CHAPTER 1

INTRODUCTION
In this chapter, the researcher explained BSE, BSE Bankex and its features. Further
researcher discussed about objectives of study, scope of study which specify the research
methodology. The researcher also explains the indices and history of BSE. The researcher
also framed hypotheses of the study on the basis of the objective which have been highlighted
in this chapter.
A. Profile of Industry
Bombay stock exchange is an Indian stock exchange located in Mumbai, Maharashtra, India.
Established in 1875 and is considered to be one of Asias fastest stock exchanges, with a
speed of 200 microseconds and one of Indias leading exchange groups and the oldest stock
exchange in the South Asia region. Bombay Stock Exchange is the world's 10th largest stock
market by market capitalization at $1.7 trillion as of 23 January 2015. More than 5,000
companies are listed on BSE, making it the world's top exchange in terms of listed members.
1. Brief History of BSE
The Bombay Stock Exchange is the oldest exchange in Asia. It traces its history to 1855,
when four Gujarati and one Parsi stockbroker would gather under banyan trees in front of
Mumbai's Town Hall. The location of these meetings changed many times as the number of
brokers constantly increased. The group eventually moved to Dalal Street in 1874 and in
1875 became an official organization known as "The Native Share & Stock Brokers
Association".
On 31 August 1957, the BSE became the first stock exchange to be recognized by the Indian
Government under the Securities Contracts Regulation Act. In 1980, the exchange moved to

the Phiroze Jeejeebhoy Towers at Dalal Street, Fort area. In 1986, it developed the BSE
SENSEX index, giving the BSE a means to measure overall performance of the exchange. In
2000, the BSE used this index to open its derivatives market, trading SENSEX futures
contracts. The development of SENSEX options along with equity derivatives followed in
2001 and 2002, expanding the BSE's trading platform.
Historically an open outcry floor trading exchange, the Bombay Stock Exchange switched to
an electronic trading system developed by CMC Ltd in 1995. It took the exchange only fifty
days to make this transition. This automated, screen-based trading platform called BSE Online trading (BOLT) had a capacity of 8 million orders per day. The BSE has also introduced
the world's first centralized exchange-based internet trading system, BSEWEBx.co.in to
enable investors anywhere in the world to trade on the BSE platform.
1.1 1830 to 1875
In the year 1830's Business on corporate stocks and Share in Bank and Cotton presses
started in Bombay. During the period of 1860-1865 Cotton price bubble as a result of the
American Civil War. During 1870 - 90's Sharp increase in Share prices of jute industries
followed by a boom in tea stocks and coal.
1.2 1875 To 1995
On 9 July 1875 The Native Share & Stock Broker's Association formed. On 2 February
1921 Clearing House started by Bank of India. On 31 August 1957 BSE granted permanent
recognition under Securities Contracts (Regulation) Act (SCRA). On 2 January 1986
SENSEX, country's first equity index launched (Base Year: 1978-79 =100). On 10 July
1987 Investor's Protection Fund (IPF) introduced. On 3 January 1989 BSE Training
Institute (BTI) inaugurated. On25 July 1990 SENSEX closes above 1000. On 15 January
1992 SENSEX closes above 2000 .On 30 March 1992 SENSEX closes above 4000 . On 1
2

May 1992 SEBI Act established (An Act to protect, develop and regulate the securities
market). On 29 May 1992 Capital Issues (Control) Act repealed. On 1992 Securities
Appellate Tribunal (SAT) established. On 14 March 1995 BSE On-Line Trading (BOLT)
system introduced.
1.3 1996 To 2000
19 August 1996 First major SENSEX revamp* 22 March 1999 Central Depository Services
Limited (CDSL) set up with other financial institutions.1 June 1999 Interest rate
swaps (IRS) / Forward Rate Agreements (FRA) allowed. On 15 July 1999 CDSL
commences work. On 11 October 1999 SENSEX closed above 5000. On 11 February 2000
SENSEX crosses 6000 intra-day. On 9 June 2000 Equity Derivatives introduced
1.4 2001 To 2005
1 March 2001 Corporatisation of Exchanges proposed by the Union Govt. On 1 February
2001 BSE Webx Launched On1 June 2001 Index Options launched. On 4 June 2001 BSE
PSU index introduced. On 15 June 2001 WDM operations at commenced..On 2 July
2001 Value at risk model introduced for margin requirement calculation. On 9 July 2001
Stock options launched. On 11 July 2001 BSE Teck launched, Indias First free float index.
On 25 July 2001 Dollex 30 launched. On 1 November 2001 Stock futures launched. On 29
November

2001 100% book building

allowed.

On 31 December 2001 All

securities clearing move to T+5 (trade date + 5 days). On 1 February 2002 Two way
fungibility for ADR/GDR. On 15 February 2002 Negotiated Dealing System (NDS)
established. On 1 April 2002 T+3 settlement Introduced. On 1 January 2003 Indias first
ETF on SENSEX - SPICE' introduced. On 16 January 2003 Retail trading in G Sec. On 1
April 2003 T+2 settlement Introduced. On 1 June 2003 Bankex launched. On1 September
2003 SENSEX shifted to free-float methodology. On 1 December 2003 T group launched.
3

On 2 June 2004 SENSEX closes over 6000 for the first time (564.71 points, 11.14%). On
17 May 2004 Second biggest fall of all time, Circuit filters used twice in a day (the
Scheme) announced by SEBI. On 20 May 2005 The BSE (Corporatisation and
Demutualisation) Scheme, 2005. On 8 August 2005 Incorporation of Bombay Stock
Exchange Limited. On 12 August 2005 Certificate of Commencement of Business. On 19
August 2005 BSE becomes a Corporate Entity. On 7 February 2006 SENSEX closed above
10000. On 7 July 2006 BSE Gujarati website launched. On 21 October 2006 BSE Hindi
website launched. On 2 November 2006 shares BSE SENSEX India Tracker listed at Hong
Kong Stock Exchange. On 2 January 2007 Launch of Unified Corporate Bond Reporting
platform: Indian Corporate Debt Market (ICDM). On 7 March 2007 Singapore Exchange
Limited entered into an agreement to invest in a 5% stake in BSE. On 16 May 2007
Appointed Date under the Scheme i.e. Date on which Corporatisaton and Demutualisation
was achieved. Notified by SEBI in the Official Gazette on 29.06.2007. On 10 January 2008
SENSEX All-time high 21206.77. On 1 October 2008 Currency Derivatives Introduced. On
18 May 2009 The SENSEX raised 2110.70 points (17.34%) and Index-wide upper circuit
breaker applied. On 7 August 2009 BSE - USE Form Alliance to Develop Currency &
Interest Rate. On 24 August 2009 BSE IPO Index launched. On 1 October 2009 Bombay
Stock Exchange introduces trade details facility for the Investors on 5 October 2009 BSE
Introduces New Transaction Fee Structure for Cash Equity Segment. On 25 November
2009 BSE launches FASTRADE - a new market access platform on 4 December 2009
BSE Launches BSE StAR MF Mutual Fund trading platform. On 7 December 2009
launch of clearing and settlement of Corporate Bonds through Indian Clearing Corporation
Ltd. On 14 December 2009 Marathi website launched. On 18 December 2009 BSE's new
derivatives rates to lower transaction costs for all. On 4 January 2010 Market time changed
to 9.0 a.m. - 3.30 p.m. On 20 January 2010 BSE PSU website launched. On 22 April 2010

