A Project Study Report on A study of the impact of monetary policies and announcement on the valuation of banking stock- A behavior

analysis of clients of Share Khan pvt.ltd.

Submitted in partial fulfillment for the Award of degree of Master of Business Administration

Submitted By Sandeep Kumar MBA-IV Semester

Poornima School of Management ISI-2, RIICO Institutional Area, Goner Road, Sitapura, Jaipur

DECLARATION

Hereby I declare that the project report entitled A study of the impact of monetary policies and announcement on the valuation of banking stock- A behavior analysis of clients of Share khan pvt.ltd.submitted for the degree of master of business administration is my original work and the project report has not formed the basis for the award of any diploma, degree associate ship, fellowship or similar other titles. It has not been submitted to any other university or institution for the award of any degree or diploma.

Place: Date:

Sandeep Kumar MBA Part II. (DMS-PSOM)

CERTIFICATE

Poornima School of Management (ISI-2, Goner Road, Sitapura, Jaipur)

This is certified that Mr. Sandeep Kumar, student of Master of Business Administration, Fourth Semester of Poornima School of Management, and Jaipur has completed his Project report on the topic of A study of the impact of monetary policies and announcement on the valuation of banking stock- A behavior analysis of clients of Share khan pvt.ltd. under supervision of Mrs. Garima Sharma and Miss EtiKhatri Faculty member, DMS-PSOM. To best of my knowledge the report is original and has not been copied or submitted anywhere else. It is an independent work done by him.

Dr. Vandana Sharma Director, PSOM

PREFACE A good monetary policy system must be able to cope with an extremely complex and dynamic environment.
The microstructure of the stock market in which brokers work is highly dynamic and volatile. Many stocks are available to be bought and sold, each exhibiting its own patterns and characteristics that are highly unpredictable. With so many options and considerations that need to be taken into account, it is an extremely arduous task for a broker to investigate aspects of the stock market and consistently provide effective advice to their clients. In the past decade, significant changes in the design and conduct of monetary policy have occurred around the world. Many developing countries, including India have adopted an inflation targeting regime. Monetary policy objectives have traditionally included promoting growth, achieving full employment, smoothing the business cycles, preventing financial crisis and stabilizing long term interest rates and the real exchange rate also the valuation of the banking stocks.

The purpose of this study is to investigate the impact of monetary policy on the valuation of the banking stocks in the context of financial sector reforms in India. We discuss the financial sector reforms and the implication of the banks, the various instruments of monetary policy in India, and the impact of monetary policy on the profitability of banks.

Acknowledgement
I express my sincere thanks to my project guide, Ms. Garima Sharma and Miss Eti Khatri Faculty of PGC Dept. of Management studies. For guiding me right from the inception till the successful completion of the project. I sincerely acknowledge her for extending their valuable guidance, support for literature, critical reviews of project and the report and above all the moral support they had provided me with all stages of this project.

Sandeep kumar

Executive Summary
There is growing complexity in the mind of the investors to take investment decision due to the change in the monetary policy of the India as well as the world and it poses impact on the stock market. Research was carried out to find what is the impact of the monetary policy and announcement on the valuation of the banking stocks. And also what investors prefer and to figure out while investing in stock market. This study suggest that people are reluctant while investing in banking sectors stock and other stocks market due to lack of knowledge Main purpose of investment is returns and liquidity, commodity market is less preferred by investors due to lack of awareness. The major findings of this study are that people are interested to invest in stock market but they lack knowledge and the impact of monetary policy on the valuation of banking stocks. Through this report we were also able to understand, how investor take decision to invest in the banking stocks due to change in monetary policy and announcements with the help of the client behavior of share khan pvt.ltd. In this report study of different types of the banking product and impact of monetary policy on them are analyzed and also the valuation of stock due to change in policy and announcement.

TABLE OF CONTENTS

S. No.

Contents

Page No.

1. 2.

Introduction to Industry Introduction to Organization and impact of monetary policy on banking stocks.

1-7 8-61

3. 4.

Review of Literature Research Methodology 4.1 Title of the Study 4.2 Duration of Project 4.3 Objective of Study 4.4 Type of Research 4.5 Sample size & Method of selecting sample 4.6 Scope of the Study 4.7 Limitations

62-68 69-95

5. 6. 7. 8. 9. 10.

Analysis and Interpretations Facts and Findings Conclusion Suggestions Appendix Bibliography

96-103 104 105 106 107-108 109-110

INTRODUCTION INDUSTRY PROFILE

OVERVIEW OF THE BANKING INDUSTRY: Banking in India originated in the last decades of the 18th century. The oldest bank in existence in India is the State Bank of India, a government-owned bank that traces its origins back to June 1806 and that is the largest commercial bank in the country. Central banking is the responsibility of the Reserve Bank of India, which in 1935 formally took over these responsibilities from the then Imperial Bank of India, relegating it to commercial banking functions. After India's independence in 1947, the Reserve Bank was nationalized and given broader powers. In 1969 the government nationalized the 14 largest commercial banks; the government nationalized the six next largest in 1980. Currently, India has 88 scheduled commercial banks (SCBs) - 27 public sector banks (that is with the Government of India holding a stake), 29 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 31 foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively. Early History: Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India, which started in 1786, and the Bank of Hindustan, both of which are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1925 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India. Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a consequence of the economic crisis of 1848-49. The Allahabad Bank,
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established in 1865 and still functioning today, is the oldest Joint Stock bank in India. When the American Civil War stopped the supply of cotton to Lancashire from the Confederate States, promoters opened banks to finance trading in Indian cotton. With large exposure to speculative ventures, most of the banks opened in India during that period failed. The depositors lost money and lost interest in keeping deposits with banks. Subsequently, banking in India remained the exclusive domain of Europeans for next several decades until the beginning of the 20th century. Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoired'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862; branches in Madras and Pondicherry, then a French colony, followed. Calcutta was the most active trading port in India, mainly due to the trade of the British Empire, and so became a banking center. Around the turn of the 20th Century, the Indian economy was passing through a relative period of stability. Around five decades had elapsed since the Indian Mutiny, and the social, industrial and other infrastructure had improved. Indians had established small banks, most of which served particular ethnic and religious communities. The presidency banks dominated banking in India but there were also some exchange banks and a number of Indian joint stock banks. All these banks operated in different segments of the economy. The exchange banks, mostly owned by Europeans, concentrated on financing foreign trade. Indian joint stock banks were generally undercapitalized and lacked the experience and maturity to compete with the presidency and exchange banks. This segmentation let Lord Curzon to observe, "In respect of banking it seems we are behind the times. We are like some old fashioned sailing ship, divided by solid wooden bulkheads into separate and cumbersome compartments." By the 1900s, the market expanded with the establishment of banks such as Punjab National Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai - both of which were founded under private ownership. Punjab National Bank is the first Swadeshi Bank founded by the leaders like LalaLajpatRai, SardarDhyal Singh Majithia. The Swadeshi movement in particular inspired local businessmen and
10

political figures to found banks of and for the Indian community. A number of banks established then have survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and India. The fervour of Swadeshi movement lead to establishing of many private banks in Dakshina Kannada and Udupi district which were unified earlier and known by the name South Canara ( South Kanara ) district.Fournationalised banks started in this district and also a leading private sector bank. Hence undivided Dakshina Kannada district is known as "Cradle of Indian Banking". From World War I to Independence: The period during the First World War (1914-1918) through the end of the Second World War (1939-1945), and two years thereafter until the independence of India were challenging for Indian banking. The years of the First World War were turbulent, and it took its toll with banks simply collapsing despite the Indian economy gaining indirect boost due to war-related economic activities. At least 94 banks in India failed between 1913 and 1918 as indicated in the following table:

Years

Number that failed

of

banks Authorized (Rs. Lakhs)

capital Paid-up (Rs. Lakhs)

Capital

1913

12

274

35

1914

42

710

109

1915

11

56

1916

13

231

1917

76

25

11

1918

209

Post-independence: The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal, paralyzing banking activities for months. India's independence marked the end of a regime of the Laissez-faire for the Indian banking. The Government of India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This resulted into greater involvement of the state in different segments of the economy including banking and finance. The major steps to regulate banking included:

In 1948, the Reserve Bank of India, India's central banking authority, was nationalized, and it became an institution owned by the Government of India.

In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India."

The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI, and no two banks could have common directors.

However, despite these provisions, control and regulations, banks in India except the State Bank of India, continued to be owned and operated by private persons. This changed with the nationalization of major banks in India on 19 July, 1969. Nationalization: By the 1960s, the Indian banking industry has become an important tool to facilitate the development of the Indian economy. At the same time, it has emerged as a large employer, and a debate has ensued about the possibility to nationalize the banking industry. Indira Gandhi, the-then Prime Minister of India expressed the intention of the GOI in the annual conference of the All India Congress Meeting in a paper
12

entitled "Stray thoughts on Bank Nationalization." The paper was received with positive enthusiasm. Thereafter, her move was swift and sudden, and the GOI issued an ordinance and nationalized the 14 largest commercial banks with effect from the midnight of July 19, 1969. Jayprakash Narayan, a national leader of India, described the step as a "masterstroke of political sagacity." Within two weeks of the issue of the ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential approval on 9 August, 1969. A second dose of nationalization of 6 more commercial banks followed in 1980. The stated reason for the nationalization was to give the government more control of credit delivery. With the second dose of nationalization, the GOI controlled around 91% of the banking business of India. Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalized banks and resulted in the reduction of the number of nationalized banks from 20 to 19. After this, until the 1990s, the nationalized banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy. The nationalized banks were credited by some, including Home ministerP. Chidambaram, to have helped the Indian economy withstand the global financial crisis of 2007-2009. Liberalization: In the early 1990s, the then NarsimhaRao government embarked on a policy of liberalization, licensing a small number of private banks. These came to be known as New Generation tech-savvy banks, and included Global Trust Bank (the first of such new generation banks to be set up), which later amalgamated with Oriental Bank of Commerce, UTI Bank(now re-named as Axis Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, revitalized the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks.

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The next stage for the Indian banking has been setup with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%, at present it has gone up to 49% with some restrictions. The new policy shook the Banking sector in India completely. Bankers, till this time, were used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of functioning. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks. All this led to the retail boom in India. People not just demanded more from their banks but also received more. Currently (2007), banking in India is generally fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been true. With the growth in the Indian economy expected to be strong for quite some timeespecially in its services sector-the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong. One may also expect M&As, takeovers, and asset sales. In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any stake exceeding 5% in the private sector banks would need to be vetted by them. In recent years critics have charged that the non-government owned banks are too aggresive in their loan recovery efforts in connection with housing, vehicle and personal loans. There are press reports that the banks' loan recovery efforts have driven defaulting borrowers to suicide.
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INTRODUCTION COMPANY PROFILE

15

INTRODUCTION OF THE COMPANY Share khan is one of the leading retail brokerage of City Venture which is running successfully since 1922 in the country. Earlier it was the retail broking arm of the Mumbai-based SSKI Group, which has over eight decades of experience in the stock broking business. Share khan offers its customers a wide range of equity related services including trade execution on BSE, NSE, Derivatives, depository services, online trading, investment advice etc. Earlier with a legacy of more than 80 years in the stock markets, the SSKI group ventured into institutional broking and corporate finance 18 years ago. SSKI is one of the leading players in institutional broking and corporate finance activities. SSKI holds a sizeable portion of the market in each of these segments. SSKIs institutional broking arm accounts for 7% of the market for Foreign Institutional portfolio investment and 5% of all Domestic Institutional portfolio investment in the country. It has 60 institutional clients spread over India, Far East, UK and US. Foreign Institutional Investors generate about 65% of the organizations revenue, with a daily turnover of over US$ 2 million. The content-rich and research oriented portal has stood out among its contemporaries because of its steadfast dedication to offering customers best-ofbreed technology and superior market information. The objective has been to let customers make informed decisions and to simplify the process of investing in stocks. WORK STRUCTURE OF SHAREKHAN Share khan has always believed in investing in technology to build its business. The company has used some of the best-known names in the IT industry, like Sun Microsystems, Oracle, Microsoft, Cambridge Technologies, Nexgenix, Vignette, Verisign Financial Technologies India Ltd, Spider Software Pvt Ltd. to build its trading engine and content. The City Venture holds a majority stake in the company. HSBC, Intel & Carlyle are the other investors.

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On April 17, 2002Sharekhan launched Speed Trade and Trade Tiger, are net-based executable application that emulates the broker terminals along with host of other information relevant to the Day Traders. This was for the first time that a net-based trading station of this caliber was offered to the traders. In the last six months Speed Trade has become a de facto standard for the Day Trading community over the net. Share khans ground network includes over 700+ Share shops in 130+ cities in India. The firms online trading and investment site - www.sharekhan.com - was launched on Feb 8, 2000. The site gives access to superior content and transaction facility to retail customers across the country. Known for its jargon-free, investor friendly language and high quality research, the site has a registered base of over 3 Lacs customers. The number of trading members currently stands at over 7 Lacs. While online trading currently accounts for just over 5 per cent of the daily trading in stocks in India, Share khan alone accounts for 27 per cent of the volumes traded online. The Corporate Finance section has a list of very prestigious clients and has many firsts to its credit, in terms of the size of deal, sector tapped etc. The group has placed over US$ 5 billion in private equity deals. Some of the clients include BPL Cellular Holding, Gujarat Pipavav, Essar, Hutchison, Planetasia, and Shoppers Stop. Finally, Share khan shifted hands and City venture get holds on it.

PRODUCTS OFFERED BY SHAREKHAN 1- Equity Trading Platform (Online/Offline). 2- Commodities Trading Platform (Online/Offline). 3- Portfolio Management Service. 4- Mutual Fund Advisory and Distribution. 5- Insurance Distribution.

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REASONS TO CHOOSE SHAREKHAN LIMITED Experience SSKI has more than eight decades of trust and credibility in the Indian stock market. In the Asia Money broker's poll held recently, SSKI won the 'India's best broking house for 2004' award. Ever since it launched Sharekhan as its retail broking

division in February 2000, it has been providing institutional-level research and broking services to individual investors. Technology With their online trading account one can buy and sell shares in an instant from any PC with an internet connection. Customers get access to the powerful online trading tools that will help them to take complete control over their investment in shares. Accessibility Sharekhan provides ADVICE, EDUCATION, TOOLS AND EXECUTION services for investors. These services are accessible through many centers across the country (Over 650 locations in 150 cities), over the Internet (through the website www.sharekhan.com) as well as over the Voice Tool. Knowledge In a business where the right information at the right time can translate into direct profits, investors get access to a wide range of information on the content-rich portal, www.sharekhan.com. Investors will also get a useful set of knowledge-based tools that will empower them to take informed decisions. Convenience One can call Share khans Dial-N-Trade number to get investment advice and execute his/her transactions. They have a dedicated call-center to provide this service via a Toll Free Number 1800-22-7500&39707500 from anywhere in India. Customer Service

18

Its customer service team assist their customer for any help that they need relating to transactions, billing, demat and other queries. Their customer service can be contacted via a toll-free number, email or live chat on www.sharekhan.com. Investment Advice Share khan has dedicated research teams of more than 30 people for fundamental and technical research. Their analysts constantly track the pulse of the market and provide timely investment advice to customer in the form of daily research emails, online chat, printed reports etc Benefits Free Depository A/c Instant Cash Transfer Multiple Bank Option. Secure Order by Voice Tool Dial-n-Trade. Automated Portfolio to keep track of the value of your actual purchases. 24x7 Voice Tool access to your trading account. Personalized Price and Account Alerts delivered instantly to your Mobile Phone & E-mail address. Live Chat facility with Relationship Manager on Yahoo Messenger Special Personal Inbox for order and trade confirmations. On-line Customer Service via Web Chat. Enjoy Automated Portfolio. Buy or sell even single share Anytime Ordering.

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Share khan offers the following products

CLASSIC ACCOUNT This is a User Friendly Product which allows the client to trade through website www.sharekhan.com and is suitable for the retail investors who is risk-averse and hence prefers to invest in stocks or who do not trade too frequently. Features Online trading account for investing in Equity and Derivatives via

www.sharekhan.com Live Terminal and Single terminal for NSE Cash, NSE F&O & BSE. Integration of On-line trading, Saving Bank and Demat Account. Instant cash transfer facility against purchase & sale of shares. Competitive transaction charges. Instant order and trade confirmation by E-mail. Streaming Quotes (Cash & Derivatives). Personalized market watch. Single screen interface for Cash and derivatives and more. Provision to enter price trigger and view the same online in market watch.

SPEEDTRADE SPEEDTRADE is an internet-based software application that enables you to buy and sell in an instant. It is ideal for active traders and jobbers who transact frequently during days session to capitalize on intra-day price movement. Features Instant order Execution and Confirmation. Single screen trading terminal for NSE Cash, NSE F&O & BSE.
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Technical Studies. Multiple Charting. Real-time streaming quotes, tic-by-tic charts. Market summary (Cost traded scrip, highest clue etc.) Hot keys similar to brokers terminal. Alerts and reminders. Back-up facility to place trades on Direct Phone lines. Live market debts.

