Comparative Analysis of Indian Stock Market with

International Markets

1. Introduction

The Indian stock exchanges hold a place of prominence not only

in Asia but also at the global stage.The Bombay Stock Exchange
(BSE) is one of the oldest exchanges across the world, while the
National Stock Exchange (NSE) is among the best in terms of
sophistication and advancement of technology. The Indian stock
market scene really picked up after the opening up of the
economy in the early nineties. The whole of nineties were used to
experiment and fine tune an efficient and effective system. The
‘badla’ system was stopped to control unnecessary volatility while
the derivatives segment started as late as 2000. The corporate
governance rules were gradually put in place which initiated the
process of bringing the listed companies at a uniform level. On the
global scale, the economic environment started taking paradigm
shift with the ‘dot com bubble burst’, 9/11, and soaring oil prices.
The slowdown in the US economy and interest rate tightening
made the equation more complex.

However after 2000 riding on a robust growth and a maturing

economy and relaxed regulations, outside investors- institutional
and others got more scope to operate. This opening up of the
system led to increased integration with heightened cross-border
flow of capital, with India emerging as an investment ‘hot spot’
resulting in our stock exchanges being impacted by global cues
like never before.

The study pertains to comparative analysis of the Indian Stock

Market with respect to various international counterparts.
Exchanges are now crossing national boundaries to extend their
service areas and this has led to cross-border integration. Also,
exchanges have begun to offer cross-border trading to facilitate
overseas investment options for investors. This not only increased
the appeal of the exchange for investors but also attracts more
volume. Exchanges regularly solicit companies outside their home
territory and encourage them to list on their exchange and global
competition has put pressure on corporations to seek capital
outside their home country. The Indian stock market is the world
third largest stock market on the basis of investor base and has a
collective pool of about 20 million investors. There are over 9,000
companies listed on the stock exchanges of the country. The
Bombay Stock Exchange, established in 1875, is the oldest in Asia.
National Stock Exchange, a more recent establishment which came
into existence in 1992, is the largest and most advanced stock
market in India is also the third biggest stock exchange in Asia in
terms of transactions. It is among the 5 biggest stock exchanges in
the world in terms of transactions volume.

ORIGIN OF NYSE
The origin of the New York Stock Exchange (NYSE) is dated back to
May 17, 1792, when the Buttonwood Agreement was signed by
twenty-four stock brokers outside of 68 Wall Street in New York
under a buttonwood tree. Also called the “Big Board”, it is the
largest stock exchange in the world in terms of dollar volume and
second largest in terms of number of companies listed.

3. Problem

Presently, the fluctuations in the Indian market are attributed

heavily to cross border capital flows in the form of FDI, FII and to
reaction of Indian market to global market cues. In this context,
understanding the relationship and influence of various exchanges
on each other is very important. This study that compares global
exchanges which are from different geopolitico-socio-economic
areas. With the cross border movements of capital like never
before inthe form of FDI and FII, coupled with the easing of
restrictions bringing various stock exchanges at par in terms of
system and regulations, it can be assumed reasonably that a
particular stock exchange will have some impact on other
exchanges.

4. Objectives

The main objective of this study is to capture the trends,

similarities and patterns in the activities and movements of the
Indian Stock Market in comparison to its international counterparts.
The aim is to help the investors (current and potential) understand
the impact ofimportant happenings on the Indian Stock exchange.
This is especially relevant in the current scenario when the
financial markets across the globe are getting integrated into one
big market and the impact of one exchange on the other
exchanges. In other words, the intention is to test the hypothesis,
‘whether various stock exchanges globally have any impact on
each other’ or they are correlated in any way with regard to their
movements and, if so, to what extent. Arising out of the main
hypothesis is the question - given the above context: What impact
would the result have on the understanding that international
diversification of investment is desirable and profitable with regard
to both risk and return?

Comparative Analysis
This is the main part of the study wherein the various stock
exchanges of the sample have been compared on certain
parameters, both qualitatively and quantitatively.
Qualitative Analysis
In this section the various stock exchanges have been compared
on the following
parameters;
1. Market Capitalization
2. number of listed securities
3. listing agreements
4. circuit filters
5. settlement
These parameters are used to look at selected important aspects
of any stock exchange, viz.,the market capitalization gives an idea
about the size of the respective exchanges; whereasthe number of
listed securities acts as an indicator for the volume and liquidity of
any exchange. The listing agreements take care of the governance
issue, while circuit filters give an insight into the risk management
framework of the said exchange. Finally, the efficiency of a stock
exchange has been measured in terms of its settlement process.