New DBM framework @ Rs.10 lakhs - 90% reduction in Membership Deposit. On 12 May
2010 Dissemination of Corporate Action information via SWIFT platform. On 23 July 2010
Options on BOLT. On 21 September 2010 First to introduce Mobile-based Trading. On 29
September 2010 Introduction of Smart Order Routing (SOR). On 4 October 2010 EUREX SENSEX Futures launch. On 11 October 2010 Launch of Fastrade on Web (FoW) Exchange hosted platform. On 5 November 2010 SENSEX closes above 21,000 for the first
time. On 12 November 2010 Commencement of Volatility Index. On 22 November 2010
Launch of SLB. On 10 December 2010 Launch of SIP. On 27 December 2010
Commencement of Shariah Index
1.5 2011 To 2014
17 November 2011 Maharashtra and United Kingdom Environment Ministers launched
Concept Note for BSE Carbon Index. On 30 December 2011, picks up a stake in the proxy
advisory firm, Institutional Investor Advisory Services India Limited (IiAS). On 7 January
2011 BSE Training Institute Ltd. with IGNOU launched India's first 2 year full-time MBA
programme specialising in Financial Market. On 15 January 2011 Co-location facility at
BSE - tie up with Netmagic.com. On 22 February 2012 Launch of BSE-GREENEX to
promote investments in Green India. On 13 March 2012 Launch of BSE - SME Exchange
Platform. On 30 March 2012 BSE launched trading in BRICSMART indices derivatives.
On 19 February 2013 - SENSEX becomes S&P SENSEX as BSE ties up with Standard and
Poor's to use the S&P brand for Sensex and other indices. On 28 November 2013 Launch
of Currency Derivatives (BSE CDX). On 28 January 2014 Launch of Interest Rate Futures
(BSE IRF). On 11 Feb 2014 Launch of Institutional Trading Platform on BSE SME. On
20 March 2014 BSE Launches New Debt Segment. On 04 April 2014 BSE SME exceeds
USD 1 billion market capitalisation. On 07 April 2014 Launch of Equity Segment on BOLT
Plus with Median Response Time of 200 (s). On 27 May 2014 BSE felicitated at The
5

Asian Banker Summit 2014. On 26 September 2014 BSE inks MoU with BNY Mellon. On
22 October 2014 BSE inks strategic partnership with YES BANK. On 28 November 2014
BSE listed cos market cap crosses landmark 100 lakh crore. On 12 December 2014 Market
Cap of BSE SME listed companies crosses landmark 10,000 crore.
2. Indices
The launch of SENSEX in 1986 was later followed up in January 1989 by introduction of
BSE National Index (Base: 1983-84 = 100). It comprised 100 stocks listed at five major
stock exchanges in India - Mumbai, Calcutta, Delhi, Ahmadabad and Madras. The BSE
National Index was renamed BSE-100 Index from 14 October 1996 and, since then, its
calculations take into consideration only the prices of stocks listed at BSE.
BSE launched the dollar-linked version of BSE-100 index on 22 May 2006, the "BSE-200"
and the "DOLLEX-200" on 27 May 1994, the BSE-500 Index and 5 sectoral indices in
1999, and the BSE-PSU Index, DOLLEX-300, and the BSE TECk Index (the country's first
free-float based index) in 2001. Over the years, BSE shifted all its indices to the free-float
methodology (except BSE-PSU index).
BSE disseminates information on the Price-Earnings Ratio, the Price to Book Value Ratio,
and the Dividend Yield Percentage of all its major indices on day-to-day basis. The values
of all BSE indices are updated on a real time basis during market hours and displayed
through the BOLT system, the BSE website, and news wire agencies. All BSE Indices are
reviewed periodically by the BSE Index Committee. This Committee, which comprises
eminent independent finance professionals, frames the broad policy guidelines for the
development and maintenance of all BSE indices. The BSE Index Cell carries out the dayto-day maintenance of all indices and conducts research on development of new indices.
SENSEX is significantly correlated with the stock indices of other emerging markets.

3 BSE Bankex
Bombay Stock Exchange Limited launched "BSE BANKEX Index" on 23 June 2003. This
index consists of major Public and Private Sector Banks listed on BSE. The BSE BANKEX
Index is displayed online on the BOLT trading terminals nationwide.
a) Bankex tracks the performance of the leading banking sector stocks listed on the
BSE
b) Bankex is based on the free float methodology of index construction
c) The base date for Bankex is 1st January 2002
d) The base value for Bankex is 1000 points. BSE has calculated the historical index
values of Bankex since 1st January 2002.
e) 14 stocks which represent 90 percent of the total market capitalization of all banking
sector stocks listed on BSE were included in the index.
f) The index is disseminated on a real time basis through BSE online trading (BOLT)
terminals.
g) Initially 12 stocks were included in the BSE Bankex. The stocks in the index were
Andhra Bank (total market cap - Rs 1,226 crore and free float market cap Rs 490.40
crore), Bank of Baroda (Rs 3,062.12 crore and Rs 1,224.85 crore), Bank of India
(Rs 2,283.44 crore and Rs 913.38 crore), Canara Bank (Rs 3,864.25 crore and Rs
1,159.28 crore), Corp Bank (Rs 2,353.13 crore and Rs 1,176.57 crore), HDFC Bank
(Rs 7,104.29 crore and Rs 5,683.43 crore). ICICI Bank Ltd (both total and free float
cap are Rs 8,732.68 crore), ING Vysya Bank (Rs 638.44 crore and Rs 319.22 crore),
Oriental Bank of Commerce (Rs 2419.26 crore and Rs 967.70 crore), Punjab
National Bank (Rs 3,846.89 crore and Rs 769.38 crore), SBI (Rs 18,236.26 crore
and Rs 9,118.13 crore) and Union Bank of India Ltd (Rs 1,516.09 crore and Rs
606.44 crore).But later on a number of replacements took place and now finally
these 14 stocks are a part of BSE Bankex. Bank Ltd, Bank of Baroda, Bank of India
Ltd, Canara Bank, Federal Bank Ltd, HDFC Bank Ltd, ICICI Bank Ltd, IDBI Bank

Ltd, Indusind Bank Ltd Axis, Kotak Mahindra Bank Ltd, Punjab National Bank,
State Bank of India, Union Bank of India, Yes bank.
4. Vision
"Emerge as the premier Indian stock exchange with best-in-class global practice in
technology, products innovation and customer service."
5. Geographical & functional area of operation
5.1 Corporate Office
BSE Limited is located on Phiroze Jeejeebhoy Towers, Dalal Street. Mumbai-400001,
Phones no :91-22-2272133/4,91-22-66545695(Hunting), Fax no. is :91-22-22721919.
6. Organization Structure

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Figure No-1: Organisation Structure of Bombay Stock Exchange

7. Present Leadership

Board of directors
Mr. S. Ramadorai
Mr Ashish kumar chauhan
Dr.Sanjiv Misra
Mr S.H. Kapadia
Mr Sudhakar Rao
Mr .Dhirendra Swarup
Dr. K.Kasturiangan
Mr. Thomas Bendixen

Non- executive chairman

Managing director & CEO
Public interest Director
Public interest Director
Public interest Director
Public interest Director
Public interest Director
Shareholder Director
Table No-1: Present Leadership

B. Objectives of the study

1. To examine the relationship among selected macroeconomic variables and BSE Bankex.
2. To analyze the impact of macroeconomic variables on BSE Bankex.
C. Scope of the Study
1. To review the previous literature
2. To collect data for the period 2009 to 2014 of BSE Bankex.
3. To collect data for gold prices, inflation and GDP for the period 2009 2014 .To
determine the relationship between selected variables.
D. Research Methodology
a) Methodology Used for Data Collection
The data was collected for the time period of 1 st January 2009 to 31st December 2014.
The data was collected from the official website of BSE (WWW.BSEindia.COM).
b) Methodology used for Data Analysis
The study was empirical in nature. REGRESSION test was applied to check whether
there is relationship between macro factors and BSE Bankex. REGRESSION is
applied in situations where the researcher wants to find out the statistically significant
relationship between the means of different factors and at the same time within
factors. Here, the multiple factor identified GDP, inflation, gold prices. And the
researcher wants to find out whether there is significant relationship between macro

factor and BSE Bankex . Hence, the most appropriate test in such situation is
REGRESSION.
E. Hypotheses of the Study
H0 = There is no significant relationship between BSE Bankex and macro factors.
H1 = There is a significant relationship between BSE Bankex and macro factors.
This chapter helped the researcher understanding the BSE, BSE BANKEX. It also covered
objective of study which provided the path for the study and scope of study which revealed
the data to be collected and time duration of data. At last, the methodology of the project and
hypotheses were also determined.
.