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INTRODUCTION OF MONETARY POLICIES AND ITS IMPACT ON THE BANKING STOCKS

22

INTRODUCTION Monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment. Monetary theory provides insight into how to craft optimal monetary policy. Monetary policy is referred to as either being expansionary or contractionary, where an expansionary policy increases the total supply of money in the economy more rapidly than usual, and contractionary policy expands the money supply more slowly than usual or even shrinks it. Expansionary policy is traditionally used to try to combat unemployment in a recession by lowering interest rates in the hope that easy credit will entice businesses into expanding. Contractionary policy is intended to slow inflation in hopes of avoiding the resulting distortions and deterioration of asset values. Monetary policy differs from fiscal policy, which refers to taxation, government spending, and associated borrowing. OVERVIEW Monetary policy rests on the relationship between the rates of interest in an economy, that is, the price at which money can be borrowed, and the total supply of money. Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment. Where currency is under a monopoly of issuance, or where there is a regulated system of issuing currency through banks which are tied to a central bank, the monetary authority has the ability to alter the money supply and thus influence the interest rate (to achieve policy goals). The beginning of monetary policy as such comes from the late 19th century, where it was used to maintain the gold standard. A policy is referred to as contractionary if it reduces the size of the money supply or increases it only slowly, or if it raises the interest rate. An expansionary policy
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increases the size of the money supply more rapidly, or decreases the interest rate. Furthermore, monetary policies are described as follows: accommodative, if the interest rate set by the central monetary authority is intended to create economic growth; neutral, if it is intended neither to create growth nor combat inflation; or tight if intended to reduce inflation. There are several monetary policy tools available to achieve these ends: increasing interest rates by fiat; reducing the monetary base; and increasing reserve requirements. All have the effect of contracting the money supply; and, if reversed, expand the money supply. Since the 1970s, monetary policy has generally been formed separately from fiscal policy. Even prior to the 1970s, the Britton Woods system still ensured that most nations would form the two policies separately. Within almost all modern nations, special institutions (such as the Federal Reserve System in the United States, the Bank of England, the European Central Bank, the People's Bank of China, and the Bank of Japan) exist which have the task of executing the monetary policy and often independently of the executive. In general, these institutions are called central banks and often have other responsibilities such as supervising the smooth operation of the financial system. The primary tool of monetary policy is open market operations. This entails managing the quantity of money in circulation through the buying and selling of various financial instruments, such as treasury bills, company bonds, or foreign currencies. All of these purchases or sales result in more or less base currency entering or leaving market circulation. Usually, the short term goal of open market operations is to achieve a specific short term interest rate target. In other instances, monetary policy might instead entail the targeting of a specific exchange rate relative to some foreign currency or else relative to gold. For example, in the case of the USA the Federal Reserve targets the federal funds rate, the rate at which member banks lend to one another overnight; however, the monetary policy of China is to target the exchange rate between the Chinese renminbi and a basket of foreign currencies.

24

The other primary means of conducting monetary policy include: (i) Discount window lending (lender of last resort); (ii) Fractional deposit lending (changes in the reserve requirement); (iii) Moral suasion (cajoling certain market players to achieve specified outcomes); (iv) "Open mouth operations" (talking monetary policy with the market). Monetary policy is the process by which the government, central bank, or monetary authority of a country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest to attain a set of objectives oriented towards the growth and stability of the economy.[1] Monetary theory provides insight into how to craft optimal monetary policy. Monetary policy rests on the relationship between the rates of interest in an economy, that is the price at which money can be borrowed, and the total supply of money. Monetary policy uses a variety of tools to control one or both of these, to influence outcomes like economic growth, inflation, exchange rates with other currencies and unemployment. Where currency is under a monopoly of issuance, or where there is a regulated system of issuing currency through banks which are tied to a central bank, the monetary authority has the ability to alter the money supply and thus influence the interest rate (to achieve policy goals). It is important for policymakers to make credible announcements. If private agents (consumers and firms) believe that policymakers are committed to lowering inflation, they will anticipate future prices to be lower than otherwise (how those expectations are formed is an entirely different matter; compare for instance rational expectations with adaptive expectations). If an employee expects prices to be high in the future, he or she will draw up a wage contract with a high wage to match these prices. Hence, the expectation of lower wages is reflected in wage-setting behavior between employees and employers (lower wages since prices are expected to be lower) and since wages are in fact lower there is no demand pull inflation because employees are receiving a smaller wage and there is no cost push inflation because employers are paying out less in wages. To achieve this low level of inflation, policymakers must have credible

announcements; that is, private agents must believe that these announcements will reflect actual future policy. If an announcement about low-level inflation targets is
25

made but not believed by private agents, wage-setting will anticipate high-level inflation and so wages will be higher and inflation will rise. A high wage will increase a consumer's demand (demand pull inflation) and a firm's costs (cost push inflation), so inflation rises. Hence, if a policymaker's announcements regarding monetary policy are not credible, policy will not have the desired effect. If policymakers believe that private agents anticipate low inflation, they have an incentive to adopt an expansionist monetary policy (where the marginal benefit of increasing economic output outweighs the marginal cost of inflation); however, assuming private agents have rational expectations, they know that policymakers have this incentive. Hence, private agents know that if they anticipate low inflation, an expansionist policy will be adopted that causes a rise in inflation. Consequently, (unless policymakers can make their announcement of low inflation credible), private agents expect high inflation. This anticipation is fulfilled through adaptive expectation (wage-setting behavior);so, there is higher inflation (without the benefit of increased output). Hence, unless credible announcements can be made, expansionary monetary policy will fail. Announcements can be made credible in various ways. One is to establish an independent central bank with low inflation targets (but no output targets). Hence, private agents know that inflation will be low because it is set by an independent body. Central banks can be given incentives to meet targets (for example, larger budgets, a wage bonus for the head of the bank) to increase their reputation and signal a strong commitment to a policy goal. Reputation is an important element in monetary policy implementation. But the idea of reputation should not be confused with commitment. While a central bank might have a favorable reputation due to good performance in conducting monetary policy, the same central bank might not have chosen any particular form of commitment (such as targeting a certain range for inflation). Reputation plays a crucial role in determining how much markets would believe the announcement of a particular commitment to a policy goal but both concepts should not be assimilated. Also, note that under rational expectations, it is not necessary for the policymaker to have established its reputation through past policy actions; as an

26

example, the reputation of the head of the central bank might be derived entirely from his or her ideology, professional background, public statements, etc. In fact it has been argued that to prevent some pathology related to the time inconsistency of monetary policy implementation (in particular excessive inflation), the head of a central bank should have a larger distaste for inflation than the rest of the economy on average. Hence the reputation of a particular central bank is not necessary tied to past performance, but rather to particular institutional

arrangements that the markets can use to form inflation expectations. Despite the frequent discussion of credibility as it relates to monetary policy, the exact meaning of credibility is rarely defined. Such lack of clarity can serve to lead policy away from what is believed to be the most beneficial. For example, capability to serve the public interest is one definition of credibility often associated with central banks. The reliability with which a central bank keeps its promises is also a common definition. While everyone most likely agrees a central bank should not lie to the public, wide disagreement exists on how a central bank can best serve the public interest. Therefore, lack of definition can lead people to believe they are supporting one particular policy of credibility when they are really supporting another.

Banking Sector and Monetary Policy in India

Banking Sector Independent India inherited a weak financial system. Commercial banks mobilized household savings through demand and term deposits, and disbursed the credit primarily to large corporations (Ghosh,1988). This lop-sided pattern of credit disbursal, and perhaps a spate of bank failures that reduced the number of banks from 566 in 1951 to 90 in 1968, led the government to nationalize the banks in 1969. The main thrust of nationalization was social banking, with the stated objective of increasing the geographical coverage of the banking system, and extension of credit to the priority sector that comprised largely of agriculture, agro-processing, and small-scale industries. This phase of banking in India was characterized by administered interest rates, mandatory syndicated lending, and pre-emption of the banks deposit base by the government in the form of measures like high cash reserve ratio (CRR) and statutory liquidity ratio (SLR).
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Banks were required to invest a significant proportion of their deposits in bonds issued by the government and approved (quasi-government) institutions. At the same time, between 1969 and 1990, the nationalized banks added over 55,000 branches to their network (Sarkar and Agarwal, 1997). While the social agenda of the banking sector, measured in terms of geographical and sectoral coverage, was arguably a success, the Indian banking sector, about 88 percent of whose assets were managed by state-owned banks, was in distress. While the ratio of gross operating profit of the scheduled commercial banks rose from 0.8 percent (of assets) in the seventies to 1.5 percent in the early nineties, the net profit of the banks declined. More importantly, perhaps, financial repression involving state-owned banks was not in harmony with the agenda of real sector reforms that the government of India unleashed in the aftermath of the balance of payments crisis of 1991. The RBI, therefore, initiated reform of the banking sector in 1992, based on the recommendations of Narasimham Committee I (Reddy, 1998). Between 1992 and 1997, the CRR was reduced from 15 percent to about 10 percent, and the SLR was reduced from 38.5 percent to 25 percent over the same period. The interest rates were gradually liberalized. Prior to 1992, the lending rates structure consisted of six categories based on the size of advances. During the 1992-94 period, the lending rates structure was rationalized to three categories, and in 1994 banks were given the freedom to determine interest rates on all loans exceeding 200,000 Indian rupees (INR). By 1998, banks were free to determine the interest rates for all loans, with the understanding that the lending rates on loans up to INR 200,000 would not exceed the declared prime lending rates (PLR) of the banks. Prior to the initiation of reforms, banks were required to refer all loans above a size threshold to the RBI for authorization, and formation of a consortium was mandatory for all loans exceeding INR 50 million. Bank credit was delivered primarily in the form of cash credit for use as working capital, and there were significant restrictions on the ability of banks to deliver term credit for projects. Finally, the RBI implemented selective credit controls on sensitive commodities. In the wake of the reforms, as early as in 1993, the threshold for the mandatory formation of consortiums was raised tenfold from INR 50 million to INR 500 million. Further, banks within 9 consortiums were permitted to frame the rules or contractual

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agreements governing the consortium lending. In 1996, selective credit controls on all sensitive commodities except sugar were removed. Banks were also allowed much greater flexibility about the proportion of the cash credit component of the loans, the new floor being 25 percent. The following year witnessed further elimination of credit controls: Banks were no longer subjected to the instructions pertaining to Maximum Permissible Bank Finance (MPBF), and were allowed to evolve their own methods for assessing the credit needs of the potential borrowers. Further, banks were no longer required to form consortiums to lend in excess of INR 500 million, and restrictions on their ability to provide term loan for projects were withdrawn. However, prudential regulations required that an individual bank not be overexposed to any one (or group of) creditor(s). Finally, in 1998, the RBI initiated the second generation of banking reforms, in keeping with the recommendations of Narasimham Committee II. The most important recommendation of the Committee was the creation of asset reconstruction companies (ARCs) to simultaneously improve the quality of the balance sheets of the banks and to facilitate recovery of loans. In a separate development, after a prolonged period of legal disputes, debt recovery tribunals (DRTs) began functioning in India, in earnest, by 1999. To summarize, by 1996, banks operating in India, were, by and large, in a position to take independent decisions on the composition of their asset portfolio, and on the choice of potential borrowers. Furthermore, there is evidence to suggest that these banks, including the state-owned ones, allocated resources in a way that was consistent with optimization of risk-return tradeoffs. There are, however, significant differences across credit market behavior of banks of different ownership. Berger et al. (2008) find that comparative advantage of Indian banks, with respect to relationship with potential borrowers, vary considerably with ownership. State-owned banks typically have banking relationship with small firms, state-owned firms and rural firms, domestic private banks have comparative advantage with respect to opaque closely held firms, and foreign banks have banking relationship with large, listed and foreign firms. The likelihood of adverse selection, therefore, varies considerably across banks, by ownership type. Bhaumik and Piesse (2008)
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demonstrate that bank ownership also has an impact on risk aversion among Indian banks, with foreign banks being 10 significantly more risk averse than domestic banks. Finally, state-owned banks retained, in principle, the ability to raise capital without being exposed to market forces. Since the impact of monetary policy on bank lending depends in large measure on the risk of adverse selection the extent of risk aversion of banks, and also on their ability to raise affordable capital, we should expect to see considerable differences in the impact of such policy on banks of different ownership. The authority to implement monetary policy in India rests with the RBI. It was established under the Reserve Bank of India Act of 1934, as a private shareholders bank, and was subsequently nationalized in 1949. Unlike the Bank of England, which was formally granted independence in 1997, the RBI does not have de jure independence from the Government of India. However, with the phasing out of automatic monetization of fiscal deficit by 1997 by way of ad hoc treasury bills, the central bank was granted de facto independence. There are strict limits on the ways and means advances by the RBI to the government, and the former does not participate in primary market auctions of government securities. While the RBI takes into cognizance the federal governments views about the state of the economy, it de facto sets monetary policy independently. Originally, the bank rate and open market operations were the RBIs instruments of choice for conducting monetary policy. In the seventies and eighties, with increased accommodation of the federal governments fiscal policies by the central bank, these instruments lost their efficacy, and the cash reserve ratio (CRR) became the primary instrument for conducting monetary policy. In 1998, in light of the realization that in an increasingly complex environment broad money supply in the medium term cannot be the sole intermediate target of monetary policy, the RBI formally adopted a multifactor approach to monetary policy. This resulted in a focus on the use of short term interest rates as the instruments of monetary policy, facilitated by the deregulation of interest rates, which was initiated as early as 1989. The bank rate, therefore, made a comeback in 1997-98, and was complemented by the rates for reverse repo (and, from 2000-01, repo) transactions. The repo and reverse repo rates have emerged as the primary instruments of monetary policy since the turn of the century.

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The CRR, which was reduced steadily from 15 percent in the early nineties to 5 percent by11 2004, has not completely been abandoned. It is still used in situations that demand significant monetary response, or when other monetary policy options have been exhausted. The use of all monetary policy instruments of the RBI are summarized It is evident from Table 1 that it is difficult to select any one instrument as the indicator of monetary policy of the RBI. This poses a problem because empirical analysis requires the use of a single monetary policy signal; the US literature on the lending channel of monetary policy focuses on changes in the federal funds rate (Kashyap and Stein, 1995, 2000), while the European literature uses short-term interest rates (Erhmann et al., 2001) or the refinancing rate (Gambacorta, 2005). Fortunately, Indian banks declare their respective prime lending rates (PLR) the rate at which they are prepared to lend to the most credit-worthy borrowers that is linked to their cost of funds. The average PLR of the five largest banks is quoted by the RBI. As evident from Figure 1, movements of this average PLR closely replicates movements in the bank rate, and, to a somewhat lesser extent, also the repo and reverse repo rates. Hence, we use the average PLR reported by the RBI as the basis for our measure of monetary policy. We are not alone in our use of such constructs as the basis for the measure for monetary policy. In the British context, Huang (2003) used the average of the base rates of selected banks as the indicator of monetary policy, while Hofman and Mizen (2004) eschewed the official Bank of England rate in favour of the average of the base rates of four major clearing banks. Investors and traders are time and again flummoxed by the violent moves in bank stocks. The Bank Nifty, which is an index comprised of the most liquid and large capitalized Indian bank stocks, has moved up 44% from March 2010 to November 2010 and has fallen by 18% from November 2010 to present. In the last one month, the index has moved up by 6% from lows. What factors cause these large moves, and how do investors and traders study these factors to take a decision on buying or selling bank stocks or the bank index. Banks are highly regulated as they take deposits from the public. Banks in India have to maintain reserves in the form of SLR (Statutory Liquidity Ratio) and CRR
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(Cash Reserve Ratio). The government is the single largest owner of bank stocks. Hence the macro noise levels around the banking sector are high. The sector is affected by policy actions by the regulator the RBI, levels of inflation in the economy, deposit growth, credit off take, system liquidity, government policy decisions, FII flows into the sector etc. Let us look at how each such macro factors affect bank stock prices. Banks have to maintain 24% of their net demand and time deposits (NDTL) in government bonds as SLR and 6% of their NDTL as cash balance with the RBI as CRR. Banks earn risk free rate of interest on SLR while they earn nothing on CRR. At present government bond yields are at around 8%. Banks profitability depends on a) movement of government bond yields and b) cost of their funds. If government bond yields move up, the inference is that the value of banks holdings in government bonds falls. However, as banks can hold government bonds at cost (to the extent of SLR), their profitability will fall to the extent of loss in value of banks holdings in government bonds over and above the SLR limit. The reverse is true when government bond yields move down, then banks profitability moves up to the extent of their excess SLR. The second factor is the cost of funds for the banks. If banks cost of funds is lower than government bond yields, banks make money in the form of positive difference between the borrowing rate and the lending rate. At present banks are raising deposits at over 8.5% levels while government bond yields are at 8%. Banks are actually earning negative interest rates on their incremental investments in government bonds, which is not good for the profitability of the banks. Investors should closely watch movements in government bond yields and the cost of funds for banks to determine the future profitability of banks. The budget, which projected a lower than expected net borrowing for the government for fiscal 2011-12 is positive for government bond yields and hence positive for bank stocks. However, if there is a threat of additional supply due to higher subsidy outgo on account of high oil prices, then it is negative for bank stocks. Oil prices ruling at high levels of USD 115/bbl is negative for banks.