Market Capitalization
Market capitalization is the measure of corporate size of a country.
It shows the current
stock price multiplied by the number of outstanding shares. It is
commonly referred to as
Market cap. It is calculated by multiplying the number of common
shares with the current price of those shares. This term is often
confused with capitalization, which is the total amount of funds used
to finance a firm's balance sheet and is calculated as market
capitalization plus debt (book or market value) plus preferred
stock. While there are no strong definitions for market cap
categorizations, a few terms are frequently used to group
companies based on its capitalization. The table below shows the
market capitalization of various stock markets in the world.

Listed Securities

Listing in a stock exchange refers to the admission of the securities

of the company for trade dealings in a recognized stock exchange.
The securities may be of any public limited company, Central or
State Government, quasi-governmental and other financial
institutions/corporations, municipalities, etc. Securities of any
company are listed in a stock exchange to provide liquidity to the
securities, to mobilize savings and to protect the interests of the
investors.
India has the highest number of companies listed in the stock
market. Out of this, about 75 % of the companies are listed with
the Bombay Stock Exchange. After India, United States has the
highest number of companies listed.

Quantitative Analysis.

The hypothesis that the exchanges impact each other has been
tested through various statistical methods with data on price,
returns collected from the exchanges. Mainly the correlation
analysis, exponential trend analysis and the risk-return analysis
has been used to validate the hypothesis.

Price Relationship

Correlation is a numerical summary measure that indicates the

strength of relationships between the pairs of variables. A
correlation is very useful but it has its limitations. That is, it can
only measure the strength of a linear relationship. The numerator
of the above formula is also a measure of association between two
variables X and Y which is called the covariance between X and Y.
Similar to correlation, a covariance is a single number that
measures the strength of the linear relationship between the two
variables. It is by looking at the sign of the correlation or the
covariance, i.e. positive or negative, that we can tell whether the
two variables are positively or negatively related.
Therefore the correlation is better because, unlike the covariance,
the correlations are not affected by the units in which the variables
are measured. All the correlations are between +1 and -1,
inclusive. The sign determines whether the relationship is positive
or negative. The strength of the relationship is measured by the
absolute value or the magnitude of the correlation. The closer it is
to +1 the stronger the relationship is and the closer to
zeroindicates that there is practically no linear relationship. At the
extreme a correlation equal to1 -1 or +1 occurs only when the
linear relationship is perfect. In this part the price data of the
various exchanges are collected and subjected to a correlation test
in order to find out the influence that they have on each other. In
other words, an effort has been made to gain insight into how far
the price movements of the exchanges are related with one
another.

Risk and Return

This section tries to compare the various exchanges on the basis

of returns and the corresponding risks associated with it, returns
being, perhaps, the single most important factor affecting the
performance of any index. While risk can be termed as the major
factor underlying all activity, it becomes imperative to compare the
exchanges based on this parameter. Table 2 exhibits the historical
risk-return figures of the exchanges. From the return perspective,
NYSE seems to be most stable among all of these stock exchanges.
There are only two years when NYSE has given the negative
returns, i.e. in the years 2001 and 2002. Russian stock exchange is
the most volatile of all these and has given returns from 108% to
-194%. NSE seems to have followed or moved in tandem with the
NYSE more after year 2000.

Abstract

The ups and downs of the financial markets are always in the news. After all, there's plenty to
report. Wide price fluctuations are a daily occurrence on the world's stock markets as investors
react to economic, business, and political events. Of late, the markets have been showing
extremely erratic movements, which are in no way tandem with the information that is fed to the
markets. Thus chaos prevails in the markets with investor optimism at unexpected levels. Irrational
exuberance has substituted financial prudence. Has the stock market volatility increased? Has the
Indian market developed into a speculative bubble due to the emergence of "New Economy"
stocks? Why is this volatility so pronounced? In this paper we try to analyse these questions in the
context of Indian stock markets. We try to unearth the rationale for these weird movements. We
examine the fundamentalist view put forward by economists who argue that volatility can be
explained by Efficient Market Hypothesis. On the other hand, the view that volatility is caused by
psychological factors is tested. An empirical study of BSE Sensex and a set of representative
stocks are carried out to find the changes in their volatility in the last two years. The stock market
regulation in introduction of rolling settlement and dematerialization as a measure of reducing
volatility is put to test. Thus, the paper will help the investors as well as market regulators to make
the markets more efficient.

1.2.1 OBJECTIVES OF THE STUDY:

Following are the objectives of the study:

• To study the scope and trading mechanism of Foreign Instititutional investors in

India.

• To find the relationship between the FIIs equity investment pattern and Indian
stock indices.