CHAPTER -2
LITERATURE REVIEW

In this chapter the previous year research paper are explained and the second part of chapter
includes the theoretical description in which meaning inflation ,gold prices and GDP are
explained . This chapter also explained the factors affecting inflation ,gold prices and GDP.
10

A. Literature Review
Review of literature provides information to the researchers regarding the previous work
done in their area of research and thereby helps them in identifying the theoretical framework
and methodological issues relevant to the study. It provides the researchers a proper direction
to carry out their research work and enables them to arrive at meaningful results. For the
purpose of the study following literature review have been identifying which are as follows:Luthra Manisha , Mahajan Shikha (2014) In their study researcher examined the impact
of macroeconomics factor on BSE bankex. Macro economic climate here is comprised of
GDP growth rate,Inflation, Gold Prices and Exchange rate. Researcher Used multiple
regression model which showed the regression co-efficient between the share prices and
various factors affecting the same. Regression results indicated that Exchange rate, Inflation,
GDP growth rate affect banking index positively whereas Gold prices had negative impact on
BSE Bankex but none of them had significant impact on Bankex . Researcher used mainly
secondary data for the period from 2002 to 2013.
SINGH POOJA (2014) This paper examined the relationship between macroeconomic
variables and Indian stock market.The Pearsons correlation and multivariate stepwise
regression was applied to understand the impact of macroeconomic indicators on the
performance of stock market. Grangers causality test was applied for the dynamic causal
relationship among the variables. The explained variables in the study includes average
monthly closing price of BSE 100 and CNX 100 while the explanatory variables were Index
of Industrial Production (IIP), Wholesale Price Index (WPI), Money Supply (M3), Interest
Rates (IR), Trade Deficit (TD), Foreign Institutional Investment (FII), Exchange rate (ER),
Crude Oil Price (CP) and Gold Price (GP). The data used in the study was in the monthly
frequency and period of the study included from January 2011 to December 2012. The results
exhibited significant impact of macroeconomic variables on Indian stock market. Foreign
11

capital had significantly positive impact on stock market.The Granger causality test signified
that there exists causal relationship from FII to stock market. Apart from this, there was no
any causal relationship among the variables.The negative impact exchange rates on stock
market appeared during the period of study, With the strengthening of dollar, Indian currency
depreciated in the international market. The stock market declined due to the decrease in the
value of rupee with respect to US dollar.
Saeed Muhammad Sajid (2014) This paper investigated the impact of bank-specific,
industry-specific, and macroeconomic variables on bank profitability before, during, and after
the financial crisis of 2008. For this purpose, 73 UK commercial banks were selected on the
basis of availability of required information. The empirical data for these banks were
collected for the period from 2006 to 2012. The regression and correlation analyses were
performed on the data and concluded that bank size, capital ratio, loan, deposits, liquidity,
and interest rate had positive impact on ROA and ROE while GDP and inflation rate had
negative impact.
Kiganda Evans Ovamba (2014) This study investigated the effect of macroeconomic factors
on bank profitability in Kenya with equity bank limited in focus. In view of the inconclusive
findings on the effect of macroeconomic factors on bank profitability among researchers, the
study was to establish the effect of macroeconomic factors on bank profitability in Kenya
with Equity bank in focus. The study specifically sought to determine, establish and examine
effect of; economic growth (real GDP), inflation and exchange rate on bank profitability in
Kenya with Equity bank in focus respectively using annual data for the period of 5 years
spanning from 2008 to 2012. The effect of macroeconomic factors on bank profitability in
Kenya with Equity bank in focus was examined using multiple regression analysis. The
results showed that macroeconomic factors have insignificant effect on bank profitability in
Kenya with equity bank in focus. Specifically; economic growth (real GDP) and inflation had
12

a positive insignificant effect whereas exchange rate had a negative insignificant effect at 5 %
level.
Scott AIGHEYISI Oziengbe, Ovuefeyen EDORE Julius (2014) In their study researcher
investigated the impact of economic openness (trade and financial openness), and inflation on
commercial banks profitability in Nigeria in the post-consolidation period (2005- 2012),
using panel data regression. The impact of the variables on commercial banks profitability in
Nigeria in the heat of the global financial crisis (2007-2010) were also investigated. The
empirical analysis indicated that trade and financial openness impact positively on
commercial banks profitability, though the impact of trade openness was statistically
insignificant. This was attributed to the low volume of trade (particularly in non-oil
commodities) between Nigeria and the rest of the world, and the low level of participation of
many of the local or indigenous banks in trade finance and merchant. Researchers also found
that inflation and bank size had insignificant impacts on banks profitability in the study
period. It further indicated that the impact of financial openness and inflation on commercial
banks profitability in the heat of the global financial crisis (2007-2010) was significantly
negative, while the impact of trade openness was insignificant. Based on these findings,
Researchers conclude that economic openness could boost commercial banks profitability if
the banks were well positioned to take advantage of the benefits it offers.
Subburayan Baranidharan, Dr. Srinivasan Vanitha (2014) In their study researcher
explored the effects of macroeconomic variables on stock return of the CNX Bank index. The
purpose of the study was to investigate the long run interaction between economic variables
and CNX bank returns. The key active economic variables namely exchange rate, interest rate
and inflation rate were considered for analysis. Interest rate and exchange rate were crucial
variables in the banking industry and monetary policy. Monthly time series data were
collected for the study period from 1st Jan 2004 to 31st Dec 2013. The statistical model used
13

in this study namely ADF, Regression, Cointegration test and Granger causality test. The
major findings from the analysis selected sample macroeconomic variables had got
significant on bank stock returns, Bank stock returns had fixed long run relationship with
selected macroeconomic variables, Exchange rate and Interest rate reflected positively on
bank stock Returns, there was no causal linkage between CNC Bankex and Interest rate,
CNX Bankex and Inflation, Bank stock exist unidirectional causal effects on the exchange
rate. The study concluded that selected macroeconomic variables were long runand causal
relationship with CNX Bankex.
Dr. Kumar Rakesh ,Miss Gautam Sarita (2014)
In their study researcher examined the impact of FII and other stock exchange volatility on
the BSE stock Exchange volatility. In this paper various factors were considered under scope
of the study which were BSE Sensex, FII (Foreign Institutional Investment), Relationship
among different foreign stock exchange which were from the UK, USA and Japan. For the
purpose of analyzing the data a period of 3 months (i.e. from 1 April 2014 to 30 June 2014)
had been taken into consideration. In order to analyze the factors this study was based on the
Secondary data. The appropriate statistical techniques as correlation model, multivariate
regression model etc. had been used for analyzing the data. This study found out that there
was a close and direct relationship of the BSE Sensex with the FTSE and NASDAQ Stock
Exchange as well as there was inverse relationship of the BSE,Sensex with the FII and
Nikkei.
Ximenes Junevio Antonio Silva, Li Li (2014) In their study researcher examined the
relationship of bank specific and macroeconomic factors on bank profitability and stock
return in Thailand over the period of 2004-2013. The sample included 11 commercial banks
listed in Stock exchange of Thailand. It is important to notice that regression result of asset
size different between large banks and medium and small banks. It means that there are

14

economies of scale for small and medium banks and diseconomies of scale of large banks.
Capital adequacy of large banks also found to be negative and significant to ROE. Capital
adequacy requirement limits the risk profile of investment of large banks and thus affect on
its ability to reach their target level of profitability. Liquidity of 21 large banks had positive
and significant relationship to bank profitability. It includes that large banks had more
opportunities to invest in short term liquid assets.
Ghosh Renu (2013) This paper examined the relationship between interest rate change and
banking stock returns in up market and down market situation. Data was collected from the
period of 1st April 1996- 31st. The results of the unit root test suggest that the time series was
stationary rejecting the first null hypothesis and accepting alternate hypothesis. significant for
all individual bank stock, equally weighted portfolio returns and Bankex returns. Moreover
the results showed that the market returns explained a greater proportion of bank returns,
compared to interest rate changes. Evidence of interest rate sensitivity was not strong since
the coefficients of interest rate changes were not significant. Overall, most of the impacted on
the individual bank, portfolio returns and Bankex returns was associated with the overall
market returns. Weak relationship was found between Bank stock returns and interest rate
changes in India.With respect to relationship between Bank stock returns and Market returns
there exist a positive and significant relationship.The impact of market returns on the
individual bank stock returns, equally weighted portfolio returns and Bankex returns was
higher than the impact of interest rate changes.
Riaz Samina, Mehar Ayub (2013) In their study researcher examined the impact of bank
specific indicators: Asset size (logarithm of total assets), Credit Risk, Total deposits to total
assets ratio and macroeconomic indicators: interest rate, on the commercial banks
profitability in Pakistan from 2006 to 2010. Researcher Used multiple regression model. The
regression results accepted both hypotheses and showed that credit risk, interest rate