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The RBI tries to control the liquidity in the system using CRR as a tool. CRR is a cost for banks as it does not earn any interest. If the RBI increases CRR, then banks cost increases as they have to keep more cash as reserves with the RBI. Banks liquidity also decreases and they will have that much less to lend. This affects the profitability of banks. The reverse is true in case of CRR being reduced which leads to an increase in the profitability of banks. In the last one year, the RBI has raised policy rates of repo and reverse repo as well as CRR to bring down inflation expectations. The policy rate hikes has raised cost of funds for the banks as well as taken up government bond yields, and this has led to expectations of banks profitability decreasing. Banks stocks initially did not react to RBI policy moves hence the fall from highs was large. Going forward, inflation expectations are still high and RBI is expected to raise policy rates further, which is negative for bank stocks. Banks profitability is dependent on many other factors. Banks earn from raising deposits and lending to the economy, banks earn fee income from services and transactions rendered and banks earn from treasury. High deposit growth coupled with high credit growth is good for bank stocks as it improves the profitability of banks. However if credit growth is excessive (as seen in the 2005-07 period when credit grew in excess of 25% consistently with real estate forming at least 30% of incremental credit growth) it is seen as risky. Banks suffer from non repayment of loans when the economy turns bad as seen in the real estate sector debacle in the post 2008 crisis period. Rising default on loans eat into the banks capital as deposits that go into funding credit have to be serviced and repaid. Investors should watch out for high credit growth and where the credit is going. Banks lent to the telecom sector for funding 2G and 3G licenses and after the scam broke out in late 2010, there are apprehensions on these loans defaulting. This is reflected in the falling prices of bank stocks. Other factors that affect bank stocks include government policy decisions. If the government forces banks to lend more to agriculture, or waives loans given to
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favored industries, banks profitability suffers. FIIs too provide a lot of liquidity to banking stocks. FII buying in 2010 (they brought in USD 28 billion) lifted bank stocks and FII selling in 2011 (USD 2billion year to date) has brought down bank stocks. Investors will have to closely watch government policies and FII flows and their potential impact on bank stocks. Obviously other fundamentals such as fee based income as percentage of total income, higher sticky deposits in the form of current and savings accounts, low non performing loans, higher treasury profits, higher return on assets etc also plays large part in valuations of bank stocks. These are longer term in nature and usually do not account for such sharp rise and fall in bank stock prices as seen in the past one year. In this attempt to contain the monster that eats into our savings, the Reserve Bank of India (RBI) has raised interest rates five times since March this year. Taking the cue, banks too have followed suit and raised interest rates just a few days ago. Last week, in its policy review, the central bank left rates unchanged, merely reducing the SLR to 24% from 25%. However, this is certainly not the end of the taming of inflation story. We are in a rising interest rate scenario and there is a consensus amongst market players that the RBI will hike rates in January. So what does this rising interest rate mean for the stock market investors? And why do money market participants bet on further rate hikes? As long as the inflation doesn't show signs of easing, the central bank has no option but to hike rates. This is because when interest rates are low, there are more borrowers willing to take loans. This means more money in the system and higher inflation. To reduce the chance of inflation, the central bank raises key interest rates, following which banks too hike rates. The opposite is also true. For example, when the economy exhibits low growth or in times of recession, central banks across the globe lower interest rates which, in turn, forces banks to reduce interest rates.

Reforms had significant impact on monetary policy RBI report

MUMBAI, DEC. 23. The Reserve Bank of India today stated that structural reforms initiated in the Indian economy in the early 1990s had a significant impact on the conduct of monetary policy in terms of its objectives, strategies and tactics.
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"An assessment of monetary management since early 1990s shows that monetary policy has been reasonably successful in meeting its key objectives, price stability, flow of credit to productive sectors and ensuring financial stability,'' the RBI stated in its "Report on Currency and Finance 2003-04,'' which is prepared by the RBI's Department of Economic Analysis and Policy. In assessing the conduct of monetary policy during the recent years, it needs to be stressed that during this period, the Indian economy witnessed a large number of shocks, both global and domestic. These shocks included a series of financial crisis in Asia, Brazil and Russia, September 11 terrorist attacks in the U.S., border tensions, sanctions imposed in the aftermath of nuclear tests, political uncertainties and changes in the Government. The monetary policy in India had to manage all such shocks, and, viewed in this light, the success in maintaining price and financial stability is all the more credible. In this regard, it needs to be noted that financial stability does not exclude interest rate cycles. Accordingly, the RBI has been preparing market participants for these cycles and they have also been advised to hedge their exposures. As the international experience indicates, a prudent fiscal policy remains the single largestpre-requisite for monetary stability. Reforms in the monetary-fiscal interface during the 1990s have been a key factor that imparted greater flexibility to monetary policy. These reforms have taken a significant step forward with the enactment of the Fiscal Responsibility and Budget Management Act, 2003. Strict adherence to these fiscal rules in letter and spirit will help stabilize inflation expectations and, in turn, keep inflation low and stable in the country while gradually providing increasing flexibility to the RBI. Fiscal discipline creates enabling conditions for monetary and financial stability. Monetary policy will have, however, still to grapple with uncertainty in the environment it operates. Uncertainty about how economies operate and about monetary policy itself is, however, no excuse for not pursuing price stability. An

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environment of sustained low and stable inflation is conducive for financial savings, with beneficial impact on investment in the economy and for sustained growth and employment. Price stability is all the more important for an economy like India, with a large proportion of poor population that has no hedges against inflation.

Corporate Travails:
Most businesses need capital to run their day-to-day operations that require a mixture of debt and equity. Companies that carry a huge debt on their balance sheets, and those which need more capital in the form of debt for expansion are the worst affected. This is because when interest rates rise, the cost of borrowing also rises. So, you have to pay a higher interest cost to service that debt. In such a scenario, a company has two options be-fore it: either to pass on the rise in interest cost to the end-user or customer, or absorb the burden itself. Since it is a competitive market, it is difficult at most times to pass on the increased cost entirely to the customers or end-users. In such a scenario, profits could come down. From an investor's perspective, when profits come down, the stock becomes less attractive to potential as well as existing investors and the stock price falls. Rising interest rates affect the fundamentals of corporate in the long term. Stock Shock Rising interest rates generally hit markets negatively. They affect some industries more than the other. For example, investors may sell any shares in interest-sensitive stocks that they hold. Interest-sensitive industries include automobiles, real estate and the banking sector. A rising interest rate scenario has a higher effect in the long term. While in the short term, it is liquidity that could help markets tide over, in the longer term, higher interest costs bring down the P/E (price-to-earnings) ratio of companies. Investors who favour increased current income compared to waiting for an investment to grow in value and sell later are attracted to investment vehicles that offer a higher rate of return. Higher interest rates can make investors switch from stocks to fixed-income instruments such as bonds and fixed deposits. In addition, high interest rates can have a negative impact on an investor's total finances. When an investor pays higher interest on his credit card, home loan or
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automobile loan, he may sell some stocks to pay off some of his high-interest debt. In order to do so, he could sell some of his stocks. Selling stocks to service debt is a common practice and can hurt stock prices. This dissertation documents the

reactions of bank stocks to monetary policy actions, which include the changes in Federal funds rate target and the FOMC meetings without adjustment in target rate. As the key policy tool used by the Federal Reserve, the changes in Federal funds rate target are considered by the market participants to convey important information of monetary policy. On the one hand, I examine the state dependency of the effect of target changes on bank stocks. On the other hand, I conduct a cross-sectional analysis to investigate if banks of different characteristics react differently to the changes in funds rate target. I find supportive evidence that the responses of bank stocks to monetary actions are conditional on the context in which the policy change takes place. Specifically, I observe that bank stocks are more adversely affected by the target changes accompanied by a simultaneous discount rate change, which is different with existing evidence. In addition, I find that the target changes that start a new policy direction elicit more market reaction, bank stocks react more vigorously to small surprises than to big surprises, and the direction of the target change does not matter. From the cross-sectional analysis, I find that monetary shocks have more pronounced impact on the banks with larger size, lower capital ratio, higher level of business diversification and higher level of international exposure. The results of this study benefit investors, depositors, bank managers and policy makers. Sectoral Slips Interest-rate sensitives such as auto and auto ancillaries, banks, and real estate are the first ones to be affected in a rising interest rate scenario. We have already seen several banking stocks taking a beating in the recent past. The largest of them all State Bank of India has lost 22% from its peak price of 3,515, while ICICI Bank has lost 13% from its high of 2,520. Bank of India has lost 25% from its high of 589. Auto stocks too have taken a hit. Maruti Suzuki has lost 15% from its high of 1,625. Real estate stocks have also been beaten down as higher interest rates could
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dampen consumer interest. Prospective buyers may feel it safer to continue staying on rent than buying a house. Construction companies and infrastructure companies that guzzle down huge amounts of cash could be affected. We are underweight on banks, autos and real estate.

Safe Haven: Sectors such as pharmaceuticals, FMCG and IT are considered noninterest rate sensitive by investors and are safe to park your money during a high rate regime. You can postpone buying a house, but you cannot postpone buying things like soaps, detergents and toothpaste, which are a daily necessity. Similar is the case with medicines, where consumption is interest-rate neutral. We have increased our exposure to IT from 4% to 6% in our portfolio.

As of now, it looks more likely that interest rates will inch upwards in the near future. Investors are advised to keep that in mind and position their portfolio accordingly. Developing Countries Developing countries may have problems establishing an effective operating monetary policy. The primary difficulty is that few developing countries have deep markets in government debt. The matter is further complicated by the difficulties in forecasting money demand and fiscal pressure to levy the inflation tax by expanding the monetary base rapidly. In general, the central banks in many developing countries have poor records in managing monetary policy. This is often because the monetary authority in a developing country is not independent of government, so good monetary policy takes a backseat to the political desires of the government or is used to pursue other non-monetary goals. For this and other reasons, developing countries that want to establish credible monetary policy may institute a currency board or adopt dollarization. Such forms of monetary institutions thus essentially tie the hands of the government from interference and, it is hoped, that such policies will import the monetary policy of the anchor nation.

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Recent attempts at liberalizing and reforming financial markets (particularly the recapitalization of banks and other financial institutions in Nigeria and elsewhere) aregradually providing the latitude required to implement monetary policy frameworks by the relevant central banks. Types of monetary policy In practice, to implement any type of monetary policy the main tool used is modifying the amount of base money in circulation. The monetary authority does this by buying or selling financial assets (usually government obligations). These open market operations change either the amount of money or its liquidity (if less liquid forms of money are bought or sold). The multiplier effect of fractional reserve banking amplifies the effects of these actions. Constant market transactions by the monetary authority modify the supply of currency and this impacts other market variables such as short term interest rates and the exchange rate. The distinction between the various types of monetary policy lies primarily with the set of instruments and target variables that are used by the monetary authority to achieve their goals. Monetary Policy: Target Market Variable: Long Term Objective: Inflation Targeting Price Targeting Monetary Aggregates Fixed Rate Gold Standard Mixed Policy Interest rate on overnight debt A given rate of change in the CPI

Level Interest rate on overnight debt The growth in money supply

A specific CPI number

A given rate of change in the CPI

Exchange The spot price of the currency The spot price of gold Usually interest rates

The spot price of the currency Low inflation as measured by the gold price Usually unemployment + CPI
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change The different types of policy are also called monetary regimes, in parallel to exchange rate regimes. A fixed exchange rate is also an exchange rate regime; The Gold standard results in a relatively fixed regime towards the currency of other countries on the gold standard and a floating regime towards those that are not. Targeting inflation, the price level or other monetary aggregates implies floating exchange rate unless the management of the relevant foreign currencies is tracking exactly the same variables (such as a harmonized consumer price index). Inflation Targeting Inflation targeting under this policy approach the target is to keep inflation, under a particular definition such as Consumer Price Index, within a desired range. The inflation target is achieved through periodic adjustments to the Central Bank interest rate target. The interest rate used is generally the interbank rate at which banks lend to each other overnight for cash flow purposes. Depending on the country this particular interest rate might be called the cash rate or something similar. The interest rate target is maintained for a specific duration using open market operations. Typically the duration that the interest rate target is kept constant will vary between months and years. This interest rate target is usually reviewed on a monthly or quarterly basis by a policy committee. Changes to the interest rate target are made in response to various market indicators in an attempt to forecast economic trends and in so doing keep the market on track towards achieving the defined inflation target. For example, one simple method of inflation targeting called the Taylor rule adjusts the interest rate in response to changes in the inflation rate and the output gap. The rule was proposed by John B. Taylor of Stanford University.[14] The inflation targeting approach to monetary policy approach was pioneered in New Zealand. It is currently used in Australia, Brazil, Canada, Chile, Colombia, the Czech

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Republic, New Zealand, Norway, Iceland, Philippines, Poland, Sweden, South Africa, Turkey, and the United Kingdom.

Price level targeting Price level targeting is similar to inflation targeting except that CPI growth in one year over or under the long term price level target is offset in subsequent years such that a targeted price-level is reached over time, e.g. five years, giving more certainty about future price increases to consumers. Under inflation targeting what happened in the immediate past years is not taken into account or adjusted for in the current and future years. Monetary aggregates In the 1980s, several countries used an approach based on a constant growth in the money supply. This approach was refined to include different classes of money and credit (M0, M1 etc.). In the USA this approach to monetary policy was discontinued with the selection of Alan Greenspan as Fed Chairman. This approach is also sometimes called monetarism.While most monetary policy focuses on a price signal of one form or another, this approach is focused on monetary quantities. Fixed exchange rate This policy is based on maintaining a fixed exchange rate with a foreign currency. There are varying degrees of fixed exchange rates, which can be ranked in relation to how rigid the fixed exchange rate is with the anchor nation. Under a system of fiat fixed rates, the local government or monetary authority declares a fixed exchange rate but does not actively buy or sell currency to maintain the rate. Instead, the rate is enforced by non-convertibility measures (e.g. capital

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controls, import/export licenses, etc.). In this case there is a black market exchange rate where the currency trades at its market/unofficial rate. Under a system of fixed-convertibility, currency is bought and sold by the central bank or monetary authority on a daily basis to achieve the target exchange rate. This target rate may be a fixed level or a fixed band within which the exchange rate may fluctuate until the monetary authority intervenes to buy or sell as necessary to maintain the exchange rate within the band. (In this case, the fixed exchange rate with a fixed level can be seen as a special case of the fixed exchange rate with bands where the bands are set to zero.) Under a system of fixed exchange rates maintained by a currency board every unit of local currency must be backed by a unit of foreign currency (correcting for the exchange rate). This ensures that the local monetary base does not inflate without being backed by hard currency and eliminates any worries about a run on the local currency by those wishing to convert the local currency to the hard (anchor) currency. Under dollarization, foreign currency (usually the US dollar, hence the term "dollarization") is used freely as the medium of exchange either exclusively or in parallel with local currency. This outcome can come about because the local population has lost all faith in the local currency, or it may also be a policy of the government (usually to rein in inflation and import credible monetary policy). These policies often abdicate monetary policy to the foreign monetary authority or government as monetary policy in the pegging nation must align with monetary policy in the anchor nation to maintain the exchange rate. The degree to which local monetary policy becomes dependent on the anchor nation depends on factors such as capital mobility, openness, credit channels and other economic factors. Gold standard The gold standard is a system under which the price of the national currency is measured in units of gold bars and is kept constant by the government's promise to buy or sell gold at a fixed price in terms of the base currency. The gold standard

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might be regarded as a special case of "fixed exchange rate" policy, or as a special type of commodity price level targeting. The minimal gold standard would be a long-term commitment to tighten monetary policy enough to prevent the price of gold from permanently rising above parity. A full gold standard would be a commitment to sell unlimited amounts of gold at parity and maintain a reserve of gold sufficient to redeem the entire monetary base. Today this type of monetary policy is no longer used by any country, although the gold standard was widely used across the world between the mid-19th century through 1971. Its major advantages were simplicity and transparency. The gold standard was abandoned during the Great Depression, as countries sought to reinvigorate their economies by increasing their money supply. [16] The Britton Woods system, which was a modified gold standard, replaced it in the aftermath of World War II. However, this system too broke down during the Nixon shock of 1971. The gold standard induces deflation, as the economy usually grows faster than the supply of gold. When an economy grows faster than its money supply, the same amount of money is used to execute a larger number of transactions. The only way to make this possible is to lower the nominal cost of each transaction, which means that prices of goods and services fall, and each unit of money increases in value. Absent precautionary measures, deflation would tend to increase the ratio of the real value of nominal debts to physical assets over time. For example, during deflation, nominal debt and the monthly nominal cost of a fixedrate home mortgage stays the same, even while the dollar value of the house falls, and the value of the dollars required to pay the mortgage goes up. Mainstream economics considers such deflation to be a major disadvantage of the gold standard. Unsustainable (i.e. excessive) deflation can cause problems during recessions and financial crisis lengthening the amount of time a economy spends in recession. William Jennings Bryan rose to national prominence when he built his historic (though unsuccessful) 1896 presidential campaign around the argument that deflation caused by the gold standard made it harder for everyday citizens to start new businesses, expand their farms, or build new homes.