• To analyze the impact of FIIs equity investment on specific industrial sector

(FMCG, Consumer Durables, Auto, Banking, Real Estate) indices.

1.2.2 SCOPE AND NEED OF STUDY:

Scope of the study is very broader and covers both the stock indices and its
comparison with foreign institutional investments. But, study is only going to cover
foreign investments in form of equity. The time period is limited from January 2007
to December 2008 as it will give exact impact in both the bullish and bearish trend.

The study will provide a very clear picture of the impact of foreign institutional
investors on Indian stock indices. It will also describe the market trends due to FIIs
inflow and outflow.

The study would be helpful for further descriptive studies on the ideas that will be
explored. Moreover, it would be beneficial to gain knowledge regarding foreign
institutional investments, their process of registration and their impact on Indian
stock market.

1.2.3 RESEARCH METHODOLOGY:

Research methodology is the arrangement of conditions for collection and analysis

of data in a manner that aims to combine relevance to the research purpose with
economy in procedure. Research methodology is the conceptual structure within
which research is conducted. It constitutes the blueprint for the collection
measurement and analysis of the data.

The research methodology here includes:

• Research problem
• Research design
• Sampling design
• Sampling technique
• Data collection method

Research Problem

An adage says “a problem well defined is half solved”. The project deals with the
“Impact of Foreign Institutional Investors on Indian Stock Market”. This research
project studies the relationship between FIIs investment and stock indices. For this
purpose India’s two major indices i.e. Sensex and S&P CNX Nifty are selected.
These two indices, in a way, represent the picture of India’s stock markets. Five
indices of BSE i.e. BSE Auto, BSE Bankex, BSE Consumer Durables, BSE FMCG,
BSE Realty are also selected so as to further observe the effect of FII in particular
industry . So this project reveals the impact of FII on the Indian capital market.

There may be many other factors on which a stock index may depend i.e.
Government policies, budgets, bullion market, inflation, economic and political
condition of the country, FDI, Re./Dollar exchange rate etc. But for this study I have
selected only one independent variable i.e. FII. This study uses the concept of
correlation and regression to study the relationship between FII and stock index. The
FII started investing in Indian capital market from September 1992when the Indian
economy was opened up in the same year. Their investments include equity only.
The sample data of FIIs investments consists of monthly average from January 2007
to December 2008.

RESEARCH DESIGN

Null Hypothesis (Ho): The various BSE indices and S&P CNX Nifty index does not
rise with the increase in FIIs investment.

Alternate Hypothesis (Ha): The various BSE indices and S&P CNX Nifty index
rises with the increase in FIIs investment.

Exploratory Research
As an exploratory study is conducted with an objective to gain familiarity with the
phenomenon or to achieve new insight into it, this study aims to find the new
insights in terms of finding the relationship between FII’S and Indian Stock Indices.

SAMPLING DESIGN

• Universe
In this study the universe is finite and will take into the consideration related news
and events that have happened in last few year.

• Sampling Unit: -
As this study revolves around the foreign institutional investment and Indian stock
market. So for the sampling unit is confined to only the Indian stock market.

SAMPLING TECHNIQUE: -

Convenient Sampling: Study conducted on the basis of availability of the Data and
requirement of the project. Study requires the events that have impact on the Indian
stock market.

Data collection Method

Secondary data: For the secondary data various literatures, books, journals,
magazines, web links are used. As there are not possibilities of collecting data
personally so no questionnaire is made.

2 CONCLUSION

In developing countries like India foreign capital helps in increasing the productivity of
labour and to build up foreign exchange reserves to meet the current account deficit. Foreign
Investment provides a channel through which country can have access to foreign
capital.

According to Data analysis and findings, it can be concluded that FII do have any significant
impact on the Indian Stock Market but there are other factors like government policies, budgets,
bullion market, inflation, economical and political condition, etc. do also have an impact on the
Indian stock market. There is a positive correlation between stock indices and FIIs but FIIs didn’t
have any significant impact on Indian Stock Market. The null hypothesis is rejected. BSE CD and
Nifty showed some positive correlation with FII in 2007 and 2008 but rest of the indices showed
very less positive correlation with FII. Also the coefficient of determination is less in all the case.
It shows the absence of linear relation between FII and stock index. This does not mean that there
is no relation between them.

One of the reasons for absence of any linear relation can also be due to the sample data. The data
was taken on monthly basis. The data on daily basis can give more positive results (may be). Also
FII is not the only factor affecting the stock indices. There are other major factors that influence
the bourses in the stock market.