15

(discount rate), total assets and TD to T.A had significant impact on ROE. Credit risk and
interest rate also had a significant influence on the ROA.
Syafri(2012) This paper examined the factors that affected the profit of commercial banks in
Indonesia. Type of data used is polling data from commercial banks listed on the Indonesia
Stock Exchange beetween 2002 and2011. Bank profitability was measured by Return on
Assets (ROA) as a function of banks specific determinants. Analysis technique used was
pooling data regression model. The empirical results showed that loan to toal assets, total
equity to total assets, loan loss provision to total loan had positive effect on profitability,
while inflation rate,
the size of bank and cost-to-income ratio (BOPO) had negative effect on profitability.
Economic growth and non interst income to total assets had no effect on bank profitability.
Kumar A (2012) In this study researcher did a technical analysis for the same considering
movment of stock and key indicators like beta, but what comes out at the end was that there
were still so many unnoticed factors Calculation Of Capital Assets Pricing Modal (capm)
which affected the share prices. From this study, we can conclude that the Indian economy is
standing on the strong foothold. This can be attributed to lower interest rate, lower inflation
rate, high forex reserves and favorable monetary and fiscal policy. This study also highlighted
the outlook for the banking industry. The passing of the securitization bill had accelerated the
growth for the banking industry. Even the monetary policy had also been in favor of banking
industry. Lowering interest rates also affected the profitability of the banks. The banking
industry was now moving towards technology. Overall, the outlook for the banking industry
was also good. From the last part of the study we can find that ICICI bank, SBI, HDFC bank
and Corporation bank had strong fundamentals.
Ghosh Arijit , Roy Samrat , Bandyopadhyay Gautam, Choudhuri Kripasindhu (2011)

16

In their study researchers tried to find out the relationship between BSE Sensex and some
other important economical factors and got some interesting results related to this.
Researchers had used statistical methods to do the analysis based on monthly basis database
of different economical factors. Researcher got some relationships of those factors with BSE
Sensex. In their analysis researchers found that dollar price along with Factor 1 i.e;
External Reserve and Factor score 2i.e; Inflation induced variables were significantly
affecting BSE Sensex. In the context of Indian economy the appreciation of Dollar bring in
more foreign exchange reserve which acted as stimulant to foster growth and in this process
the injection of capital flows affected Sensex. It is evident from the coefficient table that the
rise in the price of Dollar has a positive impact on Sensex. Researcher Used multiple
regression model.The sample included data of BSE Sensex, Oil prices, Gold price, Cash
Reserve Ratio, Food price inflation, Call money rate, Dollar price, F D I, Foreign Portfolio
Investment and Foreign Exchange Reserve (Forex) on monthly basis for the period from
Jan07 to Mar10.
Gul Sehrish, Irshad Faiza , Zaman Khalid (2011) In their study researchers investigated
the impact of bank-specific characteristics and macroeconomic indicators on banks
profitability in the Pakistans banks for the 2005-2009 periods.Researcher Used multiple
regression model.Individual bank characteristics (internal and external factors) considered as
determinants of bank profitability in Pakistan. Banks with more equity capital, Total Assets,
Loans, Deposits and macro factors i.e., economic growth, inflation and stock market
capitalization were perceived to had more safety and such an advantage can be translated into
higher profitability. For this purpose, two hypotheses had been developed for analyzing
banks profitability over specific determinants . It was hypothesized that
microeconomic factors have significant impact on profitability and

states that

states that external

factors of the banks have significant impact on the profitability. The result shows that both

17

hypotheses had accepted and had a significant impact on profitability of the Banks in
Pakistan.
Chi Jing, Tripe David Young Martin (2010)
It is expected that banks with significant foreign business should be impacted by relative
changes in the currency values of the foreign countries where they do business. Using data
from January 1997 to March 2007, this study explored the relationship for the four major
Australian banks. Contrary to expectations, no significant relationships between Australian
bank stock returns and foreign exchange rates were found, raising questions as to the
efficiency of stock markets in recognising banks foreign exchange exposures arising from
their offshore assets and business.
B. Theoretical description
Theoretical description explain about macro factors such as gold price gdp, inflation and
other macro factors.
1. Gold prices
Of all the precious metals, gold is the most popular as an investment. Investors generally buy
gold as a way of diversifying risk. The gold market is subject to speculation as are other
markets, especially through the use of futures contracts and derivatives. Gold price has shown
a long term correlation with the price of crude oil.This suggests a reason why gold is sold off
during economic weakness.
Factors Affecting The Gold Price
a) Inflation
Inflation is regarded as the number one top factor affecting the price of gold. We said
earlier that gold didnt have a practical business or personal use, but the one use it
does have is a retainer of value and wealth. Therefore it makes sense that in an
inflationary environment, where the value of paper currency is falling in regards to
what other goods and services can be bought with it, that people should want another
form of money (gold) that DOES retain its value.

18

The CPI (Consumer Price Index) is a measure tracking the price change in a basket of
common household goods, and is intended to give a good feel of how much inflation
there is in an economy and impacting the average urban civilian. The CPI or cost of
living index in most countries is tightly controlled by governments and might not
include key spending areas like food, energy, utilities, education and health in the
attempt to curb concerns about inflation. The PPI (Purchasing Power Index) is a
similar tool but from a producer perspective. Regardless of whether you look at the
total money supply, benchmarks like CPI/PPI, or just subconsciously track prices
when shopping or paying your bills gold is very likely to correlate directly in the
direction where general prices are headed and that also means down when there is
deflation.
b) Interest Rates
Interest rates are another major indicator of where gold prices are likely to go. During
times of high interest rates, capital is scarce and in high demand and therefore a large
premium is paid (interest) to those willing to lend out their money. This is a tough
competitive battle for gold to win with its non-profit yielding nature (unless youre in
the gold leasing business, which private investors are not) and therefore higher
interest rates means lower gold price (negative correlation).
The major economic data point to look out for is the federal funds rate released by the
FOMC (Federal Open Market Committee) 8 times per year in the United States. This
essentially sets a target inter-bank lending rate, which means that it either makes it
easier (cheaper) or harder (more expensive) for banks to borrow money from each
other. Higher interest rates would mean that if a bank were short on deposits to lend
out to people, it wouldnt that easily be able to just borrow that necessary amount
19

from another bank, and that would make increase the value of capital and
consequently the rates of return you get from that capital, and as mentioned earlier,
such an environment does not favour gold.
c) US Economy and the Dollar
One of the major reasons why the US Dollar became the favored reserve currency
around the world (~85% of central bank reserves are in dollars) is because during a 40
year stretch (1931-1971), the dollar was the only form of paper money that was
backed by gold. President Nixon closed this gold-for-dollars window in 1971, but by
then it was too late to do anything about it. Everyone and everything was already too
far invested in gold whether its the countries who had massive dollar reserves, or
oil which was priced in dollars, and other structural developments that would take
much pain to unravel. Besides the US was the world superpower, destined for
financial stability, so their paper was still as good as gold to many unsuspecting
stakeholders.
So basically the US dollar has taken the place of gold and all its positive qualities,
without there being any form of gold in the equation. This naturally means that the US
dollar became a substitute for gold, and a cheap one at that if you compare the
limitless paper the US government could conjure up vs the real limited availability of
gold. But the reason gold was valued in the first place was because of its rarity and
lack of counter-party risk, qualities which paper money does not hold.
So in short, gold will go up and down depending on the apparent strength of the US
economy and consequently the dollar they are inversely correlated so when the

20

dollar goes up the gold price goes down. There are several economic indicators to
watch out for that tells us of the strength of the US dollar.
d) Balance of Payments, Balance of Trade
These items look at the amount of money coming in and going out of the country. If a
country produces lots of desirable goods, has good investment prospects and sound
economy its trade balance is likely to be in surplus and its currency will be in high
demand as holding it provides lots of attractive possibilities. The opposite would be a
deficit and a weakening currency. Occasional deficits are acceptable, especially for a
developed country but sustainable periods of bringing in more value than shipping out
of the country will lead to currency devaluation. This is what the United States has
been dealing with in recent times ($500 billion trade deficit in 2012) and this not only
affects the dollar index against against other currencies, but affects the relative value
of gold as well.
e) US Debt: The amount of money owed to other countries in the form of treasury bills
can affect the dollar, and consequently the gold price in a number of ways. There is
the impact it will have on the credibility of the dollar as a reserve currency worth
owning meaning if the US debt gets too big and unmanageable, then countries will
want to own it less in the risk of never seeing that money again. The other impact of
debt is on inflation, and weve already talked about how that is a type of environment
that favors gold. For example if all of Americas creditors and purchasers of its debt
decide to cash in that money and decided to buy real goods and assets in the U.S,
there will be an awful amount of dollars chasing few real physical items, and the
prices will shoot up.

