments (in billion 2008 2009 2010 2011 2012 TOTAL 19 39 79 103 37 277 Rs.) 248 90.48 176.84 327.28 161.84 1.004 trillion Mark-tomarket (in billion Rs.) 339.7 70.12 114.96 141.44 56.12 722.4 36.92 - 22.52 - 34.98 - 56.79 - 65.32 Loss of 28.2012% 53% (9 IPOs) 36% (14 IPOs) 11% (9 IPOs) 9% (9 IPOs) 8% (3 IPOs) Return (%) Success

In the five years a total of 277 IPOs were made by both private and public sector companies with a total investment of $25.113 billion (Rs 1.004 trillion). Their MTM is now $18.060 billion (Rs 722.4 billion), representing a loss of 28.2012 per cent. It is believed that in year 2012 also the bearish trend in the market will continue and prospects of new issues are dim. The IPO scenario looks bleak and it would be very tough for the companies trying to raise money by way of IPO and it may be possible that they might have to quote at heavy discounts as it is has been the case with the IPOs already launched. Measures undertaken Since the market is down and the IPO launched into the market have been yielding negative returns, some measures are undertaken so as to make it a success even in times of variations. Leading market participants, merchant bankers and investor associations have suggested to SEBI

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that all companies raising money through an initial public offering (IPO) must have a monitoring agency to track the use of the funds. At present, this is applicable only for issues of Rs 500 crore and above. But here too, more stringent norms for monitoring are being suggested. A few weeks ago, Sebi and the ministry of corporate affairs said they would scrutinize the usage of money raised by companies through public issues, between 2011 and 2012, for purposes other than those stated in the prospectus. It will be done for broadly mapping the end use of funds raised via IPOs. For instance, if a company stated that one of the purposes to raise money was towards land and building, it would be seen that the funds raised have been used effectively or not for the purpose stated. Monitoring of issue funds in recent years will offer new challenges as many IPOs are not for specific projects, but are for acquisitions, working capital, and the now very popular 'general corporate purposes'. It is viewed that many companies use issue funds for promoting subsidiaries and later siphon off funds from these subsidiaries. "The books of the parent company would appear clean; the misuse happens through the subsidiary. The misuse can never be detected with a surface check-up. It is observed that there is a need to overhaul the entire monitoring mechanism. Just appointing a monitoring agency is not enough as it is also appointed by the company. Moreover, the existing monitoring criteria are weak. There is a need of independent monitoring agencies. Therefore, it is discovered that the IPOs have been badly hit and the negative returns that they have been showing indicates that not only the market is down, the public is also uncertain about their return and consider investing at this time a risky situation. Certain measures have to be taken so as to see that the interest of public is not ignored and the investors gain confidence in the markets rather than stay with the psychological sentiment that the market is down and thus it is not the right time to invest in the market otherwise they may lose all the money. Capacity utilization The companies are not able to go for any capacity utilization plans since they are falling short of money and they are not able to raise money from the market as well since the IPOs being launched in recent times have been showing negative returns. Also capacity expansion is not
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possible at present as expansion means smooth gush of cash flows are necessary and for that capital is to be raised from the market but since the capital market is down, possibility of raising of funds is abandoned. Therefore when there is no capital formation there can be no modernization or building up of capacity. There are two factors in an economy namely banking and capital structure. Since the FIIs are withdrawing their money and the rupee is becoming weak, the money is not reaching the industries. When the money does not reach there, the industries fall down and the building up of capacity is not possible. Rights Issue Not only the IPOs have failed in the current scenario but the rights issue is also considered as a bad option currently in the market. It has also been surveyed that in October 2012, not only the companies coming up with IPO suffered but the companies coming up with mega rights issue also suffered. The two major companies i.e. Tata motors and Hindalco came up with rights issue of Rs. 4,145 crore and Rs.5000 crore respectively which received a very lukewarm response due to which other firms are still tentative to launch their IPO. A rights issue is an invitation to existing shareholders to purchase additional new shares in the company. This type of issue gives existing shareholders securities called rights which gives the shareholders the right to purchase new shares at a discount to the market price on a stated future date. Simply, the company allows shareholders a chance to increase their exposure to the stock at a discount price. Many of them have kept their plans on hold and many have decided to launch their IPO only when the market conditions become better. But a section of investment bankers believe that some cash rich promoters are using the opportunity to raise stake in their companies at a depressed valuation through the rights-route. Promoters can not only subscribe to their portions but also subscribe to the portions meant for the unwilling shareholders. It is easier and can be done at a price which is already at a discount since very few individual shareholders may eventually use their right in an issue. Private Placement
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Due to this bearish trend and sharpened downfall in the primary market, private placement has emerged as the safest as well as strongest means of fund mobilization from the market. Thus it proves to be good news for the private equity investors who want to invest in the good companies. Companies are also benefitted as they get money in quick time, get fair valuation and limited number of investors is there as there are mostly private equity investors and only a handful of foreign investors and venture capital investors. Mutual funds It is believed that in mutual funds, when the market is at top say 19000 mark, the mutual funds decide or make arrangements for exiting from the market and sell stocks as they are not able to use the money available with them. They believe when the market is down say 9000 mark that is the time to invest in the market. But the investors do not agree with them and they like to invest when the market is at top and do not like to invest when the market is down as they think it will be a risky investment and they might not get enough return on it. For example ICICI who are managing the corpus of Rs.85000 crore or mutual funds managed by Reliance where 2.5 years ago when the market was around 19000 mark, they stopped accepting money from the investors and they banned it and gave the money back to the investors saying that they can not use the money. They believe that the right time to invest in the market is when the market is down. So when they think of purchasing shares, they are not able to do so as the investors want to withdraw and redeem their money. So there is a crisis at this point of time in the market when the market is at 9000 mark and mutual funds want to invest in the market but the investors are withdrawing their money and like to retain cash. So the people are not spending and the psychology of the people remains unchanged and they do not want to invest in the market. Moreover there is a trend now that debt/income mutual funds are being preferred more than equity mutual funds. Since there is no opportunity for the companies to raise the money from the public since there are no IPO in the market as they have been failing, therefore the equity mutual funds are not preferred. Psychology of investors