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Policy of various nations

Australia - Inflation targeting Brazil - Inflation targeting Canada - Inflation targeting Chile - Inflation targeting China - Monetary targeting and targets a currency basket Czech Republic - Inflation targeting Colombia - Inflation targeting Hong Kong - Currency board (fixed to US dollar) India - Multiple indicator approach New Zealand - Inflation targeting Norway - Inflation targeting Singapore - Exchange rate targeting South Africa - Inflation targeting Switzerland - Inflation targeting [17] Turkey - Inflation targeting United Kingdom[18] - Inflation targeting, alongside secondary targets on 'output and employment'. United States[19] - Mixed policy (and since the 1980s it is well described by the "Taylor rule," which maintains that the Fed funds rate responds to shocks in inflation and output)

Monetary policy tools Monetary base Monetary policy can be implemented by changing the size of the monetary base. Central banks use open market operations to change the monetary base. The central bank buys or sells reserve assets (usually financial instruments such as bonds) in exchange for money on deposit at the central bank. Those deposits are convertible to currency. Together such currency and deposits constitute the monetary base which is the general liabilities of the central bank in its own monetary unit. Usually other banks can use base money as a fractional reserve and expand the circulating money supply by a larger amount.
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Reserve requirements The monetary authority exerts regulatory control over banks. Monetary policy can be implemented by changing the proportion of total assets that banks must hold in reserve with the central bank. Banks only maintain a small portion of their assets as cash available for immediate withdrawal; the rest is invested in illiquid assets like mortgages and loans. By changing the proportion of total assets to be held as liquid cash, the Federal Reserve changes the availability of loanable funds. This acts as a change in the money supply. Central banks typically do not change the reserve requirements often because it creates very volatile changes in the money supply due to the lending multiplier. Discount window lending Discount window lending is where the commercial banks, and other depository institutions, are able to borrow reserves from the Central Bank at a discount rate. This rate is usually set below short term market rates (T-bills). This enables the institutions to vary credit conditions (i.e., the amount of money they have to loan out), thereby affecting the money supply. It is of note that the Discount Window is the only instrument which the Central Banks do not have total control over. By affecting the money supply, it is theorized, that monetary policy can establish ranges for inflation, unemployment, interest rates, and economic growth. A stable financial environment is created in which savings and investment can occur, allowing for the growth of the economy as a whole. Interest rates Interest rates-The contraction of the monetary supply can be achieved indirectly by increasing the nominal interest rates. Monetary authorities in different nations have differing levels of control of economy-wide interest rates. In the United States, the Federal Reserve can set the discount rate, as well as achieve the desired Federal funds rate by open market operations. This rate has significant effect on other market interest rates, but there is no perfect relationship. In the United States open market operations are a relatively small part of the total volume in the bond market.

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One cannot set independent targets for both the monetary base and the interest rate because they are both modified by a single tool open market operations; one must choose which one to control. In other nations, the monetary authority may be able to mandate specific interest rates on loans, savings accounts or other financial assets. By raising the interest rate(s) under its control, a monetary authority can contract the money supply, because higher interest rates encourage savings and discourage borrowing. Both of these effects reduce the size of the money supply. How Interest Rates Affect The Stock Market? Most people pay attention to them, and they can impact the stock market. But why? In this article, we'll explain some of the indirect links between interest rates and the stock market and show you how they might affect your life.

The Interest rate Essentially, interest is nothing more than the cost someone pays for the use of someone else's money. Homeowners know this scenario quite intimately. They have to use a bank's money (through a mortgage) to purchase a home and they have to pay the bank for the privilege. Credit card users also know this scenario quite well - they borrow money for the short term in order to buy something right away. But when it comes to the stock market and the impact of interest rates, the term usually refers to something other than the above examples - although we will see that they are affected as well.

The interest rate that applies to investors is the U.S. Federal Reserve's federal funds rate. This is the cost that banks are charged for borrowing money from Federal Reserve banks. Why is this number so important? It is the way the Federal Reserve (the "Fed") attempts to control inflation. Inflation is caused by too much money chasing too few goods (or too much demand for too little supply), which causes prices to increase. By influencing the amount of money available for purchasing
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goods, the Fed can control inflation. Other countries' central banks do the same thing for the same reason. Basically, by increasing the federal funds rate, the Fed attempts to lower the supply of money by making it more expensive to obtain

Effects of an increase When the Fed increases the federal funds rate, it does not have an immediate impact on the stock market. Instead, the increased federal funds rate has a single direct effect - it becomes more expensive for banks to borrow money from the Fed. However, increases in the discount rate also cause a ripple effect, and factors that influence both individuals and businesses are affected. The first indirect effect of an increased federal funds rate is that banks increase the rates that they charge their customers to borrow money. Individuals are affected through increases to credit card and mortgage interest rates, especially if they carry a variable interest rate. This has the effect of decreasing the amount of money consumers can spend. After all, people still have to pay the bills, and when those bills become more expensive, households are left with less disposable income. This means that people will spend less discretionary money, which will affect businesses' top and bottom lines (that is, revenues and profit) Therefore, businesses are also indirectly affected by an increase in the federal funds rate as a result of the actions of individual consumers. But businesses are affected in a more direct way as well. They, too, borrow money from banks to run and expand their operations. When the banks make borrowing more expensive, companies might not borrow as much and will pay a higher rate of interest on their loans. Less business spending can slow down the growth of a company, resulting in decreases in profit.

Stock Price affects clearly, changes in the federal funds rate affect the behavior of consumers and business, but the stock market is also affected. Remember that one method of valuing a company is to take the sum of all the expected future cash flows from that company discounted back to the present. To arrive at a stock's price, take the sum of
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the future discounted cash flow and divide it by the number of shares available. This price fluctuates as a result of the different expectations that people have about the company at different times. Because of those differences, they are willing to buy or sell shares at different prices.

If a company is seen as cutting back on its growth spending or is making less profit either through higher debt expenses or less revenue from consumers - then the estimated amount of future cash flows will drop. All else being equal, this will lower the price of the company's stock. If enough companies experience a decline in their stock prices, the whole market, or the indexes (like the Dow Jones Industrial Average or the S&P 500) that many people equate with the market, will go down. Investment Effects For many investors, a declining market or stock price is not a desirable outcome. Investors wish to see their invested money increase in value. Such gains come from stock price appreciation, the payment of dividends - or both. With a lowered expectation in the growth and future cash flows of the company, investors will not get as much growth from stock price appreciation, making stock ownership less desirable.

Furthermore, investing in stocks can be viewed as too risky compared to other investments. When the Fed raises the federal funds rate, newly offered government securities, such Treasury bills and bonds, are often viewed as the safest investments and will usually experience a corresponding increase in interest rates. In other words, the "risk-free" rate of return goes up, making these investments more desirable. When people invest in stocks, they need to be compensated for taking on the additional risk involved in such an investment, or a premium above the risk-free rate. The desired return for investing in stocks is the sum of the risk-free rate and the risk premium. Of course, different people have different risk premiums, depending on their own tolerance for risk and the company they are buying. However, in general, as the risk-free rate goes up, the total return required for investing in stocks also increases. Therefore, if the required risk premium decreases while the potential
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return remains the same or becomes lower, investors might feel that stocks have become too risky, and will put their money elsewhere.

Interest Rates Affect but Don't Determine the Stock Market The interest rate, commonly bandied about by the media, has a wide and varied impact upon the economy. When it is raised, the general effect is to lessen the amount of money in circulation, which works to keep inflation low. It also makes borrowing money more expensive, which affects how consumers and businesses spend their money; this increases expenses for companies, lowering earnings somewhat for those with debt to pay. Finally, it tends to make the stock market a slightly less attractive place to investment.

Keep in mind, however, that these factors and results are all interrelated. What we described above are very broad interactions, which can play out in innumerable ways. Interest rates are not the only determinant of stock prices and there are many considerations that go into stock prices and the general trend of the market - an increased interest rate is only one of them. Therefore, one can never say with confidence that an interest rate hike by the Fed will have an overall negative effect on stock prices. Currency board Currency board-A currency board is a monetary arrangement that pegs the monetary base of one country to another, the anchor nation. As such, it essentially operates as a hard fixed exchange rate, whereby local currency in circulation is backed by foreign currency from the anchor nation at a fixed rate. Thus, to grow the local monetary base an equivalent amount of foreign currency must be held in reserves with the currency board. This limits the possibility for the local monetary authority to inflate or pursue other objectives. The principal rationales behind a currency board are threefold: 1. To import monetary credibility of the anchor nation; 2. To maintain a fixed exchange rate with the anchor nation;

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3. To establish credibility with the exchange rate (the currency board arrangement is the hardest form of fixed exchange rates outside of dollarization). In theory, it is possible that a country may peg the local currency to more than one foreign currency; although, in practice this has never happened (and it would be a more complicated to run than a simple single-currency currency board). A gold standard is a special case of a currency board where the value of the national currency is linked to the value of gold instead of a foreign currency. The currency board in question will no longer issue fiat money but instead will only issue a set number of units of local currency for each unit of foreign currency it has in its vault. The surplus on the balance of payments of that country is reflected by higher deposits local banks hold at the central bank as well as (initially) higher deposits of the (net) exporting firms at their local banks. The growth of the domestic money supply can now be coupled to the additional deposits of the banks at the central bank that equals additional hard foreign exchange reserves in the hands of the central bank. The virtue of this system is that questions of currency stability no longer apply. The drawbacks are that the country no longer has the ability to set monetary policy according to other domestic considerations, and that the fixed exchange rate will, to a large extent, also fix a country's terms of trade, irrespective of economic differences between it and its trading partners. Hong Kong operates a currency board, as does Bulgaria. Estonia established a currency board pegged to the Deutschmark in 1992 after gaining independence, and this policy is seen as a mainstay of that country's subsequent economic success (see Economy of Estonia for a detailed description of the Estonian currency board). Argentina abandoned its currency board in January 2002 after a severe recession. This emphasized the fact that currency boards are not irrevocable, and hence may be abandoned in the face of speculation by foreign exchange traders. Following the signing of the Dayton Peace Agreement in 1995, Bosnia and Herzegovina established a currency board pegged to the Deutschmark (since 2002 replaced by the Euro).
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Currency boards have advantages for small, open economies that would find independent monetary policy difficult to sustain. They can also form a credible commitment to low inflation. Unconventional monetary policy at the zero bound Other forms of monetary policy, particularly used when interest rates are at or near 0% and there are concerns about deflation or deflation is occurring, are referred to as unconventional monetary policy. These include credit easing, quantitative easing, and signaling. In credit easing, a central bank purchases private sector assets, in order to improve liquidity and improve access to credit. Signaling can be used to lower market expectations for future interest rates. For example, during the credit crisis of 2008, the US Federal Reserve indicated rates would be low for an extended period, and the Bank of Canada made a conditional commitment to keep rates at the lower bound of 25 basis points (0.25%) until the end of the second quarter of 2010. Since February 9, the market has been swaying between the 17,500 and 18,500 levels, keeping experts guessing on its next move. It has been seesawing something like this: 200 points down one day, 350 points up on the next followed by a steep 150 points fall in the very next session. It almost appears to be a zero-sum game, with the Sensex expected to stay in a narrow range for the time being, unless global factors such as the tsunami in Japan have a ripple effect on the index. Reports of scams and corruption, high inflation, the Arab crisis continue to spook the market. But they have not been able to force the market to take a definite direction. You, too, like most, must be wondering, which way the benchmark index is heading. Well, if you are an investor waiting on the fringes for the dust to settle on the bourses, it's likely, as ever, you may end up missing the bus when the markets finally set out on a northward excursion. The concerns on issues of corruption may continue to outweigh the bits-and-pieces of positive news that keep trickling in, in the form of policy changes and, at times, good corporate performance, but if you are a long-term investor, this could well be the time to take a position in the market.

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"We believe that in the long term, GDP (gross domestic product) growth of 8.5% is quite possible, and this should lead to good corporate performance. We are also strong believers that in the long term markets are slaves of corporate earnings," says Chandresh Nigam, head of investment, Axis Mutual Fund.

According to a recent Morgan Stanley Research report, India's medium-term growth story remains strong. "We expect India to be back on a higher growth path of 8.5-9% from 2012-13 onwards driven by demographics, reforms and globalization,"

The Union Budget for 2011-12 has allayed concerns that the reform process has got stalled, by making the right noises. "The Budget has made several commitments on various economic reforms such as the Banking Law Amendment Bill and liberalising the insurance policy. Going forward, there would be several proactive measures on furthering economic reforms, which would mitigate the volatility arising from the current situation in West Asia," says G Chokkalingam, executive director and chief investment officer (CIO), Centrum Wealth Management.

Nonetheless, the alarmist drum-beating by doomsayers always attracts a larger audience with retail investors panicking the most-which is understandable considering they are the least equipped to absorb the shock of a market crash. The mantra, however, is to stop thinking for the short term and, if possible, filter out .

CONCERNS

Inflation Woes: The Reserve Bank of India (RBI) has been struggling to strike a balance between checking the runaway inflation-by increasing its benchmark interest rates-and protecting economic growth. Despite this, inflation as measured by the Wholesale Price Index stayed above 8% for January, well above the RBI's Marchend target of 7%.

Oil Spike: As the Libyan crisis refuses to recede, global crude price has crossed $110 a barrel and was ruling just above that level- despite a more than 2% fall witnessed after the crisis in Japan - on March 16, 2011. This has not only fuelled
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fears of a further rise in inflation-India imports 75% of the total crude it consumes-it has added to the uncertainty about India's growth. Sunder Subramanian, senior manager, institutional sales, Sharekhan, says the markets willremain subdued till crude cools off. Syed Sagheer, equity fund manager, IDBI Asset Management, agrees, "Rise in oil prices is the single biggest concern for the market as sustained high prices would widen the fiscal deficit and impact earnings of many corporate."

FIIs on the Run: With scams and graft cases ruling newspaper headlines, FIIs have been apprehensive about the Indian market. Inflation and rising crude prices have also played a role in scaring them away. FIIs sold shares worth over Rs 5,500 cr in the first two months of the current calendar year Market experts, however, feel that FIIs would take a positive view of the Indian market in the long term. Sameer Kamdar, chief executive officer at ASK Investment Managers says, "FII investments will continue to remain volatile and unpredictable in the short term. In the long term though, India continues to be among the top emerging market economies with a steady and high growth rate. Considering all this, FIIs should continue to chase Indian stocks for a long time to come." In such a scenario, should you be worried? You should be, because with rising inflation the real return (return on your investments adjusted for inflation) from your investments- especially those in fixed income instruments-are shrinking. This makes it all the more important for you to allocate a part of your savings to investment instruments that beat inflation by a decent margin-and the best option available to make this happen is to invest in equities for the long term, ignoring short-term volatility.

VIRTUE OF LONG TERM INVESTMENT KN Sivasubramanian chief investment officer, Franklin Equity- India, Franklin Templeton Investments, says, "Investors should remain focused on their long-term goals and asset allocation, and keep in mind inflation and real returns
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Equity markets rarely see a secular bull run over a long period. Every northward move is followed by a downward correction. Even during the longest bull-run ever witnessed by Indian equity markets, between January 2004 and January 2008, there have been periods, though short-lived, of sharp market corrections. The Sensex dropped from 12,612 to 8,929 or 29% between May 10, 2006 and June 14, 2006. Again the index shed close to 2,000 points (from 14,404 to 12,415) between February 19, 2007 and March 5, 2007 (Sensex) These sharp corrections aside, the Sensex rose from 9,390 in January 2006 to 20,286 at the end of 2007, a jump of 116% in two years. So, are you missing the woods for the trees by paying too much attention to market crashes? The cardinal rule is-and most experts would vouch for it-that over the long-term, investment in equities are no as risky as it seems Mahesh Patil, head of equity, Birla Sun Life Mutual Fund, says, retail investors should not be driven by daily movements of the indices. "Though the markets are not out of woods yet, the comforting factor is that valuations are looking quite fair at present," he says. If you read our report on multibagger stocks.you will know that some stocks have given more than 1000% returns in the last six years, a period that witnessed one of the biggest market crashes in 2008-09 following the global financial crisis.