21

f) Mining Supply of Gold

In contrast, supply contractions or new findings can also cause a change in the price
of gold. Recent gold supply trends show that gold is becoming harder and more
expensive to mine, which will have a upward pressure on the price as population
growth and demand surpasses any new gold supply.
g) Demand for Gold
As our gold demand analysis showed, about 45% of yearly gold demand comes from
jewelry, 45% from investment bullion, while 10% comes from industrial demand. If
for any reason one of these areas showed a great surge in demand, then gold prices
could rise following the natural laws of supply and demand. With China and India
providing much of the fresh demand for gold, the economic conditions of these
countries as well as any regulations, holidays, taxes that may be present should be
closely monitored.
2. Inflation
To put it simply, inflation is the long term rise in the prices of goods and
services caused by the devaluation of currency. While there are
advantages to inflation which will discuss later in this part, first focus
on some of the negative aspects of inflation.
Inflationary problems arise when we experience unexpected inflation which is not
adequately matched by a rise in peoples incomes. If incomes do not increase along with
the prices of goods, everyones purchasing power has been effectively reduced, which can
in turn lead to a slowing or stagnant economy. Moreover, excessive inflation can also

22

wreak havoc on retirement savings as it reduces the purchasing power of the money that
savers and investors have squirreled away.
2.1 Wholesale Price Index (WPI)
The Wholesale

Price

Index (WPI)

is

the price of a

representative

basket of wholesale goods. Some countries ( like the Philippines) use WPI changes as a
central measure of inflation. But now India has adopted new CPI to measure inflation.
However, United States now report a producer price index instead.
The Wholesale Price Index or WPI is "the price of a representative basket of wholesale
goods". Some countries use the changes in this index to measure inflation in their
economies, in particular India The Indian WPI figure was released weekly on every
Thursday. But since 2009 it has been made monthly. It also influences stock and fixed
price markets. The Wholesale Price Index focuses on the price of goods traded between
corporations, rather than goods bought by consumers, which is measured by
the Consumer Price Index. The purpose of the WPI is to monitor price movements that
reflect supply and demand in industry, manufacturing and construction. This helps in
analyzing both macroeconomic and microeconomic conditions.
Calculation :
The wholesale price index (WPI) is based on the wholesale price of a few relevant
commodities of over 240 commodities available. The commodities chosen for the
calculation are based on their importance in the region and the point of time the WPI is
employed. For example in India about 435 items were used for calculating the WPI in
base year 1993-94 while the advanced base year 2004-05 and which has now been
planned to change to 2010-2011; uses 676 items. [1] The indicator tracks the price
23

movement of each commodity individually. Based on this individual movement, the WPI
is determined through the averaging principle. The following methods are used to
compute the WPI:
Laspeyres Formula
It is the weighted arithmetic mean based on the fixed value-based weights for the base
period,
Ten-Day Price Index.
Under this method, sample prices with high intra-month fluctuations are selected and
surveyed every ten days through phone. Utilizing the data retrieved by this procedure and
with the assumption that other non-surveyed sample prices remain unchanged, a tenday price index is compiled and released.
Calculation Method
Monthly price indexes are compiled by calculating the simple arithmetic mean of three
ten- day sample prices in the month.
Ten-Day Price Index.
Under this method, sample prices with high intra-month fluctuations are selected and
surveyed every ten days through phone. Utilizing the data retrieved by this procedure and
with the assumption that other non-surveyed sample prices remain unchanged, a tenday price index is compiled and released. Calculation Method Monthly price indexes are
compiled by calculating the simple arithmetic mean of three ten-day sample prices in
the month.

2.2 Consumer Price Index (CPI)

24

A consumer price index (CPI) measures changes in the price level of a market
basket of consumer goods and servicespurchased by households.
The CPI is a statistical estimate constructed using the prices of a sample of representative
items whose prices are collected periodically. Sub-indexes and sub-sub-indexes are
computed for different categories and sub-categories of goods and services, being
combined to produce the overall index with weights reflecting their shares in the total of
the consumer expenditures covered by the index. It is one of several price
indices calculated by most national statistical agencies. The annual percentage change in a
CPI is used as a measure of inflation. A CPI can be used to index (i.e., adjust for the effect
of inflation) the real value of wages, salaries, pensions, for regulating prices and for
deflating monetary magnitudes to show changes in real values. In most countries, the CPI
is, along with the population census and the USA National Income and Product Accounts,
one of the most closely watched national economic statistics.
Calculation
a) Calculating the CPI for a single item.
Current item price ($) = (base year price) * [(Current CPI) / (Base year CPI)]
or

Where 1 is usually the comparison year and CPI1 is usually an index of 100.

25

Alternatively,

the

CPI

as

can

be

performed

. The "updated cost" (i.e. the price of

an item at a given year, e.g.: the price of bread in 2010) is divided by the initial
year (the price of bread in 1970), then multiplied by one hundred.
b) Calculating the CPI for multiple items
Many but not all price indices are weighted averages using weights that sum to
1 or 100.
Example: The prices of 85,000 items from 22,000 stores, and 35,000 rental units
are added together and averaged. They are weighted this way: Housing: 41.4%,
Food and Beverage: 17.4%, Transport: 17.0%, Medical Care: 6.9%, Other: 6.9%,
Apparel: 6.0%, Entertainment: 4.4%. Taxes (43%) are not included in CPI
computation.

where the

s sum to 1 or 100.

2.3 Causes of Inflation

a) The Money Supply
Inflation is primarily caused by an increase in the money supply that outpaces
economic growth. Ever since industrialized nations moved away from the gold
standard during the past century, the value of money is determined by the amount of
currency that is in circulation and the publics perception of the value of that money.
26

When the Federal Reserve decides to put more money into circulation at a rate higher
than the economys growth rate, the value of money can fall because of the changing
public perception of the value of the underlying currency. As a result, this devaluation
will force prices to rise due to the fact that each unit of currency is now worth less.
One way of looking at the money supply effect on inflation is the same way collectors
value items. The rarer a specific item is, the more valuable it must be. The same logic
works for currency; the less currency there is in the money supply, the more valuable
that currency will be.
When a government decides to print new currency, they essentially water down the
value of the money already in circulation. A more macroeconomic way of looking at
the negative effects of an increased money supply is that there will be more dollars
chasing the same amount of goods in an economy, which will inevitably lead to
increased demand and therefore higher prices.
b) The National Debt
High national debt in the U.S. is a bad thing, but did you know that it can actually
drive inflation to higher levels over time? The reason for this is that as a countrys
debt increases, the government has two options: they can either raise taxes or print
more money to pay off the debt.
A rise in taxes will cause businesses to react by raising their prices to offset the
increased corporate tax rate. Alternatively, should the government choose the latter
option, printing more money will lead directly to an increase in the money supply,
which will in turn lead to the devaluation of the currency and increased prices .
c) Demand-Pull Effect
27