5.3 LIMITATIONS

Besides following scientific methodologies the study has come across some limitations. These are:
? The study is based on Sensex sample. The Sensex companies have an external image that they
are the best performers in the country. If the sample companies consist of probably a
heterogeneous group then the results may give better insight in to relationship of the specific
variables.

? The data is taken on monthly basis. The data on daily basis can give more positive results.

? Due to time constraint, my project report is not fully exhaustive.

? Secondary data that I have used in this study may not give true picture of the concern.

5.4 RECOMMENDATIONS

After the analysis of the project study, following recommendations can be made:

1) Simplifying procedures and relaxing entry barriers for business activities and providing investor
friendly laws and tax system for foreign investors.

2) Allowing foreign investment in more areas. In different industries indices the FIIs should be
encouraged through different patterns like futures, options, etc.

3) Somewhere, a restriction related to the track record of Sub- Accounts is also to be made on the
investors who withdraw money out of the Indian stock market who have invested with the help of
participatory notes.

4) We have to modernize and also have to save our culture. Similarly the laws should be such that
it protect domestic investors and also promote trade in country through FIIs.

5) Encourage industries to grow to make FIIs an attractive junction to invest.

Suggestion:

For long term investors:

run in Indian stock market with calculative mind will take you and your investing into a different
stage of higher returns all together.

Variation and fluctuations in day to day business will give you shock as well as surprise ;you
will loose and gain with rapid rate rate in day to day activities of the share market but in the long
run it will prove you steady growth of returns.

A yearly comparison speaks a theory too, and that’s its rate,you can be in positive point of view
with positive sources o sensex
For mid term investors: A long

A wide range o portfolio with regular investment say monthly will lead to steady growth o
return which will be more than the deposits in bank.

Fluctuation in very short period should be avoided and ignored to complete the period of
investment to maximize the return

For short term investors:

Speculation must be avoided as too many o the investors just wanted to insure their day to
day profits but they ignored the market conditions and economic factors.

A rapid growth can be registered in a very short period which excites you to invest more
and more into the stock market but it requires a deep knowledge of the market or it will
result in huge losses.

Short term investors should the money regularly on the market as their some investment
will be on the higher value of the market and some investment will be when market is low
,so the average invested amount and the average market will be in equilibrium position

Patience , strategy, knowledge about the market, investing policies , portfolio management,
Ratings of the companies, government policies , etc. are some of the major factors to boom
your return despite of fluctuations

CONCLUSION

In developing countries like India foreign capital helps in increasing the productivity of
labour and to build up foreign exchange reserves to meet the current account deficit. Foreign
Investment provides a channel through which country can have access to foreign
capital.

According to Data analysis and findings, it can be concluded that FII do have any significant
impact on the Indian Stock Market but there are other factors like government policies, budgets,
bullion market, inflation, economical and political condition, etc. do also have an impact on the
Indian stock market. There is a positive correlation between stock indices and FIIs but FIIs didn’t
have any significant impact on Indian Stock Market. The null hypothesis is rejected. BSE CD and
Nifty showed some positive correlation with FII in 2007 and 2008 but rest of the indices showed
very less positive correlation with FII. Also the coefficient of determination is less in all the case.
It shows the absence of linear relation between FII and stock index. This does not mean that there
is no relation between them.

One of the reasons for absence of any linear relation can also be due to the sample data. The data
was taken on monthly basis. The data on daily basis can give more positive results (may be). Also
FII is not the only factor affecting the stock indices. There are other major factors that influence
the bourses in the stock market.

5.3 LIMITATIONS

Besides following scientific methodologies the study has come across some limitations. These are:
? The study is based on Sensex sample. The Sensex companies have an external image that they
are the best performers in the country. If the sample companies consist of probably a
heterogeneous group then the results may give better insight in to relationship of the specific
variables.

? The data is taken on monthly basis. The data on daily basis can give more positive results.

? Due to time constraint, my project report is not fully exhaustive.

? Secondary data that I have used in this study may not give true picture of the concern.

5.4 RECOMMENDATIONS

After the analysis of the project study, following recommendations can be made:

1) Simplifying procedures and relaxing entry barriers for business activities and providing investor
friendly laws and tax system for foreign investors.

2) Allowing foreign investment in more areas. In different industries indices the FIIs should be
encouraged through different patterns like futures, options, etc.

3) Somewhere, a restriction related to the track record of Sub- Accounts is also to be made on the
investors who withdraw money out of the Indian stock market who have invested with the help of
participatory notes.

4) We have to modernize and also have to save our culture. Similarly the laws should be such that
it protect domestic investors and also promote trade in country through FIIs.

5) Encourage industries to grow to make FIIs an attractive junction to invest.