WHY INVEST NOW? Since November 5, 2010, when the Sensex ended at 21,004, it's all-time closing high, it has shed over 2,500 points or 12% till March 10, 2011. The price-to-earnings ratio, or PE ratio-an indicator of how expensive a particular stock is-of the Sensex dropped from 24 to 19.91 during that period and the PE of the Nifty shed 13%, While some may consider these ratios to be high-PE of over 20 generally indicates expensive valuation- if you expand your universe of stocks to the BSE-500, you may be able to spot many good stocks at cheap valuations. The BSE-500 index was trading at the PE ratio of 18.29 as on March 10, 2011, down from 23 on November5,2010 .

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GauravDoshi, vice-president, equity specialist for Portfolio Management Services (PMS), Morgan Stanley Private Wealth Management, says "Given the price erosion that has already taken place, we believe, at current levels, it is time to turn constructive on investments in Indian equities with a long-term outlook."

PrakashDiwan, head of institutional sales at Networth Stock Broking says, "In the next couple of years, the current levels of the market may end up proving to be the best buying opportunity available to retail investors THE RIGHTPICKS

Though volatile equity markets should not scare you, it is always advisable to be highly selective while choosing your stocks.

Play safe: Go for stocks of companies with strong financial and operational credentials. Companies with large market capitalization (an indication of the size of a company arrived at by multiplying the current stock price with the number of outstanding shares) have the capacity to withstand short-term market volatility and economic shocks because of their strong financials and business value. Avoid midcap and small-cap stocks of companies with dubious managements or financials. "The advice to retail investors would be to use the bad days in the markets to invest in high quality companies with sound managements and lot of free cash," says, VikasKhemani, executive vice-president and head, institutional equities, Edelweiss Securities. Money today asked stock analyst to pick their favorite scrip considering the short-term market volatility and long-term growth prospects (See our story Budget Stocks on Page 24). Most of the experts showed faith in large-cap stocks such as Infosys, Axis Bank, BHEL, ITC, Tata Motors, M&M, L&T and SBI.

"Large-cap stocks like Larsen and Toubro, BHEL, Reliance, NTPC are safe and have a greater capability of absorbing inflationary pressures," says Tushar Agarwal, chief executive officer at AGROY Group.

Value Picks: Use the market volatility to pick good growth and value stocks which
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have been hammered substantially and are available at cheaper

valuations.

Growth stock companies are those whose revenues and earnings are growing faster than the industry in which they operate. Such companies usually do not pay dividends, and instead use the funds to invest in expansion. A value stock, on the other hand, is available at a price lower than what it should command given its fundamentals. Such companies pay high dividends and have a low PE ratio. criteria for identifying value. .

Invest systematically: Investors who are too scared to take a plunge in the equity markets directly may opt for large-cap and index funds through the systematic investment route. While mutual funds provide diversification, systematic investment helps in averaging out the volatility factor. "Systematic investing remains an ideal strategy, as it offers an easy as well as effective way to participate in equity markets, reducing the impact of volatility," says Sivasubramanian of Franklin Templeton Investments . Even in the case of direct equity investments, one should avoid making a large onetime allocation. Investors should, instead, invest a smaller sum each time the market dips and valuations look attractive .

SECTORAL REVIEW

while selecting the right stock is important, in a volatile market, taking the correct sectoral position also becomes significant. Considering the prevailing

macroeconomic situation, market conditions and the recent Budget announcements, the following sectors should appeal to you.

Infrastructure: The Union Budget's focus on infrastructure comes as a big boost to the sector. The government plans to increase the outlay for the sector substantially and raise the investment limit for FIIs in corporate bonds. These measures will help enhance the fund flow to the sector. Besides, continuous underperformance for over three years makes infrastructure stocks lucrative at current levels. The CNX Infrastructure index has moved up by just 14% in the last three years beginning
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March 2008 and has been sliding since December last year .

FMCG and Pharmaceuticals: Both are categorized as defensive sectors and are not affected too much by inflation or the interest rate hikes. This makes these stocks less prone to market volatility. Also, the Budget's focus on rural incomes comes as positive for the consumption-driven FMCG sector.

"The government's continued focus on boosting rural incomes, education sector and infrastructure augurs well for consumer-oriented as well as infrastructure sectors," says sivasubramanian. Rate-sensitive stocks: High inflation and the increase in interest rates may keep the sentiments for banking, real estate and auto negative. However, many experts believe these stocks especially the banking sector stocks have already lost a lot of value and are now available at decent valuations.

"If I were an investor, I would not stay away from rate-sensitive stocks because they have corrected a lot. Any positive news related to the sectors can give a push to stock prices from the present levels," says Raj Bhatt, vice-chairman and chief executive at ElaraCapital. The Union Budget was also positive for both the auto and banking sectors. While the government announced a Rs 6000-crore proposal to recapitalize PSU banks during 2011-12, its decision not to raise excise duties on passenger cars buoyed spirits of auto majors. But the real estate sector had no such luck and many experts are still unanimous in asking investors to stay clear of realty stocks. In an directionless market, the strategy for retail investors would be to stay focused on their investment objectives without getting carried away by incoherent noises. If possible, stop looking at your equity portfolio on a daily basis. For serious investors, inactivity pays in the long run. As Warren Buffett says, "Much success (in the equity market) can be attributed to inactivity. Most investors can't resist the temptation to constantly buy and sell.".

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Objectives of monetary policy 1. Central banks derive their objectives from their respective mandates. Monetary policy could have either a single objective of price stability or multiple objectives besides price stability. In the literature and in practice, price stability is considered as the dominant objective of monetary policy. 2. The preamble to the Reserve Bank of India Act, 1934 delineates the basic functions of the Bank as to regulate the issue of Bank notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage. The objectives of monetary policy evolved from this broad guideline as maintaining price stability and ensuring adequate flow of credit to the productive sectors of the economy. In practice, monetary policy endeavoured to maintain a judicious balance between economic growth and price stability. 3. The question is how do we define price stability? Price stability does not mean zero inflation. It is considered as a low and stable order of inflation. This is because both high inflation and deflation impose costs on the economy by way of loss of output and misallocation of resources. For advanced economies, an inflation rate of about 2 per cent is equated with price stability. For an emerging market economy (EME) like India, going through significant structural changes, a slightly higher rate of inflation which allows relative prices to adjust smoothly can be considered appropriate. The Chakravarty Committee (1985) had defined an inflation rate of 4 per cent per annum as tolerable for India. 4. India is a moderate inflation country with the long-term average inflation rate remaining in a single digit of about 7.5 per cent since 197071. Over this 40-year period, the average inflation rate, however, has decelerated to about 5.5 per cent in the decade of 2000s. The medium term objective of monetary policy is to bring down the average inflation rate to around 3.0 per cent consistent with Indias integration with the global economy. 5. While a low level of inflation is essential to sustain high levels of growth, it is not sufficient to maintain financial stability, as has been demonstrated by the recent global financial crisis. Consequently, besides price stability, ensuring orderly conditions in the financial markets has become a key policy concern. In this context,
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it may be indicated that financial stability had emerged as another important objective of monetary policy in India much before the crisis. Thus, monetary policy in India has evolved to have multiple objectives of price stability, financial stability and growth. These objectives are not inherently contradictory, rather mutually reinforcing. Price and financial stability are important for sustaining high levels of growth which is the ultimate objective of public policy. 6. In order to attain the objectives of policy it is necessary to have a consistent policy framework. At a theoretical level, the evolution of monetary framework could be traced to the desire to reduce inflationary bias in the economy through various refinements under the broader debate on rules versus discretion in policy making, and more recently, constrained discretion which believes that the doctrines of rules and discretion are not mutually exclusive2. In practice, the nature of the framework is contingent upon two important considerations. First, the level of development of financial markets and institutions; and second, the degree of openness of the economy to trade and capital flows. In India, like most other countries, the monetary policy framework has evolved in response to and in consequence of financial developments and shifts in the underlying transmission mechanism. How did monetary policy framework evolve globally? .In order to achieve the objectives of monetary policy which are not under the direct control of central banks, monetary authorities typically set intermediate targets, which bear a stable relationship with the overall objectives of monetary policy3. The selection of intermediate target is also conditional upon the channels of monetary transmission the process through which monetary policy actions impact the ultimate objectives. Historically, although credit targets were prevalent, the concept of a formal intermediate target emerged with the monetarist emphasis on money targeting in an environment of worsening inflation in the 1970s and observed stable relationship among money, output and prices. A number of major central banks such as Switzerland, Germany, Japan, the UK, the USA, France, Australia and Canada adopted monetary targets in the mid-1970s. In the 1980s, financial market innovations reduced the need for financial intermediation
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by the banking system and in turn began to impart volatility to the behavior of monetary aggregates. The consequent weakening of the stable relationship among money, output and prices made many advanced country central banks to move towards signaling monetary policy stance through setting of interest rates. Monetary targeting, however, continued in some form in many bank-based economies in continental Europe such as Germany, France and Switzerland where it was possible to establish money demand stability with redefinition of monetary aggregates. Given the under-developed nature of financial markets coupled with the quantitybased credit channel of monetary transmission, money target was considered suitable in case of developing countries. In the 1980s, monetary targeting was adopted in many developing countries such as Brazil, China, Indonesia, Korea, Malaysia, Peru, Philippines, Russia and Venezuela. As financial innovations spread to developing countries and they became more open to external capital flows, monetary targeting proved less effective. The weakening of monetary targeting framework, both in advanced and developing countries, triggered a search for alternate monetary frameworks. As it was also widely recognized that monetary policy can contribute to sustainable growth by maintaining price stability, beginning with New Zealand in 1989, a number of advanced and developing countries moved to inflation targeting. Under this approach, central banks target the final objective, i.e., inflation itself rather than targeting any intermediate variable. Among the major central banks, the Bank of England (BoE) formally adopted inflation targeting in 1992. 12. The US Federal Reserve (Fed) follows a more eclectic approach, which can be termed as risk management approach, in pursuit of its twin objectives of price stability and maximum employment. Under the risk management approach, the Fed takes a policy view on interest rate on consideration of balance of risks to inflation and growth. Although the European Central Bank (ECB) has a single mandate of price stability, it is not an inflation targeting central bank. Its policy decisions are based on a two pillars strategy comprising of economic analysis and monetary analysis. Money supply continues to be an important variable in its analytical tool under the second pillar reflecting the enduring influence of the German Bundesbank which was a major monetary targeting central bank. Notwithstanding the difference
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in approach among central banks, price stability is accepted as the predominant objective of monetary policy. How did monetary policy framework evolve in India? In India also, monetary policy framework has undergone significant transformation over time. In the 1960s, as inflation was considered to be structural and inflation volatility was mainly caused by agricultural failures, there was greater reliance on selective credit controls. The aim was to regulate bank advances to sensitive commodities to influence production outlays, on the one hand and to limit possibilities of speculation, on the other. In the 1970s, there was a surge in inflation on account of monetary expansion induced by expansionary fiscal policies besides the oil price shocks. By the early 1980s, there was a broad agreement on the primary causes of inflation. It was argued that while fluctuations in agricultural prices and oil price shocks did affect prices, sustained inflation since the early 1960s could not have occurred unless it was supported by the continuous excessive monetary expansion generated by the large-scale monetization of the fiscal deficit4. Against the backdrop, the Committee to Review the Working of the Monetary System (Chairman: Prof. SukhamoyChakravarty; 1985), set up by the Reserve Bank, recommended a monetary targeting framework to target an acceptable order of inflation in line with desired output growth. It also recommended for limiting monetary expansion through the process of monetization of fiscal deficit by an agreement between the Reserve Bank and the Government.5 With empirical evidence supporting reasonable stability in the demand function for money, broad money (M3) formally emerged as an intermediate target. Under this approach, a monetary projection is made consistent with the expected real GDP growth and a tolerable level of inflation6. The framework was, however, a flexible one allowing for various feedback effects. Moreover, money supply target was relatively well understood by the public at large. With the pace of trade and financial liberalization gaining momentum following the initiation of structural reforms in the early 1990s, the efficacy of broad money as an

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intermediate target of monetary policy came under question. The Reserve Banks Monetary and Credit Policy for the First Half of 199899 observed that financial innovations emerging in the economy provided some evidence that the dominant effect on the demand for money in the near future need not necessarily be real income, as in the past. Since the mid-1990s, apart from dealing with the usual supply shocks, monetary policy had to increasingly contend with external shocks emanating from swings in capital flows, volatility in the exchange rate and global business cycles. Subsequently, increase in liquidity emanating from capital inflows raised the ratio of net foreign assets (NFA) to Reserve Money (Chart 1).

This rendered the control of monetary aggregates more difficult. Consequently, there was also increasing evidence of changes in the underlying transmission mechanism of monetary policy with interest rate and the exchange rate gaining importance vis-vis quantity variables.8 Bank credit to private sector as a per cent of GDP also started rising, though it still remains low as compared to advanced economies and many EMEs underscoring the potential for greater credit penetration (Table 1). These developments necessitated refinements in the conduct of monetary policy.

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Against this backdrop, the Reserve Bank formally adopted a multiple indicators approach in April 1998 with a greater emphasis on rate channels for monetary policy formulation. As a part of this approach, information content from a host of quantity variables such as money, credit, output, trade, capital flows and fiscal position as well as from rate variables such as rates of return in different markets, inflation rate and exchange rate are analyzed for drawing monetary policy perspectives. The multiple-indicators approach, as conceptualized when Dr. BimalJalan was the Governor, continued to evolve and was augmented by forward looking indicators and a panel of parsimonious time series models. The forward looking indicators are drawn from the Reserve Banks industrial outlook survey, capacity utilization survey, professional forecasters survey and inflation expectations survey9. The assessment from these indicators and models feed into the projection of growth and inflation. Simultaneously, the Reserve Bank also gives the projection for broad money (M3), which serves as an important information variable, so as to make the resource balance in the economy consistent with the credit needs of the government and the private sector. Thus, the current framework of monetary policy can be termed as an augmented multiple indicators approach.

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This large panel of indicators is at times criticized as a check list approach, as it does not provide for a clearly defined nominal anchor for monetary policy. However, given the level of financial market development, the evolving nature of monetary transmission and the need to maintain the resource balance between the government and the private sector, monetary policy assessment becomes inherently complex. Globally, it is now recognized that the task of monetary management has become more challenging. In view of central banks operating in an environment of high uncertainty regarding the functioning of the economy as well as its prevailing state and future developments, a single model or a limited set of indicators may not be a sufficient guide for monetary policy. Instead, an encompassing and integrated set of data is required. This reinforces the usefulness of monitoring a number of macroeconomic indicators in the conduct of monetary policy. In the context of the recent crisis, it is argued that monitoring money and credit may help policymakers interpret asset market
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developments and draw implications from them for the economic and financial outlook.10 There is a need to raise awareness in the central banking community of the importance of monetary analysis and its implications, both for economies individually and globally.11 Thus, there is now increasing support for a broad-based approach to monetary policy. Policy Environment Changing Monetary Policy Framework Since the onset of the reforms process, monetary management in terms of framework and instruments has undergone significant changes, reflecting broadly the transition of the economy from a regulated to liberalized and deregulated
3

regime. While the twin objectives of monetary policy of maintaining price stability and ensuring availability of adequate credit to productive sectors of the economy to support growth have remained unchanged; the relative emphasis on either of these objectives has varied over the year depending on the circumstances. Reflecting the development of financial markets and the opening up of the economy, the use of broad money as an intermediate target has been deemphasized, but the growth in broad money (M 3) continues to be used as an important indicator of monetary policy. The composition of reserve money has also changed with net foreign exchange assets currently accounting for nearly one-half. A multiple indicator approach was adopted in 1998-99, wherein interest rates or rates of return in different markets (money, capital and government securities markets) along with such data as on currency, credit extended by banks and financial institutions, fiscal position, trade, capital flows, inflation rate, exchange rate, refinancing and transactions in foreign exchange available on high frequency basis were juxtaposed with output data for drawing policy perspectives. Such a shift was gradual and a logical outcome of measures taken over the reform period since early nineties. The thrust of monetary policy in recent years has been to develop an array of instruments to transmit liquidity and interest rate signals in the short-term in a more flexible and bi-directional manner. A Liquidity Adjustment Facility (LAF) has been introduced since June 2000 to precisely modulate short-term liquidity and signal