The demand-pull effect states that as wages increase within an economic system
(often the case in a growing economy with low unemployment), people will have
more money to spend on consumer goods. This increase in liquidity and demand for
consumer goods results in an increase in demand for products. As a result of the
increased demand, companies will raise prices to the level the consumer will bear in
order to balance supply and demand. An example would be a huge increase in
consumer demand for a product or service that the public determines to be cheap. For
instance, when hourly wages increase, many people may determine to undertake
home improvement projects. This increased demand for home improvement goods
and services will result in price increases by house-painters, electricians, and other
general contractors in order to offset the increased demand. This will in turn drive up
prices across the board.
d) Cost-Push Effect
Another factor in driving up prices of consumer goods and services is explained by an
economic theory known as the cost-push effect. Essentially, this theory states that
when companies are faced with increased input costs like raw goods and materials or
wages, they will preserve their profitability by passing this increased cost of
production onto the consumer in the form of higher prices. A simple example would
be an increase in milk prices, which would undoubtedly drive up the price of a
cappuccino at your local Starbucks since each cup of coffee is now more expensive
for Starbucks to make.
e) Exchange Rates

28

Inflation can be made worse by our increasing exposure to foreign marketplaces. In

America, we function on a basis of the value of the dollar. On a day-to-day basis, we
as consumers may not care what the exchange rates between our foreign trade
partners are, but in an increasingly global economy, exchange rates are one of the
most important factors in determining our rate of inflation. When the exchange rate
suffers such that the U.S. currency has become less valuable relative to foreign
currency, this makes foreign commodities and goods more expensive to American
consumers while simultaneously making U.S. goods, services, and exports cheaper to
consumers overseas. This exchange rate differential between our economy and that of
our trade partners can stimulate the sales and profitability of American corporations
by increasing their profitability and competitiveness in overseas markets. But it also
has the simultaneous effect of making imported goods (which make up the majority of
consumer products in America), more expensive to consumers in the United States.
3. Gross Domestic Product (GDP)
The monetary value of all the finished goods and services produced
within a country's borders in a specific time period, though GDP is
usually calculated on an annual basis. It includes all of private and
public consumption, government outlays, investments and exports
less imports that occur within a defined territory.
"C" is equal to all private consumption, or consumer spending, in a
nation's economy"G" is the sum of government spending"I" is the
sum of all the country's businesses spending on capital"NX" is the
nation's total net exports, calculated as total exports minus total
imports. (NX = Exports - Imports)
29

Method of Determining GDP

a) The Expenditure Approach
This method of determining GDP adds up the market value of all domestic
expenditures made on final goods and services in a single year, including
consumption expenditures, investment expenditures, government expenditures, and
net exports. Add all of the expenditures together and you determine GDP.
b) The Production Approach
This method also called the Net Product or Value added method requires three stages
of analysis. First gross value of output from all sectors is estimated. Then,
intermediate consumption such as cost of materials, supplies and services used in
production final output is derived. Then gross output is reduced by intermediate
consumption to develop net production.

c) The Income Approach

This method of determining GDP is to add up all the income earned by households
and firms in the year. The total expenditures on all of the final goods and services are
also income received as wages, profits, rents, and interest income. By adding together
all of the wages, profits, rents, and interest income, you determine GDP:
The three methods of measuring GDP should result in the same number, with some
possible difference caused by statistical and rounding differences. The credibility of
data is always a significant concern in any form of research. An advantage of using
the Expenditure Method is data integrity. The U.S. Bureau of Economic Analysis

30

considers the source data for expenditure components to be more reliable than for
either income or production components..
As such we will concentrate on the Expenditure Approach which is the most
commonly discussed method of representing GNP particularly in non-academic
examinations of economic activity.
GDP as examined using the Expenditure Approach is reported as the sum of four
components. The formula for determining GDP is: C + I + G + (X - M) = GDP
C = Personal Consumption Expenditures
I = Gross Private Fixed Investment
G = Government Expenditures and Investment
X = Net Exports
M = Net Imports
Before moving forward in our discussion, it should be noted, the income approach is
gathering a growing following. This is true particularly among economic blogs,
investment publications and cable news business programs due to its concentration on
the importance of wages. An alternative method of calculating GNP using the Income
Approach is RIPSAW.
The mnemonic RIPSAW breaks down as follows: GDP = R + I + P + S + A + W
R = rents
I = interests
31

P = profits
SA = statistical adjustments (corporate income taxes, dividends, undistributed
corporate profits
W = wages
At this point, we could spend the next thousand words describing alternate means of
computing GNP. While that might be beneficial in its attempt to be exhaustive, for our
purposes what you need to remember is, in economics, there is rarely only one way to
develop and analyze data
Additionally, GDP is impacted by variables beyond economists control such as the
economic health of our trade partners, monetary factors such as the value of the
dollar, restrictions in state and local governments spending to the subjective views by
consumers to business which influence their consumption/investment choices.
4. International trade
The exchange of goods or services along international borders This type of trade
allows for a greater competition and more competitive pricing in the market. The
competition results in more affordable products for the consumer. The exchange of
goods also affects the economy of the world as dictated by supply and demand,
making goods and services obtainable which may not otherwise be available to
consumers globally.
Factors Affecting International Trade
a) Impact of Inflation:

32

If a countrys inflation rate increases relative to the countries with which it trades, its
current account will be expected to decrease, other things being equal. Consumers and
corporations in that country will most likely purchases more goods overseas (due to
high local inflations), while the countrys exports to other countries will decline.
b) Impact of National Income:
If a countrys income level (national income) increases by a higher percentage than
those of other countries, its current account is expected to decrease, other things being
equal. As the real income level (adjusted for inflation) rises, so does consumption of
goods. A percentage of that increase in consumption will most likely reflect an
increased demand for foreign goods.
c) Impact of Government Policies:
A countrys government can have a major effect on its balance of trade due to its
policies on subsidizing exporters, restrictions on imports, or lack of enforcement on
piracy.
d) Subsidies for Exporters:
Some governments offer subsidies to their domestic firms, so that those firms can
produce products at a lower cost than their global competitors. Thus, the demand for
the exports produced by those firms is higher as a result of subsidies.
Many firms in China commonly receive free loans or free land from the government.
These firms incur a lower cost of operations and are able to price their products lower
as a result, which enables them to capture a larger share of the global market.

33

e) Restrictions on Imports:
If a countrys government imposes a tax on imported goods (often referred to as a
tariff), the prices of foreign goods to consumers are effectively increased. Tariffs
imposed by the U.S. government are on average lower than those imposed by other
governments. Some industries, however, are more highly protected by tariffs than
others. American apparel products and farm products have historically received more
protection against foreign competition through high tariffs on related imports.
In addition to tariffs, a government can reduce its countrys imports by enforcing a
quota, or a maximum limit that can be imported. Quotas have been commonly applied
to a variety of goods imported by the United States and other countries.
f) Lack of Restrictions on Piracy:
In some cases, a government can affect international trade flows by its lack of
restrictions on piracy. In China, piracy is very common; individuals (called pirates)
manufacture CDs and DVDs that look almost exactly like the original product
produced in the United States and other countries. They sell the CDs and DVDs on
the street at a price that is lower than the original product. They even sell the CDs and
DVDs to retail stores. It has been estimated that U.S. producers of film, music, and
software lose $2 billion in sales per year due to piracy in China.
As a result of piracy, Chinas demand for imports is lower. Piracy is one reason why
the United States has a large balance-of-trade deficit with China. However, even if
piracy were eliminated, the U.S. trade deficit with China would still be large.