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It is examined that though there are too many fluctuations in the market but the effect in Indian economy is not as much as it is in US or Europe. Earlier the economy was growing at about 8% and now it is growing at about 6%. The spending spree has gone down as even the people in US have started saving. The worth has gone down and people in our economy have a psychology that when the market is down it is better to retain cash rather than make investments or any purchases. Once there was a man who lived in a village and used to sell vada pao in the village. He used to give discounts to his customers and used to incur advertisement expenses as well. He was earning a good amount of money from the same business. His son comes to village after completing his MBA from the city and informs his father about the current situation in the world and tells him about recession. Though his father thinks that there is no such problem in the village, he believes his son as he thinks that he is more educated and asks his son that what he should do in order to stay away from recession. His son asks him to cut down all expenditure. His father does the same thing but after few months finds out that the sales have dropped and the profits have gone down. Then he thinks that his son was correct and there is some serious problem in the economy. This shows that it is just the psychological factor and sentiments of investors and not the recession affecting our lives too much. So we should not retain cash and stop purchasing. Instead, we should start making our investments. We should try to reduce the cost using the psychological situation that if there is recession, we should retain our employees and instead use synergy and make right decisions so as to survive in the market as recession is believed to be the best time of making our investments.

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SUGGESTIONS AND CONCLUSION

Suggestions Based on the results and discussions of the primary as well as secondary research conducted, some suggestions can be given so as to make use of the hidden opportunities which will not only help the investors but also the market regulators in making the market competent enough so that the economy is not only stabilized but maintains a steady growth rate. From Investors point of view Though these are tough times where the prices of the stocks are not only fluctuating but there so much uncertainty that the investments are at risk. But if the investments are made keeping in mind the demographic factors such as age or income or be well- informed and keep all the information about the current things and invest cautiously on the basis of the information gathered, the investments can give sufficient rate of return. In times of inflation when there are chances of negative inflation and various sectors of the economy are affected and are not able to give enough returns, investors should be selective while making investment decisions. Following factors should be kept in mind while making investments: 1. Investments in sectors like telecommunication, healthcare, utility companies like electricity distribution etc can be made where the demand wont be hit unlike other sectors where the demand has dropped. 2. Investment to be done where product or service will not see a decline in demand. So identification of these companies where decline in prices lead to increase in demand for their products, prompting them to produce more value added products with greater economies of scale. So companies in sector like beverages or telecom are a good bet to invest in. 3. Companies with strong balance sheet should be considered for investments which do not have much debt on their books. The investors should stock to companies which are less leveraged like IT companies or health care or energy sector.
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4. Investment in companies operating in capital goods sector should be avoided. Capital good requirement when companies are investing in either new projects or expanding existing facilities. But as the companies are avoiding both, the performance of the capital goods company may further decline so investments should not be done in this sector. 5. Investments in real estate sector should be avoided since home buyers will further postpone their purchase decisions, which will further increase the suffering of cash starved real estate sector. 6. Lastly, the investors should study the trends and invest cautiously based on their objective, age, income and keeping risk and return factor in mind. 7. Investors should hold on to their investments for the long term. Investors should use the market falls and volatility to buy value picks. 8. Small investors should build their equity portfolio with large-caps and some select midcap companies where the business visibility is good and market liquidity of stocks is high 9. Risk-averse investors and investors who cannot keep a regular track of markets would be better off investing in mutual funds. These investors can look for diversification and creation of an investment basket of mutual funds itself. 10. Long-term investors with higher risk appetite can look for investments in blue chip and fundamentally good stocks.