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short-term interest rates. The LAF, in essence, operates through repo and reverse repo auctions thereby setting a corridor for the short-term interest rate consistent with policy objectives. There is now greater reliance on indirect instruments of monetary policy. The RBI is able to modulate the large market borrowing programmeby combining strategic debt management with active open market operations. Bank Rate has emerged as a reasonable signally rate while the LAF rate has emerged as both a tool for liquidity management and signaling of interest rates in the overnight market. The RBI has also been able to use open market operations effectively to manage the impact of capital flows in view of the stock of marketable Government securities at its disposal and development of financial markets brought about as part of reform. The responsibility of the RBI in undertaking reform in the financial markets has been driven mainly by the need to improve the effectiveness of the transmission channel of monetary policy. The developments of financial markets have therefore, encompassed regulatory and legal changes, building up of institutional infrastructure, constant fine-tuning in market microstructure and massive up gradation of technological infrastructure. Since the onset of reforms, a major focus of architectural policy efforts has been on the principal components of the organized financial market spectrum: the money market, which is central to monetary policy, the credit market, which is essential for flow of resources to the productive sectors of the economy, the capital market, or the market for long-term capital funds, the Government securities market which is significant from the point of view of developing a risk-free credible yield curve and the foreign exchange market, which is integral to external sector management. Along with the steps taken to improve the functioning of these markets, there has been a concomitant strengthening of the regulatory framework. The medium-term objective at present is to make the call and term money market purely inter-bank market for banks, while non-bank participants, who are not subject to reserve requirements, can have free access to other money market instruments and operate through repos in a variety of instruments. The Clearing Corporation of India Ltd is expected to facilitate the development of a repo market in
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a risk free environment for settlement. A phased programmed for moving out of the call money market has already been announced and the final phase-out will coincide with the implementation of the Real Time Gross Settlement (RTGS) system. Further reform is being contemplated in terms of reduction of CRR to the statutory minimum of 3 per cent, removal of established lines of refinance, limits on call money borrowing lending and borrowing by banks and PDs and a move over to a fullfledged LAF. With the switchover to borrowings by Government at market related interest rates through auction system in 1992, and more recently, abolition of system of automatic monetization, it was possible to progress towards greater market orientation in Government securities. Further reforms in the Government Securities market have resulted in the rationalization of T-Bills market, increase in instruments and participants, elongated the maturity profile, created greater fungibility in the secondary market, instituted a system of delivery versus payment, strengthened the institutional framework through Primary Dealers and more recently Clearing Corporation, and enhanced the transparency in market operations. Clarity in the regulatory framework has also been established with the amendment to the Securities Contracts Regulation Act. A Negotiated Dealing System for trading in Government Securities is in operation. Further developments in the Government Securities market hinges on legislative changes consistent with modern technology and market practices; introduction of a RTGS system, integrating the payments and settlement systems for Government securities and standardization of practices with regard to manner of quotes, conclusion of deals and code of best practices for repo transactions. The movement to a market-based exchange rate regime took place in 1993. Reforms in the foreign exchange market have focused on market development with prudential safeguards without destabilizing the market. Thus, authorized dealers have been given the freedom to initiate trading position in the overseas markets; borrow or invest funds in the overseas markets (up to 15 per cent of tier I capital, unless otherwise approved); determine the interest rates subject to a ceiling) and maturity period of Foreign Currency Non-Resident (FCNR) deposits (not exceeding three years); and use derivative products for asset-liability management. These
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activities are subject to net overnight position limit and gap limits, to be fixed by them. Other measures such as permitting forward cover for some participants, and the development of the rupee-forex swap markets also have provided additional instruments to hedge risks and help reduce exchange rate volatility. Alongside the introduction of new instruments (cross-currency options, interest rates and currency swaps, caps/collars and forward rate agreements), efforts were made to develop the forward market and ensure orderly conditions. Foreign institutional investors were allowed entry into forward markets and exporters have been permitted to retain a progressively increasing proportion of their earnings in foreign currency accounts. The RBI conducts purchase and sale operations in the forex market to even out excess volatility. In respect of the financial markets, linkage between the money, Government Securities and forex markets has been established and is growing. The price discovery in the primary market is more credible than before and secondary markets have acquired greater depth and liquidity. The number of instruments and participants in the markets has increased in all markets, the most impressive being the Government Securities market. The institutional and technological infrastructures that have been created by the RBI to enable transparency in operations and secured settlement systems. The presence of foreign institutional investors has strengthened the integration between the domestic and international capital markets. Credit Delivery The reforms have accorded greater flexibility to banks to determine both the volume and terms of lending. The RBI has moved away from micro regulation of credit to macro management. External constraints to the banking system in terms of the statutory preemptions have been lowered. All this has meant greater lendable resources at the disposal of banks. The movement towards competitive and deregulated interest rate regime on the lending side has been completed with linking of all lending rates to PLR of the concerned bank and the PLR itself has been transformed into a benchmark rate. As a result of reforms, borrowers are able to the get credit at lower interest rates. The lending rate between 1991-92 and 2001-02 has declined from about 19.0 per cent to current levels of 10.5-11.0 per cent. The actual lending rates for top rated
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borrowers could even be lower since banks are permitted to lend at below Prime Lending Rate (PLR). Further, since banks invest in Commercial Paper (CP), which is more directly related to money market rates, many top rated borrowers are able to tap bank funds at rates below the prime lending rates. These developments have been possible to banks because the overall flexibility now available in the interest rate structure has enabled them to reduce their deposit rates and still improve their spreads. In terms of priority sector credit also, the element of subsidization has been removed although some sort of directed lending to Agriculture, Small Scale Industry (SSI) and export sector have been retained. The definition of priority sector has been gradually increased to help banks make loans on commercially viable terms. However, the actual experience has been that the credit pick up is not up to the mark and has been generally less than projected by the RBI in its monetary policies, in a number of years. Also, while in general the rates of interest have come down, they are available more to highly rated borrowers than to the small and medium enterprises. There is considerable concern about the inadequate flow of resources to rural areas, and in particular agriculture, while interest rates have not been reduced to the extent they were, for the corporate sector.

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REVIEW OF LITERATURE

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1. IMFsrecent quarterly bulletin has excellent literature review- Monetary Policy and asset prices In a highly influential paper, Bernanke and Gertler (1999) started the debate on how monetary policy should react to asset price fluctuations. A decade and two recessions later, it is a good time to take stock of the recent empirical and theoretical advances on this debate. This article discusses three questions: first, what is the evidence on the effects of asset prices (including housing prices) on the macro economy? Second, how can monetary policy mitigate the effects of asset prices fluctuations? And third, what other policy options can be used to prevent and exit a financial and banking crisis like the one suffered during 200709. 2. Bank Capital Requirement and the Effectiveness of Monetary Policy: A Literature Review Lang Wang Peking University May 2005This paper reviews literature exploring capital adequacy requirements' impact on monetary policy effectiveness. It reviews main theories on bank lending supply through which capital requirements affect monetary policy effectiveness, and finds that a binding risk-based capital requirement affect the strength of monetary shocks. Moreover, with a binding capital requirement, the effects on bank lending supply depend on the size, the capital level, the balance sheet liquidity of banks and the capital distribution and market structure in the banking sector. The paper also reviews empirical findings which suggest that capital requirement is one reason for the credit crunch in the U.S. and Japan. After that, the paper reviews predictions on the impact of the Basel II on the effectiveness of monetary policy. 3. Bank Capital Regulation in Contemporary Banking Theory: A Review of the Literature Joo A. C. Santos Federal Reserve Bank of New York April 2000 BIS Working Paper No. 90 This paper reviews the theoretical literature on bank capital regulation and analyses some of the approaches to redesigning the 1988 Basel Accord on capital standards. The paper starts with a review of the literature on the design of the financial system and the existence of banks. It proceeds with a presentation of the market failures that justify banking regulation and an analysis of the mechanisms that have been suggested to deal with these failures. The paper then reviews the theoretical literature on bank capital regulation. This is followed by a brief history of capital regulation since the 1988 Basel Capital Accord and a presentation of both the alternative approaches that have been put forward on

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setting capital standards and the Basel Committee's proposal for a new capital adequacy framework. 4. Indian G-Sec Market: How the Term Structure Reacts to Monetary Policy Rituparna Das- Behavior of term structure is a major source of interest rate risk and influencesthe decision making process of the participants in money market andgovernment securities (G-Sec) market regarding holding and trading.

Monetarypolicy is a major determining factor of term structure. The first quarter of thecurrent financial year found hikes in monetary policy rates in India to befollowed by upward shifts in the domestic term structure, which adverselyaffected the G-Sec portfolios of the market participants. This paper wants to findout how term structure responds to monetary policy actions in India.

5. There are a number of studies in USA on how term structure responds to the expectations about the central banks monetary policy actions. Cook et al (1989) found that changes in the federal funds target rate (FFTR) in the 1970s caused large movements in short term interest rates, moderate movements in medium term rates, and small movements in long term rates. Kuttner (2001) estimated that the bond rates response to expected changes in monetary policy is negligible, while their response to unexpected changes is significant. Faustal(2002), as reported by Goukasianetal(2006), using prices from federal funds futures contracts derived the unexpected component of Federal Reserve policy decisions and assessed their impact on the future trajectory of interest rates.

6. Goukasianet al (2006) measured the expected and unexpected components ofthe changes in the FFTR and the sensitivity of the term structure of zero rates tothose changes. They used two alternative models of term structure the Nelson-Siegel model and the extended Vasicek model. They calibrated both models alongwith data on changes in the FFTR and studied the impact of monetary policy onthe shape of the term structure. They found extended Vasicek model to performbetter than the (Nelson-Siegel-Svensson) NSS model.

7. Conventional wisdom is that expectation of an increase in a policy rate leads to animmediate increase in the benchmark rates and decrease in bond prices. Kuttner
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(2001) reported that studies of Cook et al (1989) and Roleyet al (1995) foundstrong evidence of the above wisdom in 1970s but weak evidence in 1980s and1990s in the context of USA. Objective The objective of the paper is to find in India a. The impact of monetary policy shocks contained in announcement of the monetary policy statement or credit policy statement by the Reserve Bank of India (RBI) on short end, medium part and long end of the term structure. b. The reactions of the sensitive ends of the term structure to expected and unexpected changes in monetary policy c. The differences, if any, in the reactions between immediate pre-inflation period December 07 - March 08 and inflationary period April 08 - August 08 and toexamine whether there is any change in structure of the relationship betweenterm structure and monetary policy shocks.

8. Links between yields in G-Sec market and monetary policyin India The RBI under the heading Government Securities Market in its Annual Reports mentions various links between G-Sec yields and monetary policy and between monetary policy and the driver factors like inflation. In the context of the current financial year, Diagram I shows that in India wholesale and consumer prices were relatively stable till the end of the financial year 2007-08 and started looking up thereafter whereas in USA the CPI was steadily rising during 1970sand then the rise became slow in 1980s and 1990s1, which were the periods of studies Cook et al (1989) and Role yet al (1995) respectively and the outcomes were different between these periods.

9.Investors in July 2010 before the launch of an Industrial Credit and Investment Corp. of India (ICICI) Bank Subjects: MEETINGS; BONDS (Finance); CAPITALISTS & financiers; BANKS & banking; STATE Bank of India (Company); ICICI Bank Ltd. -Finance; ROYAL Bank of Scotland; HONGKONG & Shanghai Banking Corp. Ltd.; Commercial Banking 10.MANAGING GAP: A CASE STUDY APPROACH TO ASSET-LIABILITY MANAGEMENT OF BANKS.Vij, Madhu. Vision (09722629), Jan-Mar2005, Vol. 9
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Issue 1.The importance of managing the asset-liability mix in the Indian financial markets has emerged from the increased volatility in the domestic interest rates as well as foreign exchange rates that .ASSET-liability management; SECURITIES markets; VOLATILITY (Finance); INTEREST rates; FOREIGN exchange rates; BANKS & banking; INTEREST rate risk; Commercial Banking; Investment Banking and Securities Dealing; Securities and Commodity Exchanges. 11.An Empirical Study of Indian Individual Investors Behavior by -Syed Tabassum Sultan This paper while discussing the characteristics of the Indian individual investors along makes an attempt to discover the relationship between a dependent variable i.e., Risk Tolerance level and independent variables such as Age, Gender of an individual investor on the basis of the survey. Indian investors are high income, well educated, salaried, and independent in making investment decisions and conservative investors. From the empirical study it was found that irrespective of gender, most of the investors (41%) are found have low risk tolerance level and many others (34%) have high risk tolerance level rather than moderate risk tolerance level. It is also found that there is a strong negative correlation between Age and Risk tolerance level of the investor. Television is the media that is largely influencing the investors decisions. Hence, this study can facilitate the investment product designers to design products which can cater to the investors who are low risk tolerant 12.Deepak Mohanty: Monetary policy framework in India experience with multipleindicators approach It will set out how the framework of monetary policy has evolved over the last two and half decades. First, It will touch upon the objectives of monetary policy and then discuss briefly about how monetary framework has evolved globally before dwelling on the Indian experience. It will conclude with an overall assessment of the monetary policy regime in India.

13. I take some fact and trend of banking stock from the sites of BSE and NSE and analyzed the movement of shares of the banking stocks due to the change in the monetary policies and announcement in the banking sectors.

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14.Jalan, B (2001), Banking and Finance in the New Millennium, RBI Bulletin, February, 215.232

15According to SEBI, Professional Rating of market intermediaries, as a concept, is a matter of debate and discussions. The need for rating is felt not only from the point of view of greater disclosure requirements for investors interests, considering the important role such intermediaries play, being an interface between investors and exchanges but also from the point of view of measuring the adequacy of systems and controls to meet internal as well as external compliance requirements. So that need for Intermediaries Rating services (Brokers), In view of the developments that are taking place in the capital markets, the need to constantly upgrade and improve systems and procedures in operation as well as skill sets has gained considerable importance. Besides compliance with regulatory requirements both in letter and spirit has assumed significance so as to mitigate risk and ensure adequate protection of investors interest. And Rating objectives / benefits are rated entity would be in a position to brand its image and capitalize the same for generating more business. In a nutshell, the product may accrue significant benefits to all stakeholders including the investors, stock brokers themselves, the regulator and others who will benefit from the transparency and the consequential focus on efficiency. According to SEBI and Intermediaries Regulation and Supervision Department, different factors are consider for rating process Organization structure, Policy on Investors interest, Risk Management Policy and System, Organization process and procedures, Management policy on compliance, Financials, History/Background, Firms positioning. 16. According to Michal Parness, Founder & CEOInvestors dont Make Money in the Stock Market. One reason the institutions make so much money is that they are trading. They make money every time you buy or sell. They make money whether you win or lose. That means that when youre investing, youre basically just sitting there. Youre not going anywhere. Youre not making money as an investor.

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17. Trading the Trend: The Only Way to Make Money in the MarketIf you dont know this already, Trend Trading means trading trends based on human emotions. Not lagging indicators. Not complex statistical analysis and not Ph.D. level mathematical equations. With trend trading, you look for market movement. That could mean stocks that are going to move up or down during the course of a day (intraday). Youll play the gaps up and down, often several days a week. The Trend trading means being aware and taking advantage of trends like the runups that happen around earning sessions. These are trends that have worked time and time again in the market. They consistently yield results.

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RESEARCH METHODOLOGY

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Methodology Based on the responses of the questionnaire, analysis has been carried out. Statistical methods such as Chi-square test of independence of attributes and Correlation have been used to uncover relationships among the variables. For measuring the risk tolerance level cumulative scale has been used. To study the dependency/Independency of the factors Chi-square test of independence of attributes was used. Correlation is used to know the relationship between Risk tolerance level andthe Age of the investor The questionnaire consists of 32 questions of which first 10 questions were focused to know the demographic characteristics of the investor. Next 10 questions to find the risk tolerance level of the investor and the rest were focused to accomplish the other objectives of the study.

DEFINITION OF RESEARCH When you say that you are undertaking a research study to find answers to a question you are implying that the process. 1. Is being undertaken within a framework of a set of philosophies (approaches). 2. Uses procedures, methods and techniques that have been tested for their validity and reliability. 3. Is designed to be unbiased and objective. Philosophies mean approaches e.g. qualitative, quantitative and the academic discipline in which you have been trained. Validity means that correct procedures have been applied to find answers to a question. Reliability refers to the quality of a measurement procedure that provides repeatability and accuracy. Unbiased and objective means that you have taken each step in an unbiased manner and drawn each conclusion to the best of your ability and without introducing your own vested interest. (Bias is a deliberate attempt to either conceal or highlight something).

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Adherence to the three criteria mentioned above enables the process to be call research. However, the degree to which these criteria are expected to be fulfilled varies from Discipline to discipline and so the meaning of research differs from one academic Discipline to another. The difference between research and non-research activity is, in the way we find answers: the process must meet certain requirements to be called research. We can identify these requirements by examining some definitions of research. The word research is composed of two syllables, re and search. reis a prefix meaning again, anew or over again search is a verb meaning to examine closely and carefully, to test and try, or to probe.Together they form a noun describing a careful, systematic patient study and investigation in some field of knowledge, undertaken to establish facts or principles. Research is a structured enquiry that utilizes acceptable scientific methodology to solve problems and create new knowledge that is generally applicable. Scientific methods consist of systematic observation, classification and interpretation of data. Although we engage in such process in our daily life, the difference between our casual day- to-day generalization and the conclusions usually recognized as scientific method lies in the degree of formality, rigorousness, verifiability and general validity of latter. TYPES OF RESEARCH Research can be classified from three perspectives: 1. Application of research study 2. Objectives in undertaking the research 3. Inquiry mode employed Application:
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From the point of view of application, there are two broad categories of research: pure research and - applied research.Pure research involves developing and testing theories and hypotheses that are intellectually challenging to the researcher but May or may not have practical application at the present time or in the future. The knowledge produced throughpure research is sought in order to add to the existing body of research methods. Applied research is done to solve specific, practical questions; for policy formulation, administration and understanding of a phenomenon. It can be exploratory, but is usually descriptive. It is almost always done on the basis of basic research. Applied research can be carried out by academic or industrial institutions. Often, an academic institution such as a university will have a specific applied research program funded by an industrial partner interested in that program. Objectives: From the viewpoint of objectives, a research can be classified as -Descriptive -Correlation -Explanatory -Exploratory Descriptive research attempts to describe systematically a situation, problem, phenomenon, service or programme, or provides information about , say, living condition of a community, or describes attitudes towards an issue. Correlation research attempts to discover or establish the existence of a relationship/ interdependence between two or more aspects of a situation. Explanatory research attempts to clarify why and how there is a relationship between two or more aspects of a situation or phenomenon. Exploratory research is undertaken to explore an area where little is known or to investigate the possibilities of undertaking a particular research study (feasibility study/ pilot study).In practice most studies are a combination of the first three categories.