34

g) Impact of Exchange Rates:

Each countrys currency is valued in terms of other currencies through the use of
exchange rates, so that currencies can be exchanged to facilitate international
transactions.
5. Unemployment
Unemployment occurs when people are without work and actively seeking
work. The unemployment rate is a measure of the prevalence of unemployment and it
is calculated as a percentage by dividing the number of unemployed individuals by all
individuals currently in the labor force. During periods of recession, an economy
usually experiences a relatively high unemployment rate.According to International
Labour Organization report, more than 200 million people globally or 6% of the
world's workforce were without a job in 2012. The types of unemployment are as
follows:
a) Cyclical Unemployment
Over time, the economy experiences many ups and downs. That's what we
call cyclical unemployment because it goes in cycles. Cyclical unemployment occurs
because of these cycles. When the economy enters a recession, many of the jobs lost
are considered cyclical unemployment.
For example, during the Great Depression, the unemployment rate surged as high as
25%. That means one out of four people were willing and able to work, but could not
find work! Most of this unemployment was considered cyclical unemployment.
Eventually, unemployment came down again. As you can see, at least part of
unemployment can be explained by looking at the cycles, or the ups and downs of the
economy
35

b) Frictional Unemployment
Frictional unemployment occurs because of the normal turnover in the labor market
and the time it takes for workers to find new jobs. Throughout the course of the year
in the labor market, some workers change jobs. When they do, it takes time to match
up potential employees with new employers. Even if there are enough workers to
satisfy every job
Opening, it takes time for workers to learn about these new job opportunities, and for
them to be considered, interviewed and hired.
When Cindy graduates from college, she begins looking for work. Let's say it takes
her four months to land a new job. During this time, she is frictionally unemployed.
c) Structural Unemployment
Let's talk about structural unemployment occurs because of an absence of demand for
a certain type of worker. This typically happens when there are mismatches between
the skills employers want and the skills workers have. Major advances in technology,
as well as finding lower costs of labor overseas, lead to this type of unemployment.
6. Exchange rate
Rate at which one currency may be converted into another. The exchange rate is used
when simply converting one currency to another (such as for the purposes of travel to
another country), or for engaging in speculation or trading in the foreign exchange
market. There are a wide variety of factors which influence the exchange rate, such as
interest rates, inflation, and the state of politics and the economy in each country, also
called rate of exchange or foreign exchange rate or currency exchange rate.
Determinants of Exchange rate :
a) Differntial in Inflation
36

As a general rule, a country with a consistently lower inflation rate exhibits a rising
currency value, as its purchasing power increases relative to other currencies. During
the last half of the twentieth century, the countries with low inflation included Japan,
Germany and Switzerland, while the U.S. and Canada achieved low inflation only
later. Those countries with higher inflation typically see depreciation in their currency
in relation to the currencies of their trading partners. This is also usually accompanied
by higher interest rates
b) Differentials in Interest Rates
Interest rates, inflation and exchange rates are all highly correlated. By manipulating
interest rates, central banks exert influence over both inflation and exchange rates, and
changing interest rates impact inflation and currency values. Higher interest rates
offer lenders in an economy a higher return relative to other countries. Therefore,
higher interest rates attract foreign capital and cause the exchange rate to rise. The
impact of higher interest rates is mitigated, however, if inflation in the country is
much higher than in others, or if additional factors serve to drive the currency down.
The opposite relationship exists for decreasing interest rates - that is, lower interest
rates tend to decrease exchange rates.
c) Current-Account Deficits
The current account is the balance of trade between a country and its trading partners,
reflecting all payments between countries for goods, services, interest and dividends.
A deficit in the current account shows the country is spending more on foreign trade
than it is earning, and that it is borrowing capital from foreign sources to make up the
deficit. In other words, the country requires more foreign currency than it receives

37

through sales of exports, and it supplies more of its own currency than foreigners
demand for its products. The excess demand for foreign currency lowers the country's
exchange rate until domestic goods and services are cheap enough for foreigners, and
foreign assets are too expensive to generate sales for domestic interests.
d) Terms of Trade
A ratio comparing export prices to import prices, the terms of trade is related to
current accounts and the balance of payments. If the price of a country's exports rises
by a greater rate than that of its imports, its terms of trade have favorably improved.
Increasing terms of trade shows greater demand for the country's exports. This, in
turn, results in rising revenues from exports, which provides increased demand for the
country's currency (and an increase in the currency's value). If the price of exports
rises by a smaller rate than that of its imports, the currency's value will decrease in
relation to its trading partners.

e) Political Stability and Economic Performance

Foreign investors inevitably seek out stable countries with strong economic
performance in which to invest their capital. A country with such positive attributes
will draw investment funds away from other countries perceived to have more
political and economic risk. Political turmoil, for example, can cause a loss of
confidence in a currency and a movement of capital to the currencies of more stable
countries.
7. Interest rate

38

An interest rate is the rate at which interest is paid by borrowers (debtors) for the use
of money that they borrow from lenders (creditors). Specifically, the interest rate is a
percentage of principal paid a certain number of times per period for all periods
during the total term of the loan or credit. Interest rates are normally expressed as a
percentage of the principal for a period of one year, sometimes they are expressed for
different periods like for a month or a day. Different interest rates exist parallelly for
the same or comparable time periods, depending on the default probability of the
borrower, the residual term, the payback currency, and many more determinants of a
loan or credit. For example, a company borrows capital from a bank to buy new assets
for its business, and in return the lender receives rights on the new assets as collateral
and interest at a predetermined interest rate for deferring the use of funds and instead
lending it to the borrower. A commercial bank can usually borrow at much lower
interest rates from the central bank than the rate at which companies can borrow from
the commercial bank.
Interest-rate targets are a vital tool of monetary policy and are taken into account
when dealing with variables like investment, inflation, and unemployment. The
central banks of countries generally tend to reduce interest rates when they wish to
increase investment and consumption in the country's economy. However, a low
interest rate as a macro-economic policy can be risky and may lead to the creation of
an economic bubble, in which large amounts of investments are poured into the realestate market and stock market. In developed economies, interest-rate adjustments are
thus made to keep inflation within a target range for the health of economic activities
or cap the interest rate concurrently with economic growth to safeguard economic
momentum.

39

Reasons for interest rate changes :

a) Political short-term gain: Lowering interest rates can give the economy a short-run
boost. Under normal conditions, most economists think a cut in interest rates will only
give a short term gain in economic activity that will soon be offset by inflation. The
quick boost can influence elections. Most economists advocate independent central
banks to limit the influence of politics on interest rates.
b) Deferred consumption: When money is loaned the lender delays spending the money
on consumption goods. Since according to time preference theory people prefer goods
now to goods later, in a free market there will be a positive interest rate.
c) Inflationary expectations: Most economies generally exhibit inflation, meaning a
given amount of money buys fewer goods in the future than it will now. The borrower
needs to compensate the lender for this.
d) Alternative investments: The lender has a choice between using his money in
different investments. If he chooses one, he forgoes the returns from all the others.
Different investments effectively compete for funds.
e) Risks of investment: There is always a risk that the borrower will go bankrupt,
abscond, die, or otherwise default on the loan. This means that a lender generally
charges a risk premium to ensure that, across his investments, he is compensated for
those that fail.
f) Liquidity preference: People prefer to have their resources available in a form that
can immediately be exchanged, rather than a form that takes time to realize.
g) Taxes: Because some of the gains from interest may be subject to taxes, the lender
may insist on a higher rate to make up for this loss.
h) Banks: Banks can tend to change the interest rate to either slow down or speed up
economy growth. This involves either raising interest rates to slow the economy
down, or lowering interest rates to promote economic growth

40

i) Economy: Interest rates can fluctuate according to the status of the economy. It will
generally be found that if the economy is strong then the interest rates will be high, if
the economy is weak the interest rates will be low.
This chapter helped the researcher in understand the previous literature and helped in
understanding the meaning of gold prices, inflation and GDP. It also covered the various
factors which affect gold prices and inflation. In this chapter method of determining GDP
were also included which helped the researcher.

CHAPTER-3
DATA PRESENTATION AND ANALYSIS
This chapter is divided into two parts i.e. the data presentation and the data analysis. The data
presentation part deals with the presentation of data through Bar chart. In data analysis part,
the data is analyze through correlation and regression analysis.
A. Data Presentation
In this section, each parameter of macro factors and BSE bankex has been taken separately &
discussed in detail.
41

1. Gold Rate

Gold Prices
35000

31799

30000

28422 27996

26400

25000
18500

20000

Gold Prices 15000

Gold Prices

14500

#REF!

10000
5000
0

2009

2010

2011

2012

2013

2014

Years

Figure No-2: Gold Prices in India

Interpretation
As can be seen from figure no.2 in the year 2009 gold rate was 14500, while it increased to
18500 in the year 2010 then it increased in 2011 after that the gold prices were at its peak in
the year 2012 after which it started decreasing.

