IS SENSEX THE BAROMETER OF INDIAN ECONOMY?

 

                                                Snippets from the recent news stories ............

From Haridas Mundhra in 1958 to Harshad Mehta in 1992 and recent report of SEBI are testimony to the fact that common -man /retail investor  is being coned by market manipulators  time and again.

Many a times people argue that SENSEX as barometer of the economy. Is it really so or otherwise. Lets try to understand. 

Stock exchange:

 Platform  where you can  buy and sell stocks. Primarily BSE and NSE are the two exchanges in India . BSE is Bombay stock exchange which is located in Mumbai and one of the oldest exchanges where stocks are bought and sold. NSE  is national stock exchange similar to BSE where stocks are bought and sold as well.

NATIONAL STOCK EXCHANGE OF INDIA: 

The National Stock Exchange of India, located in Mumbai , was promoted by leading financial institutions at the behest of the Government of India, and was incorporated in November 1992 as a tax-paying company.

BOMBAY STOCK EXCHANGE:

BSE Limited is the oldest stock exchange in Asia with a rich heritage. Popularly known as "BSE", was established in 1875. It was the first stock exchange in the country to obtain permanent recognition in 1956 from the Government of India under the Securities Contracts (Regulation) Act, 1956.

Sensex:

It is the benchmark  index of the Bombay Stock Exchange (BSE). As on October 2024, BSE has more than 5500 companies listed under it. SENSEX is composed of 30 of the largest and most actively-traded stocks on the BSE. These stocks are selected based on various factors like:

• Market capitalisation, 
• Trading frequency, 
• Listing history.

T    Sensex is calculated by using the free-float market capitalisation method and through this, the performance of thirty companies gets reflected. The free-float market capitalisation method shows a proportion of stocks that are ready to be traded and are issued by the companies to the public in the market.

 NIFTY :

Nifty is the benchmark index of NSE (National Stock Exchange). Nifty is made up of 50 stocks. As on October 2024, NSE has more than 2300 companies listed under it . The base index value for Sensex is 100, while the base index value of Nifty is 1000.

SENSEX vs NIFTY:

•  Sensex comprises 30 well-established companies, whereas Nifty comprises 50 top companies that are listed for trading on BSE and NSE respectively.
• Any company can be listed on BSE as it has low eligibility criteria where to be listed in NSE a company has to have a very good reputation and huge revenue.  
• Basically NSE is for blue chip stocks and BSE is for all.  
• NSE provides future contract trading where BSE has recently started futures. 
• Trading volumes in NSE is much more than BSE so everyone prefer to trade in NSE rather than BSE.
• Nifty is a broader market index that covers 24 sectors while Sensex covers only 13 sectors.

 IS SENSEX THE BAROMETER OF ECONOMY :

Answer to this question is “YES as well as NO” inclined more towards “NO”.

How Economy affects SENSEX:

• Value of stocks constituting SENSEX /NIFTY depends upon demand and supply of the stocks. 
• Demand of these stocks is directly proportional to the economic health of the country reflected through macro indicators of the nation in general and the financial health of the company. 
• Hence GDP growth, inflation and climate change affect the value of stocks of Indian companies. 

Positive, long-term economic factors affecting Indian Stock market :

• a demographic advantage fueled by urban growth and increasing affluence, 
• Increasing market demand 
• Rural sector still to be explored fully 
• an efficient regulatory framework, 
• a robust government initiative to enhance infrastructure, 
• a manufacturing sector benefiting from supply chain diversification, 
• policies that favor sustainability and industry growth, 
• and an expanding capacity for renewable energy.

But we have to consider following factors before concluding.

1.Going by the definition of SENSEX, it reflects market value of “ 30 well-established companies” which cover around 13 different sectors 

                                                        while 

NIFTY 50 reflects market value of “50 well-established companies” which cover around 24 different sectors.

As per definition, both NIFTY and SENSEX reflects more of the health of these companies constituting the respective index rather than the economy affecting the common man. 

2.It might be a possibility that a company in the indices is performing well moving sensex higher but other companies in that sector might not doing well.

3.More than that ,it is reflecting portion exclusively of formal economy and no cognizance of informal /grey economy which is the most prevalent in Indian economy.

4.SENSEX also behaves according to investment through  FII which again does not reflects the economic behaviour of the Indians, rather health of economies world wide specially of USA .

When USA Economy /Sentiments good :

Indian Capital Market →→→→→→→→Investments/FII/FDI →→→→→→USA

********In  Trump 2.0 regime, US market is buyoed while FII's are consistent on pulling investments from Indian market .

When USA Economy /Sentiments poor:

US Capital Market →→→→→→→→Investments/FII/FDI →→→→→→Indian Capital Market.

*********Quantitative Easing in the wake of 2008 recession led to capital flight of dollar from USA to India giving a push to Indian market.

5.It is also being observed that investments coming from abroad via P-Notes is merely to exploit the market profits and manipulate the markets. On 16^th Oct 2007, when SEBI proposed for curbs on investments via P-Notes ,then there was intra day market crash by 9% within 1 hour of opening session. 

6.Post covid, retail investors have increased in India increasing the exposure of sensex to the common man but recent SEBI reports that :

 “ A study conducted by the SEBI has shown that retail traders tend to be at a disadvantage when it comes to trading in equity derivatives. Approximately 93 percent of these traders experienced an average loss of Rs 2 lakh (per trader) over the past three financial years that concluded in March 2023.”

 7. Collusion between different players in the Economy has also resulted in various market related scams to name a few Haridas Mundhra scam popularly known as LIC Scam (first big financial scam of Independent India) and Harshad Mehta scam (scam of 5000 crores in 1992) are few glaring examples.

8.Many a times it appears that market is more of manipulated rather being driven by fundamentals. Recently case of an IPO mentioned below is a case in point :

"The company Resourceful Automobile garnered an overwhelming reaction from investors, achieving a total subscription that was close to 400 times by the end of the day, similar to trends observed in SME IPOs this year. For an IPO valued at Rs 12 crore, the subscription requests amounted to Rs 2,700 crore. Additionally, the firm operates only two Yamaha dealership showrooms and employs eight people."

Conclusively, Sensex and NIFTY are more of indicating the sentiments of the investors rather behaving exclusively as barometer of Indian economy.

Anticipating good year end for SENSEX 2024.......................

ALL's WELL THAT ENDS WELL .