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Inquiry Mode: From the process adopted to find answer to research questions the two approaches are: - Structured approach - Unstructured approach

Structured approach: The structured approach to inquiry is usually classified as quantitative research. Here everything that forms the research process, objectives, design, sample, and the questions that you plan to ask of respondents is predetermined. It is more appropriate to determine the extent of a problem, issue or phenomenon by quantifying the variation. E.g. how many people have a particular problem? How many people hold a particular attitude? Unstructured approach: The unstructured approach to inquiry is usually classified as qualitative research. This approach allows flexibility in all aspects of the research process. It is more appropriate to explore the nature of a problem, issue or phenomenon without quantifying it. Main objective is to describe the variation in a phenomenon, situation or attitude. E.g. description of an observed situation, the historical enumeration of events, an account of different opinions different people have about an issue, description of working condition in a particular industry. Both approaches have their place in research. Both have their strengths and weaknesses. In many studies you have to combine both qualitative and quantitative approaches. For example, suppose you have to find the types of cuisine / accommodation available in a city and the extent of their popularity. Types of cuisine are the qualitative aspect of the study as finding out about them entails description of the culture and cuisine. The extent of their popularity is the quantitative aspect as it involves estimating the number of people who visit
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restaurant serving such cuisine and calculating the other indicators that reflect the extent of popularity. THE RESEARCH PROCESS: The research process is similar to undertaking a journey. For a research journey there are two important decisions to make1) What you want to find out about or what research questions (problems) you want to find answers to. 2) How to go about finding their answers. There are practical steps through which you must pass in your research journey in order to find answers to your research questions. The path to finding answers to your research questions constitutes research methodology. At each operational step in the research process you are required to choose from a multiplicity of methods, procedures and models of research methodology which will help you to best achieve your objectives. This is where your knowledge base of research methodology plays a crucial role. Steps in Research Process: 1. Formulating the Research Problem 2. Extensive Literature Review 3. Developing the objectives 4. Preparing the Research Design including Sample Design 5. Collecting the Data 6. Analysis of Data 7. Generalization and Interpretation

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8. Preparation of the Report or Presentation of Results-Formal write ups of conclusions reached. JOURNALS Journals provide you with the most up-to-date information, even though there is a gap of two to three years between the completion of a research project and the publication in a journal. As with books, you need to prepare a list of journals for identifying literature relevant to your study. This can be done as follows: - Locate the hard copies of the journal that are appropriate to your study; - use the

internet
- Look at the index of research abstracts in the relevant field to identify and read the articles. Whichever method you choose, first identify the journals you want to look at in more detail for your review of literature. Select the latest issue; examine its content page to see if there is an article of relevance to your research topic. If you feel a particular article is of relevance to you, read its abstract. If you think you are likely to use it, photocopy or prepare a summary and record it for reference for later use. The Bibliography The bibliography should give a clear, complete description of the sources that were used while preparing the report. It is an alphabetical list as per the authors surname. 1. for a Book Surname of author, name or two initials, Title taken from title pageunderlined or in italics, Edition (if more than one), volume if more than one, place of publication, publishers, date on title page or copyright date. E.g. Kothari, C.R., Research Methods-Methods and Techniques, 1989, New Delhi: Wiley Eastern Limited, 4835/24 Ansari Road, Daryaganj, New Delhi 110 006.

Step 3 The formulations of objectives:

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-Objectives are the goals you set out to attain in your study. -They inform a reader what you want to attain through the study. -It is extremely important to word them clearly and specifically. Objectives should be listed under two headings: a) Main objectives (aims); b) Sub-objectives. The main objective is an overall statement of the thrust of your study. It is also a statement of the main associations and relationships that you seek to discover or establish. The sub-objectives are the specific aspects of the topic that you want to investigate within the main framework of your study, they should be numerically listed, Wording should clearly, completely and specifically Communicate to your readers your intention, Each objective should contain only one aspect of the Study. Use action oriented words or verbs when writing objectives. The objectives should start with words such as to determine, to find out, to ascertain, to measure, to explore etc. The wording of objectives determines the type of research (descriptive, correlational and experimental) and the type of research design you need to adopt to achieve them. e.g. Identifying Variables: In a research study it is important that the concepts used should be operationalised in measurable terms so that the extent of variations in respondents understanding is reduced if not eliminated. Techniques about how to operationalised concepts, and knowledge about variables, plays an important role in reducing this variability. Their knowledge, therefore is important in fine tuning your research problem. For example:

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-Jet Airways is a perfect example of quality cabin service. - Food in this restaurant is excellent. - The middle class in India is getting more prosperous. When people express these feelings or preferences, they do so on the basis of certain Criteria in their minds. Their judgment is based upon indicators that lead them to Conclude and express that opinion.

These are judgments that require a sound basis on which to proclaim. This warrants the use of a measuring mechanism and it is in the process of measurement that knowledge about variables plays an important role.

The definition of a variable: An image, perception or concept that can be measured hence capable of taking on different values- is called a variable. The difference between a concept and a variable: Concepts are mental images or perceptions and therefore their meaning varies markedly from individual to individual. A concept cannot be measured whereas a variable can be subjected to measurement by crude/refined or subjective/objective units of measurement. It is therefore important for the concept to be converted into variables. Concept Variable -Subjective impression - Measurable though the no uniformity as to its degree of precision varies Understanding among from scale to scale and Different people variable to variable. -As such cannot be measured. e.g. Excellent - gender (male/female)
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 High achiever -age (x years y months) Rich -weight (--kg) Satisfaction - height (-- cms) Domestic violence - religion (Catholic, Hindu) -Income (Rs ---per year) Concepts, indicators and variables: If you are using a concept in your study, you need to consider its operationalisationthat is, how it will be measured. For this, you need to identify indicators- a set of criteria reflective of the concept which can then be converted into variables. The choice of indicators for a concept might vary with researchers, but those selected must have a logical link with the concept. Concepts___>Indicators_____>Variables Concepts Indicators Variables working definition Rich 1. Income 1. Income 1.If>Rs100000 2. Assets 2.Total value 2.If>Rs250000 of home, car,investments. Effectiveness 1.No. of 1.No.of guests diff. in before guests served in and after levels Month/year 2. Changes 2.No. of excellent - do - in Ratings per 50 feedbacks a) Extent of b) Pattern of Types of measurement scales: Measurement is central to any enquiry.

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The greater the refinement in the unit of measurement of a variable, the greater the confidence, other things being equal, one can place in the findings. S.S.Stevens has classified the different types of into four categories: Nominal or classificatory scale Ordinal or ranking scale Interval scale Ratio scale

The nominal or classificatory scale: A nominal scale enables the classification of individuals, objects or responses into subgroups based on a common/shared property or characteristic. A variable measured on a nominal scale may have one, two or more subcategories depending upon the extent of variation. For example, water or tree have only one subgroup, whereas the variable gender can be classified into two sub-categories: male and female. Hotels can be classified into ---- sub-categories. The sequence in which subgroups are listed makes no difference as there is no relationship among subgroups. The ordinal or ranking scale: Besides categorizing individuals, objects, responses or a property into subgroups on the basis of common characteristic, it ranks the subgroups in a certain order. They are arranged either in ascending or descending order according to the extent a subcategory reflects the magnitude of variation in the variable. For example, income can be measured either quantitatively (in rupees and paisa) or qualitatively using subcategories above average, average and below average.Thedistance between these subcategories are not equal as there is no quantitative unit ofmeasurement.
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Socioeconomic status and attitude are other variables that can be measured on ordinal scale.

The interval scale:

An interval scale has all the characteristics of an ordinal scale. In addition, it uses a unit of measurement with an arbitrary starting and terminating points. Constructing hypotheses: As a researcher you do not know about a phenomenon, but you do have a hunch to form the basis of certain assumption or guesses. You test these by collecting information that will enable you to conclude if your hunch was right. The verification process can have one of the three outcomes. Your hunch may prove to be: 1. right; 2. Partially right; or 3. Wrong. Without this process of verification, you cannot conclude anything about the validity of your assumption. Hence, a hypotheses is a hunch, assumption, suspicion, assertion or an idea about a phenomenon, relationship or situation, the reality or truth of which you do not know. A researcher calls these assumptions/ hunches hypotheses and they become the basis of an enquiry. In most studies the hypotheses will be based upon your own or someone elses observation. Hypotheses bring clarity, specificity and focus to a research problem, but are not essential for a study. You can conduct a valid investigation without constructing formal hypotheses.

The functions of hypotheses: The formulation of hypothesis provides a study with focus. It tells you what specific aspects of a research problem to investigate. A hypothesis tells you what data to collect and what not to collect, thereby providing focus to the study.
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 As it provides a focus, the construction of a hypothesis enhances objectivity in a study. A hypothesis may enable you to add to the formulation of a theory. It enables you to specifically conclude what is true or what is false. PREPARING THE RESEARCH DESIGN Research design is the conceptual structure within which research would be conducted. The function of research design is to provide for the collection of relevant information with minimal expenditure of effort, time and money. The preparation of research design, appropriate for a particular research problem, involves the consideration of the following: 1. Objectives of the research study. 2. Method of Data Collection to be adopted 3. Source of informationSample Design 4. Tool for Data collection 5. Data Analysis-- qualitative and quantitative 1. Objectives of the Research Study: Objectives identified to answer the research questions have to be listed making sure that they are: a) Numbered, and b) Statement begins with an action verb. 2. Methods of Data Collection: There are two types of data Primary Data collected for the first time Secondary Datathose which have already been collected and analysed by someone. Methods of Primary Data Collection
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OBSERVATION METHOD: Commonly used in behavioral sciences It is the gathering of primary data by investigators own direct observation of relevant people, actions and situations without asking from the respondent. e.g. A hotel chain sends observers posing as guests into its coffee shop to check on cleanliness and customer service. A food service operator sends researchers into competing restaurants to learn menu items prices, check portion sizes and consistency and observe point-of purchase merchandising. A restaurant evaluates possible new locations by checking out locations of competing restaurants, traffic patterns and neighborhood conditions. Observation can yield information which people are normally unwilling or unable to provide. E.g. observing numerous plates containing uneaten portions the same menu items indicates that food is not satisfactory. 5. Disguised observation Limitations: - Feelings, beliefs and attitudes that motivate buying behavior and infrequent behavior cannot be observed. - Expensive method Because of these limitations, researchers often supplement observation with survey research.

SURVEY METHOD Approach most suited for gathering descriptive information.

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Structured Surveys: use formal lists of questions asked of all respondents in the same way. Unstructured Surveys: let the interviewer probe respondents and guide the interview according to their answers. Survey research may be Direct or Indirect. Direct Approach: The researcher asks direct questions about behaviors and thoughts. E.g. why dont you eat at MacDonalds? Indirect Approach: The researcher might ask: What kind of people eat at MacDonalds? From the response, the researcher may be able to discover why the consumer avoids MacDonalds. It may suggest factors of which the consumer is not consciously aware. ADVANTAGES: -can be used to collect many different kinds of information -Quick and low cost as compared to observation and experimental method. LIMITATIONS: -Respondents reluctance to answer questions asked by unknown interviewers about things they consider private. -Busy people may not want to take the time. -may try to help by giving pleasant answers. -unable to answer because they cannot remember or never gave a thought to what they do and why. -may answer in order to look smart or well informed.

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CONTACT METHODS: Information may be collected by Mail Telephone Personal interview Mail Questionnaires: Advantages: -can be used to collect large amounts of information at a low cost per respondent. -respondents may give more honest answers to personal questions on a mail questionnaire no interviewer is involved to bias the respondents answers. -convenient for respondents who can answer when they have time Good way to reach people who often travel Limitations: -not flexible -take longer to complete than telephone or personal interview -response rate is often very low - Researcher has no control over who answers. Telephone Interviewing: - Quick method - More flexible as interviewer can explain questions not understood by the respondent - Depending on respondents answer they can skip some Qs and probe more on others - allows greater sample control
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- Response rate tends to be higher than mail Drawbacks: -Cost per respondent higher -Some people may not want to discuss personal Qs with interviewer -Interviewers manner of speaking may affect the respondents answers -Different interviewers may interpret and record response in a variety of ways -under time pressure, data may be entered without actually interviewing Personal Interviewing: It is very flexible and can be used to collect large amounts of information. Trained interviewers are can hold the respondents attention and are available to clarify difficult questions. They can guide interviews, explore issues, and probe as the situation requires. Personal interview can be used in any type of questionnaire and can be conducted fairly quickly. Interviewers can also show actual products, advertisements, packages and observe and record their reactions and behavior. This takes two formsIndividual- Intercept interviewing Group - Focus Group Interviewing

Intercept interviewing: Widely used in tourism research. -allows researcher to reach known people in a short period of time. - Only method of reaching people whose names and addresses are unknown -involves talking to people at homes, offices, on the street, or in shopping malls. -interviewer must gain the interviewees cooperation
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-time involved may range from a few minutes to several hours (for longer surveys compensation may be offered) --involves the use of judgmental sampling i.e. interviewer has guidelines as to whom to intercept, such as 25% under age 20 and 75% over age 60

Drawbacks: -Room for error and bias on the part of the interviewer who may not be able to correctly judge age, race etc. -Interviewer may be uncomfortable talking to certain ethnic or age groups. Focus Group Interviewing: It is rapidly becoming one of the major research tools to understand peoples thoughts and feelings. It is usually conducted by inviting six to ten people to gather for a few hours with a trained moderator to talk about a product, service or organization. The meeting is held in a pleasant place, and refreshments are served to create a relaxed environment. The moderator needs objectivity, knowledge of the subject and industry, and some understanding of group and consumer behavior. The moderator starts with a broad question before moving to more specific issues, encouraging open and easy discussion to bring out true feelings and thoughts. At the same time, the interviewer focuses the discussion, hence the name focus group interviewing. -often held to help determine the subject areas on which questions should be asked in a later, large-scale, structured-direct interview Comments are recorded through note taking or videotaped and studied later to understand consumer buying process. This method is especially suited for managers of hotels and restaurants, who have easy access to their customers.

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E.g. some hotel managers often invite a group of hotel guests from a particular market segment to have a free breakfast with them. Managers get the chance to meet the guests and discuss what they like about the hotel and what the hotel could do to make their stay more enjoyable and comfortable. The guests appreciate this recognition and the manager gets valuable information. Restaurant managers use the same approach by holding discussion meetings over lunch or dinner.

EXPERIMENTAL METHOD Also called Empirical Research or Cause and Effect Method, it is a data-based research, coming up with conclusions which are capable of being verified with observation or experiment. Experimental research is appropriate when proof is sought that certain variables affect other variables in some way. e.g. - Tenderizers (independent variable) affect cooking time and texture of meat( dependent variable) . - The effect of substituting one ingredient in whole or in part for another such as soya flour to flour for making high protein bread. -Develop recipes to use products. Such research is characterized by the experimenters control over the variables under study and the deliberate manipulation of one of them to study its effects. In such a research, it is necessary to get at facts first hand, at their source, and actively go about doing certain things to stimulate the production of desired information. -Researcher must provide self with a working hypothesis or guess as to the probable results. - Then work to get enough facts (data) to prove or disprove the hypothesis. -He then sets up experimental designs which he thinks will manipulate the persons or the materials concerned so as to bring forth the desired information.