2. Inflation (wpi)

WPI
200
150

126.02

130.81

143.32

156.13

167.62

177.64

WPI 100

WPI

50
0

2009

2010

2011

Years

42

2012

2013

2014

Figure No-3: Inflation (wpi) in India

Interpretation
In year 2009 inflation (wpi) was 126 then it increased to 130 in the year 2010. Then it
increased continuously and reached to 177.64 in the year 2014.
3. GDP

GDP growth rate(in %)

15
10

Growth rate

8.48

10.26
6.64

5
0

2009

2010

2011

4.74

5.02

5.63

2012

2013

2014

Gdp Growth Rate

Years

Figure No-4: GDP in India

Interpretation
In the year 2009 the GDP growth rate was 8.48 then it increased to 10.26 in 2010 after that it
decreased to 4.74 in the year 2012. After that it increased in the 2013 and 2014 with the
growth rate 5.02and 5.63 respectively.
4. Bankex

43

Bankex

Bankex

16000
14000
12000
10000
8000
6000
4000
2000
0

14434.14

13457.99
10066.4

13042.38

9212.56
Bankex

5497.61

2009

2010

2011

2012

2013

2014

Year

Figure No-5: Bankex in India

Interpretation: In the year 2009 the value of bankex was 5497.61. It increased to 10066.40
in the year 2010.After that it increased to 13457.99 in the year 2011.In the year 2012 it
decreased to 9212.56 after that in the year 2013 it increased to 14434.14 but it decreased to
13042.38 in the year 2014.The highest value was captured in the year 2013 and the lowest in
the year 2009.
B. Data Analysis
In this part, the data of GDP ,Gold rate and inflation (wpi) were analyzed to determine
whether the null hypothesis stands accepted or rejected.
The objective of this study was to analyze the relationship between macro factors and BSE
Bankex for the period of six years from 2009 to 2014, the data is analyzed with the help of
correlation and regression analysis.

1. Gold Prices
44

Hypotheses of the Study

H0 = There is no significant impact of macro factors(WPI,GDP growth rate , Gold price) on
BSE Bankex.
H1 = There is a significant impact of macro factors (WPI,GDP growth rate , Gold price) on
BSE Bankex.
Regression :
Descriptive Statistics
Mean

Std. Deviation

BankEx
WPI

10951.8467
150.2567

3356.64363
20.49163

6
6

GDPGrowthRate

6.7950

2.17257

GoldPrice

24602.8333

6639.66946

Table No-2: Descriptive Statistics

Correlations
BankEx WPI
BankEx
WPI
Pearson Correlation
GDPGrowthRate
GoldPrice
BankEx
WPI
Sig. (1-tailed)
GDPGrowthRate
GoldPrice
BankEx
WPI
N
GDPGrowthRate
GoldPrice

Model
1

1.000
.696
-.485
.654
.
.062
.165
.079
6
6
6
6

.696
1.000
-.817
.812
.062
.
.024
.025
6
6
6
6

GDPGrowthR
ate
-.485
-.817
1.000
-.887
.165
.024
.
.009
6
6
6
6

Table No-3: Correlation

Variables Entered/Removeda
Variables Entered
Variables Removed
GoldPrice,
GDPGrowthRateb

WPI,

.654
.812
-.887
1.000
.079
.025
.009
.
6
6
6
6

Method
Enter

45

GoldPrice

Table No-4: Variables Entered/Removeda

a. Dependent Variable: BankEx
b. All requested variables entered.

Model

.785a

Model Summary
R Square
Adjusted R Square

.617
.042
Table No-5: Model Summary
a. Predictors: (Constant), GoldPrice, WPI, GDPGrowthRate

Std. Error
Estimate
3286.24144

of

the

ANOVAa
Model

Sum of Squares Df
Mean Square
Regression
34736516.824 3
11578838.941
1
Residual
21598765.585 2
10799382.793
Total
56335282.409 5
Table No-6: ANOVA
a. Dependent Variable: BankEx
b. Predictors: (Constant), GoldPrice, WPI, GDPGrowthRate
Coefficientsa
Model
Unstandardized Coefficients Standardized
Coefficients
B
Std. Error
Beta
(Constant)
-23848.677 28804.282
WPI
115.206
131.779
.703
1
GDPGrowthRate 1181.216
1569.406
.765
GoldPrice
.385
.507
.761
Table No-7: Coefficients
a. Dependent Variable: BankEx

F
1.072

Sig.
.516b

Sig.

-.828
.874
.753
.758

.495
.474
.530
.527

Analysis
The impact of the determinants affecting bse bankex has been captured statistically by the
multiple regression models. Here the value of r is .785. This shows that the macro factors
46

have 78.5% influences on the bse bankex . In this case the value of r 2 is .617 which means
that the macro factors account for 61.7% variation in the average price of the shares of all
banks included in bse bankex. The beta value for WPI was 115.206 this means that increase
by 1 unit wpi rate increases 115.206 and GDP growth rate increases by 1181.216, gold price
was increases by .385
The value for the r-squared adjusted in the model is 0.42 which endorses that 42% of the
variation in the dependent variable is explained by the independent variables of the model.
The table shows the output, which contains an analysis of variance (ANOVA). The sum of
squares here is 34736516.824; the value of residual sum of squares is 21598765.585. we can
see that inflation, GDP growth rate and gold prices show positive relationship. The sig. value
however indicates that none of the factors (independent variables) are sig. in predicting the
value of dependent variable i.e BSE Bankex.
Interpretation
The objective of this research was to analyze the impact of macroeconomic factors on BSE
Bankex. For the accomplishment of purpose the macro economic factors Inflation, GDP
growth rate, and Gold Prices were used and regression model was used with these variables
as independent variables and dependent variable was BSE Bankex. . After analyzing the
results came to the conclusion that Inflation, and GDP growth rate and Gold Prices affect the
Bankex positively. Hence the alternative hypothesis was accepted.

CHAPTER-4
SUMMARY AND CONCLUSIONS

47

This chapter includes the findings of the study drawn on the basis of data presented and
analyzed in earlier chapter, the limitations of the study and the suggestions and scope for
further study.
A. Findings of the Study
The main findings of the study were
a) Gold prices ( = .761): this value indicates that as the gold prices increase by 1 standard

deviation (6639.66946), the average price of BSE Bankex increased by .761 standard
deviation. Gold prices(b=-..385) value indicates that as the gold prices increased by 1
unit, the average price increases by .385 units.
b) Inflation (wpi): Inflation (b=115.206) value indicates that as the inflation increases by 1

unit, the average price increases 115.206units. Inflation ( b=.703): th value indicates that
as the inflation increases by 1 standard deviation (20.49), the average price increases by .
703 standard deviation.
c) GDP: GDP growth rate (b=1181.216) value indicates that as the GDP growth rate

increases by 1 unit, the average price increases by 1181.216 units. GDP growth rate
( =.765) value indicates that as the GDP growth rate increases by 1 standard deviation
(2.17257), the average price increases by .765 standard deviation. GDP growth rate and
BSE Bankex was found to be negatively correlated.

B. Limitations of the Study

The main limitations of the study were

48

a) The study only considered gold prices, Inflation (measured in terms of WPI) ,GDP
and BSE Bankex other macro factors were not considered for the present study.
b) The study was based on secondary data; no primary data had been used for the
present study.
c) The study was only confined to a limited period of six years data i.e. from 2009 to
2014.
C. Suggestions and Scope for Further Study
a) It is hoped that the findings of the study would be of interest to future researchers.
b) Further, the scope of the study can be widened by using the more macro factors.

The chapter explained the findings and limitation of study and the researcher found that there
was a positive impact of macro factors on bse bankex. In the last suggestion and future scope
of study was detailed.

CHAPTER-5

49

RECOMMENDATIONS
This chapter talks about the recommendations made by the researcher based on the analysis
of the data and the findings of the data.
1. Recommendations of the Study
a) Other macro factors should include for the study, macrofactors like exchange rate,
unemployment rateand consumer price index.
b) Investor has to look other macro factors too.
Hence, this chapter explained the various recommendations made by the researcher.

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50

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