From the governments point of view It is a tough job for the government to stabilize the economy by introducing measures at right time. But it has to take steps to bring in stability as soon as possible. The following factors should be considered: 1. Plans should be taken for reduction in rising fiscal deficit. 2. Plans should be taken to increase expenditure because it will provide necessary impetus on creating demand.
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3. Government should also consider reducing the repo rate as well as reverse repo rate. 4. More money should be pumped in to the financial system. 5. Government should encourage economic activity by lowering down interest rate including the home loans 6. As the dollar is losing value to euro and yen in recent times so mortgage rates should be reduced and it will benefit the existing and future mortgage borrowers. 7. Rating should be taken for raising funds unlike on the basis of balance sheet or loan as it was before. 8. Strict policies to be made by government so that there is no fudging of accounts on the basis of which investors invest their money as their money is at risk then. The auditors should be so strict that if they have any objections, the company should redo their books of accounts. 9. There should be better and improved financial reporting standards. 10. As the short selling contributes to volatility of the market, the government should try and control it.

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Conclusion 1.It can be concluded that in recent times the stock market has been affected and there are wide price fluctuations in the market. 2.There is volatility in the market which has acted as a sudden shock for the investors, government, corporate and the economy as a whole. Though the Indian economy is not affected as the other countries like US, Europe etc but there is credibility crisis as the spending spree of the public have gone down and government can control such things only up to an extent. 3.Understanding stock market risk and return behavior is important for all countries but it is of more importance to developing countries especially where the market consist of risk averse investors as the opportunities to invest and diversify the investment is not much. .4. Some of they companies are not able to raise funds from the market as the IPO they launched have failed and they are not able to plan for any capacity utilization plans nor expansion plans. 5.The companies who had made merger and acquisition deals have also being hit as their deals have been valued in half. 6. The weakening of rupee indicates that the FII have been taking dollars to their countries and there is shortage of it due to which the exports have gone down and the fiscal deficit have been increasing day by day. This shows that Indian economy has also been affected by the volatility of stock market. 7. the investors are so uncertain about the market and they are not sure about the risk-return factor on their investments
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8.They have been surrendering their credit cards as well indicating that they are not sure about the payment whether they will be able to make any payment or not. 9. They also believe that investment in fixed deposits and bonds is a safer option that futures or shares etc as they are risk bound and the investors dont want to take chances with their money. 10.The investors also feel that the volatility is due to the global recession and the weakening of rupee due to which imports are increasing and exports have been falling down. 11. As the inflation was too high couple of months ago, the measures have helped it to lower the rate but now the chances are that there may be negative inflation as well which will prove to be dangerous for the economy as it will discourage investments and weaken the economy. 12.Moreover there will be fall in prices due to reduced demand in the economy. 13. So not only the investors should be cautious while making their investments but the government should also take measures like cutting down the interest rates etc so as to bring the economy back to the normal stage . Therefore it can be said that there are variations and the stock market has been affecting the Indian economy as well. 14. Exports being a major part of GDP, India is less vulnerable to external shocks than many other Asian nations. Political uncertainties too have narrowed down. Savings in India have risen and investment is being made in gold, commodities and real-estate while financial savings are also being done.

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References
Going through a rich source of journals, magazines & articles pertaining to my domain at the college library and on the net, I was able to make this report. Following are the list of Journals and articles studied:

Lo and A.C. MacKinlay, Stock Market Prices Do Not Follow Random Walks: Evidence from a Simple Specification Test, Review of Financial Studies, Vol 1, 2001, pp 41-66.

Garman, M and M. Klass. On the Estimation of Security Price Volatilities from Historical Data,

Websites
http://www.bseindia.com http://www.nseindia.com http://www.financialexpress.com/ http://www.tradingeconomics.com www.moneycontrol.com

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Annexure

SURVEY ON STOCK MARKET VOLATILITY AND ITS IMPACT ON INDIAN ECONOMY

1. Which age group do you belong to? ( ) 20-30 yrs ( ) 40-50 yrs ( ) 30-40 yrs ( ) 50 and above yrs

2. Since when have you been investing in the stock market? ( ) 0-3 yrs ( ) 6-9 yrs ( ) 3-6 yrs ( ) 9 and above yrs

3. Has your purchase decisions for investment changed recently? ( ) yes ( ) no

4. Which product of investment would you like to invest in the current times? ( ) fixed deposits ( ) shares ( ) bonds ( ) others
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5. Do you prefer to take risk in current scenario? ( ) yes ( ) no

6. Has there been any change in your saving pattern of income? ( ) yes ( ) no

7. Out of income of Rs.100, how much would you like to save now? ( ) up to 15 ( ) 30-45 ( ) 15-30 ( ) 45 and above

8. What is the percentage of equity in equity- debt investment ratio in your portfolio? ( ) up to 20% ( ) 40-60% ( ) 20-40% ( ) 60 and above%

9. Would you like to retain more cash in your current portfolio? ( ) yes ( ) no

10. Has your net worth being effected? ( ) yes ( ) no

11. What rate of return are you expecting from your investments? ( ) up to 10% ( ) 20-30 % ( ) 10-20% ( ) 30 and above %
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12. Is it safe to invest in stock market in current scenario? ( ) yes ( ) no

13. According to you, what are the reasons for stock market variations? ( ) FII ( ) prices of oil etc ( ) govt. regulations ( ) global recession

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