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DETERMINING SAMPLE DESIGN Researchers usually draw conclusions about large groups by taking a sample A Sample is a segment of the population selected to represent the population as a whole. Ideally, the sample should be representative and allow the researcher to make accurate estimates of the thoughts and behavior of the larger population. Designing the sample calls for three decisions: Who will be surveyed? (The Sample) The researcher must determine what type of information is needed and who is most likely to have it. How many people will be surveyed? (Sample Size) Large samples give more reliable results than small samples. However it is not necessary to sample the entire target population. How should the sample be chosen? (Sampling) Sample members may be chosen at random from the entire population (probability sample) The researcher might select people who are easier to obtain information from (no probability sample) The needs of the research project will determine which method is most effective Types of Samples Probability samples Simple random sample: Every member of the population has a known and equal chance of being selected. Stratified random sample Population is divided into mutually exclusive groups such as age groups and random samples are drawn from each group. Cluster (area) sample: The population is divided into mutually exclusive groups such as blocks, and the researcher draws a sample of the group to interview.
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No probability samples Convenience sample: The researcher selects the easiest population members from which to obtain information. Judgment sample: The researcher uses his/her judgment to select population members who are good prospects for accurate information. Quota sample: The researcher finds and interviews a prescribed number of people in each of several categories. PROCESSING AND ANALYSING DATA Processing and analyzing data involves a number of closely related operations which are performed with the purpose of summarizing the collected data and organizing these in a manner that they answer the research questions (objectives). The Data Processing operations are: 1. Editing- a process of examining the collected raw data to detect errors and omissions and to correct these when possible. 2. Classification- a process of arranging data in groups or classes on the basis of common characteristics. Depending on the nature of phenomenon involved 3. Tabulation-Tabulation is the process of summarizing raw data and displaying the same in compact form for further analysis. It is an orderly arrangement of data in columns and rows. Tabulation is essential because: a) It conserves space and reduces explanatory and descriptive statement to a minimum. b) It facilitates the process of comparison. c) It facilitates the summation of items and the detection of errors and omissions. d) It provides the basis for various statistical computations. Tabulation may also be classified as simple and complex tabulation. Simple tabulation generally results in one-way tables which supply answers to questions about one characteristic of data only. Complex tabulation usually results on two-way
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tables (which give information about two inter-related characteristics of data), three way tables or still higher order tables, also known as manifold tables. Data Analysis Methods Qualitative Data Analysis: Qualitative data analysis is a very personal process with few rigid rules and procedures. For this purpose, the researcher needs to go through a process called Content Analysis: Content Analysis means analysis of the contents of an interview in order to identify the main themes that emerge from the responses given by the respondents .This process involves a number of steps: Step 1.Identify the main themes. The researcher needs to carefully go through the descriptive responses given by respondents to each question in order to understand the meaning they communicate. From these responses the researcher develops broad themes that reflect these meanings People use different words and language to express themselves. It is important that researcher select wording of the theme in a way that accurately represents the meaning of the responses categorized under a theme. These themes become the basis for analyzing the text of unstructured interviews. Step 2.Assign codes to the main themes: If the researcher wants to count the number of times a theme has occurred in an interview, he/she needs to select a few responses to an open- ended question and identify the main themes. He/she continues to identify these themes from the same question till a saturation point is reached. Write these themes and assign a code to each of them, using numbers or keywords. Step 3.Classify responses under the main themes: Having identified the themes Next step is to go through the transcripts of all the interviews and classify the responses under the different themes. Step 4.Integrate themes and responses into the text of your report: Having identified responses that fall within different themes, the next step is to integrate into the text of
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your report. While discussing the main themes that emerged from their study, some researchers use verbatim responses to keep the feel of the response. There are others who count how frequently a theme has occurred, and then provide a sample of the responses. It entirely depends upon the way the researcher wants to communicate the findings to the readers.

Quantitative Data Analysis: This method is most suitable for large well designed and well administered surveys using properly constructed and worded questionnaire. Data can be analysed either manually or with the help of a computer. Manual Data Analysis: This can be done if the number of respondents is reasonably small, and there are not many variables to analyze. However, this is useful only for calculating frequencies and for simple cross tabulations. Manual data analysis is extremely time consuming. The easiest way to do this is to code it directly onto large graph paper in columns. Detailed headings can be used or question numbers can be written on each column to code information about the question. To manually analyze data (frequency distribution), count various codes in a column and then decode them. In addition, if you want to carry out statistical tests, they have to be calculated manually. However, the use of statistics depends on your expertise and thedesire/need to communicate the findings in a certain way. Data Analysis Using a Computer: If you want to analyze data using computer, you should be familiar with the appropriate program. In this area, knowledge of computer and statistics plays an important role. The most common software is SPSS for windows. However, data input can be long and laborious process, and if data is entered incorrectly, it will influence the final results.
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REPORTING THE FINDINGS: Writing the report is the last, and for many, the most difficult step of the research process. The report informs the world what you have done, what you have discovered and what conclusions you have drawn from your findings. The report should be written in an academic style. Language should be formal and not journalistic. Written Research Project Report Format Traditional written reports tend to be produced in the following format. .Sampling design: Target population: The target population in this research refers to the bank customers who are having an account in SBI bank and ICICI bank due to the convenience in collecting the data. The respondents can be any gender, any income level, any occupation and any education level. Sampling unit The sampling units are customers of share khan pvt ltd. Sampling method For this research we use non-probability sampling. Zikmund (1997) stated that in non-probability sampling, the probability of any particular member of the population being chosen is unknown. The element in the population does not have any probability attached to their being chosen as sample subjects. Snow ball sampling will be applied in this research. Snow ball sampling is used to collect the data from the customers. Snow ball sampling refers to the procedure that involves the selection of additional respondents based on referrals of initial respondents. Sample size

Ghauri (2002) stated that sample size depend on the desired precision from the estimate. Precision is the size of the estimating interval when the problem is one of estimating a population parameter. This research selects 60 respondents as the
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sample size due to limited of time by asking them that they are having an account in and ICICI bank due to the convenience in collecting the data. The respondents can be any gender, any income level, any occupation and any education level.

Sampling plan: The researcher is going to collect the data from the ATMS and also by visiting the bank. Pilot Study: A pilot study can refer to many types of experiments, but generally the goal of study is to replicate the full scale experiment, but only on a smaller scale. A pilot is often used to test the design of the full-scale experiment. The design can then be adjusted in time. This can turn out to be valuable: should anything be missing in the pilot, it can be added to the experiment and chances are that the fullscale (and more expensive) experiment will not have to be re-done. Validity: The ability of a scale or a measuring instrument to measure what it is intended to measure can be termed as the validity of the measurement. Validity can be measured through several methods like face validity, content validity, criterion related validity and construct validity. For this comparative study the researcher has taken the face validity. Face validity: Face validity refers to the collective agreement of the experts and researchers on the validity of the measurement scale. The researcher has gave the questionnaire to the experts in banking field. Sources of data: The data is basically primary in nature It was obtained from the customers

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Data Collection Method: Our communication approach was basically structured questioning, that is personal interview with the aid of printed questionnaires. Appropriate statistical analysis will be adopted. The data will be tabulated and analyzed. Limitations of the Study The study is limited to a particular branch of share khan pvt.ltd . Since the time is less the researcher has taken a sample of 100 people and it will not reveal the whole population of a country.

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DATA ANALYSIS &INTERPERTATION

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Data Analysis and Interpretation:

The following information contains the data interpretation of the questionnaires. The respondents responses for the questions have been interpreted and a finding has been made based on the respondents responses. Questionnaires responses are as follows Q1. Number of persons currently doing trading in the banking stocks. According to the response of the share khan ltd Answer- A) Yes -- 85% B) No--10%

10%

5%

yes No 85% No response

Interpretation From the response of the client of the share khan ltd we can analyzed that 85% of the client are invests the money also in the banking stocks. Only 10% investors are not do investment in the banking stocks. Q2. Age group of the investors invested in the banking stocks? Answer21yrs-35yrs125% 35yrs-45yrs 35% Above 45yrs 40%

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45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 21yrs-35yrs135yrs-45yrs Above 45yrs Series1

Interpretation From the above table we can see that age group above 45yrs are invest more in the baking stocks it is about 40% and client of age group 35yr to 45yrs are about 35% and only 25% client of age group 21yrs to 35yrs are interested to invest in the banking stocks. Q3. Name of the banking shares which are more prefer by the client? AnswerSBI ICICI IDBI 20% 30% 11%

CITI BANK19% HDFC 22%

35% 30% 30% 25% 20% 20% 15% 10% 5% 0% SBI ICICI IDBI CITI BANK HDFC 11% 19% Series1 22%

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Interpretation From the above chart we can anticipate that 30% of the clients are interested in the ICICI bank stocks, 22% are of HDFC bank and 20% are of SBI it means that ICICI yield good return to the investor as compare to the other bank and investor are also giving banking share good response Q4. Are banking stocks a good buy now? AnswerYes No 78% 22%

22% yes 78% No

Interpretation When the above question was ask to the client of share khan their response was positive. They get good return from the banking stocks and they market for banking stocks is quite optimistic. Q5. Do you think Investors in bank stocks are making eye-popping returns?

Answer Yes ---79% No--- 21%

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yield no profit, 21% yes NO bank stock give profit , 79%

Interpretation Here we can see from the response of the client of the share khan that they seek good eye- propping profit from the banking stocks because 79% investor give the favorable response to the banking stocks. Q6. Are bank stocks rising only because of speculation and amateur investors? Answer-

Yes 26% No 73%

80% 70% 60% 50% 40% 30% 20% 10% 0% Yes No those who because of speculation, Yes, 26% those who don't think that speculation is the only reason, No, 73% Series1

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Interpretation From the above chart we can analyzed that only due to the speculation the bank price doesnt rises .the are various factor due to which bank stock price rises such as if there is change in the monetary policy occurs or any announcement in the banking sector come then it causes impact on the price of the banking stocks Q7. Do you think that banking stocks are more volatile as compare to other

stocks?
AnswerYes 76% No 18%

18%

Yes No

76%

Interpretation From the above pie chart it is clear that the perception of the investor towards the banking stocks is that banking stock are very volatile and fluctuate more due any announcement or news or any change in the monetary policy. Q8. Do you think that fluctuation in banking stock due to frequent announcement and change in monetary policies? AnswerYes NO 65% 35%

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due to speculation, No, 15%

fluctutation due to announcement and monetary policy, yes, 85% yes No

Interpretation Fluctuation in the banking sectors mainly due to the various announcement and changes in the monetary policies, such as CRR,SLR, repo rate reverse, repo rate and change in the interest rate, inflation control etc announcement or change in these things cause volatility in the stock price. Q9. Do you think It is better to stay always from banking stocks? AnswerYes No 49% 51%

those take risk and earn high return NO, 51%

stay away from banking stock YES, 49%

YES NO

Interpretation

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As we know that banking stock is highly volatile and the value fluctuate with announcement and change in monetary policy. But due to volatility it also it also provides opportunity to book good profit. But with change in the interest rate and inflation it affects the valuation of the banking stocks.

FACTS AND FINDINGS

The study reveals that male investors dominate the investment market in India. Most of the investors possess higher education like graduation and above. Majority of the Investors belong to accountancy and related employment, nonfinancial management and some other occupations are very few. Most investors read two or more sources of information to make investment decisions. The investors decisions are based on their own initiative. The investment habit was noted in a majority of the people who participated in the study. The objective of investment was either capital appreciation or balance of capital appreciation and current income. Investors prefer to park their funds in avenues like PPF/FD/Bonds next to Equities and Mutual Funds Scheme. Most of the investors get their information related to investment through electronic media (TV) next to print media (News paper/ Business news paper/ Magazines) Most of the investors are financial illiterates. Gender and the risk tolerance level of the investor are independent attributes of the investor. Increase in age decrease the risk tolerance level.

SUGGESTIONS AND RECOMENDATIONS

At the outset, the study draws attention to some stylised facts which have a bearing on the relevance of monetary policy intervention in an emerging, predominantly bank-based economy such as India. In particular, it focuses attention on some of the factors, which influence the monetary policy transmission mechanism in the Indian
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context. These are the actual policy instruments used: correlation between the policy instruments like Bank Rate on the one hand and other interest rates and the exchange rate on the other; terms to maturity of financial assets determining how quickly monetary policy transmits its influence; growth of the financial sector and its increased competitiveness in funds deployment and finally the impact of opening up of the economy.

Policy Inferences

First, the study suggests the existence of a bank lending channel in the Indian context. The analysis based on econometric techniques seems to validate this point. This would suggest that the central bank, while Operational sing monetary policy is likely to encounter independent shifts in the loan supply. These changes in bank loan supply would also induce Changes in bank portfolios.

Second, evidence seems to point to the fact that the response of big banks to monetary policy shocks differs from that of small banks, with the latter being more compliant. In particular, large banks with a wider resource base can more successfully insulate their loan supply from contractionary policy shocks vis--vis the small banks with limited opportunities to access markets for resources in a contractionary monetary policy regime. This would imply that bank mergers and other moves towards consolidation in the banking sector, which are likely to lead to creation of bigger banks, which beneficial for the business and investors and have implications for the efficacy of monetary policy.

Third, the study is indicative of the fact that despite the scaling down of the Cash Reserve Ratio and the Bank Rate over the period of financial reforms, quantitative instruments like the CRR continue to be important along with the price instrument Bank Rate. This is primarily so in a medium-term framework, adopted in the present study. The change in RBI Repo Rate, which has emerged as an important signaling rate in the short-term, has implications for short-term portfolio choice of banks.So it should be well executed.

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Fourth, prudential regulations have an important role to play in influencing lending decisions of banks. In particular, the institution of capital adequacy ratios has made banks more concerned with the risk return profile of loans, since additional lending warrants additional capital base in order to adhere to the regulatory capital standards.

LIMITATIONS As only Jaipur dealt in survey so it does not represent the view of the total Indian market. Size of the research may not be substantial. There was lack of time on the part of respondents. The survey was carried through questionnaire and the questions were based on perception. There may be biasness in information by market participant. Complete data was not available due to company privacy and secrecy

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CONCLUSIONS The overall monetary and macroeconomic conditions are, at present quite satisfactory and in line with the policy expectations. India needs to further improve upon the financial sector reforms. Nevertheless the Reserve Bank would continue to keep a constant watch on the domestic and external situation. Monetary policy is guided by the objective of provision of adequate liquidity to meet credit growth and support investment demand in the economy while monitoring carefully the movements in the price level. The policy stance continues to be one of preference for a soft and flexible interest rate environment within the framework of macroeconomic stability. On the basis of the study it is found that Share khan Ltd is better services provider than the other stockbrokers because of their timely research and personalized advice on what stocks to buy and sell. Share khan Ltd. provides the facility of Trade tiger as well as relationship manager facility for encouragement and protects the interest of the investors. It also provides the information through the internet and mobile alerts that what IPOs are coming in the market and it also provides its research on the future prospect of the IPO. Study also concludes that people are not much aware of commodity market and while its going to be biggest market in India. The company should also organize seminars and similar activities to enhance the knowledge of prospective and existing customers, so that they feel more comfortable while investing in the stock market.

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APPENDIX
Questionnaire regarding the investment behavior of the investor in banking stock Name DesignationQualificationPlaceSex-

1. Are you currently doing trading in banking stocks? A) Yes B)NO

2. What is your age group? A) 20-34 B) 35-45 C) above45

3. Can you give name of some of banking shares in which you do trading?

----------------------------------------------------------------------------------------------4. Are banking stocks a good buy now? A) Yes B) NO

5. Do you think Investors in bank stocks are making eye-popping returns? A) Yes B) NO

6. Are bank stocks rising only because of speculation and amateur investors? A) Yes B) NO

7. If the government is bailing out the Banks, will it be wise to buys the stocks of Bank so cheap? A) Yes B) NO

8. Does monetary policies affect the banking stock? A) Yes B) NO

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9. Do you think that banking stocks are more volatile as compare to other stocks? A) Yes B) NO

10. Do you think that fluctuation in banking stock due to frequent announcement and change in monetary policies? A) Yes B) NO

11. According to you what are the think make impact while purchasing banking stocks?

----------------------------------------------------------------------------------------------------

12. According to you which bank stocks is performing good as compare to the market?

13. Why people say stay always from banking stocks?

14. Do you think that strict monetary policies of RBI is beneficial for the banking stock? A) Yes B) NO

15. Do you think that fluctuation in the bank interest rate change the mind of investors? How? A) Yes B) NO

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BIBLIOGRAPHY
Books: BERI G C. MARKETING RESEARCH NEW DELHI, TATA Mc GRAW-HILL PUBLISHING COMPANY LIMITED. KOTHARI RESEARCH METHODOLOGY NEW DELHI, VIKAS PUBLISHING HOUSE PVT.LTD.1978. GOYAL, DR.ALOK, FINANCIAL MARKET OPERATION NEW DELHI, V.K. (INDIA) ENTERPRISES.

Magazines:
VALUELINE (SHAREKHAN MONTHLY RESEARCH MAGAZINE) CAPITAL MARKET (5PASISA.COM), NEW DELHI. THE FINAPOILS (YOUR PERSONAL FINANCE ADVISOR FROM KARVY)

Internet: http://WWW.MONEYCONTROL.COM http://WWW.CAPITALINE.COM http://WWW.SHAREKHAN LTD.COM http://WWW.INDIAINFOLINE.COM http://WWW.ICICIDIRECT.COM http://WWW.HDFCSECURITY.COM http://WWW.KARVY.COM

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