Crude Oil Price and Stock Market Movement

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PROJECT REPORT On

“Crude oil price and stock market movement”

Prepared By Mr. Dilip Kumar Gorai Roll No. – 08FC075 Batch - 2008-10 Guide by Prof.(Dr.) S. Dev IMIS

As a Partial Fulfillment Fulfillment of PGDFC of IMIS

Institute of Management & Information Science Bhubaneswar

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TABLE OF CONTENTS

1. ACKNOWLEDGMENT……………………………………………………………..1

2. ABSTRACT...……..…… ABSTRACT...……..………………………………… ……………………………………………………… ……………………………...2 …...2

SUMMERY……………………………………………… ………………………………………...3 …………...3 3. EXECUTIVE SUMMERY…………………

4. INTRODUCTION……………………………… INTRODUCTION………………………………………………………… …………………………………..4………..47

5. LITERATURE REVIEW…………………… REVIEW……………………………………………… ………………………………………...7 ……………...7 6. EVENT ANALYSIS (2006-2009)……………………………………………….…8-17 (2006-2009)……………………………………………….…8-17

7. OBJECTIVE…….…………… OBJECTIVE…….……………………………………… …………………………………………………….1 ………………………….17 7

STUDY…………………………………………………… …………………………..17-18 ..17-18 8. LIMITATIONS OF STUDY…………………………

9. METHODOLOGY...… METHODOLOGY...…………………………… ……………………………………………………… ……………………………….18….1819

………………………………………...…19……………...…1910. OBSERVATION & CONCLUSION ………………………… 25

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Acknowledgment We would like to express our sincere thanks to prof. (Dr.) S. Dev. For    providing us a good project and his valuable advice and encouragement while we were working on this project. And we could learn many things while doing this project that how the market (sensex) fluctuate with the movement of other variables like crude oil price, inflation, FII, and FDI. We are also very thankful to Prof. S. Sahoo, who introduced us to many insightful ideas on this topic and offered us great help with data collection. Last but not least I would like to thank my group members for their equal distribution and good group coordination while working on this project.

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Abst Ab stra ract ct : While there is a strong presumption in the financial press that oil prices drive the stock market, the empirical evidence on the impact of oil price shocks on stock prices has been mixed. This study shows that the response of aggregate Indian stock market returns or movement may differ greatly depending on whether the increase in the price of crude oil is driven by demand or supply shocks in the crude oil market. The conventional wisdom that higher oil prices necessarily cause lower stock prices is shown to apply only on ly to oiloil-ma mark rket et spec specif ific ic dema demand nd shoc shocks ks such such as incr increa ease sess in the the   precautionary demand for crude oil that reflect concerns about future oil supply shortfalls. In contrast, positive shocks to the global demand for industrial commodities cause both higher crude oil prices and higher stock prices, which helps explain the resilience of the Indian stock market to the recent surge in the  price of oil.

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Executive Summery: Today, BSE is the world’s number one exchange in terms of the number of listed companies and the world’s 5th in transaction number. Of the 23 stock exchanges in the India, Bombay Stock Exchange is the largest, with over 6,000 stocks listed. The BSE accounts for  over ov er two two thir thirds ds of the the tota totall trad tradin ing g vo volu lume me in the the coun countr try. y. Esta Establ blis ishe hed d in 18 1875 75,, the the exch exchan ange ge is also also the the olde oldest st in Asia Asia.. Amon Among g the the twen twenty ty-t -two wo Stoc Stock k Ex Exch chan ange gess reco recogn gniz ized ed by the the Government of India under the Securities Contracts (Regulation) Act, 1956, it was the first one to be recognized and it is the only one that had the privilege of getting permanent recognition abinitio initio.. Mo Moreo reover ver,, The BSE SENSE SENSEX X is not only only scient scientifi ifical cally ly design designed ed but also also based based on global globally ly accept accepted ed constr construct uction ion and revi review ew metho ethodo dolo logy gy.. Th Thee inde index x is wide widely ly repo report rted ed in bo both th dome do mest stic ic and and inte intern rnat atio iona nall mark market etss thro throug ugh h prin printt as well well as electronic media. The "Free-float Market Capitalization" Capitalization" methodology of BSE index construction is regarded as an industry’s best practice globally. All major index providers like MSCI, FTSE, STOXX, S&P and Dow Jones use the Free-float methodology. Due to its wide acceptance amongst the Indian investors; SENSEX is regarded to be the pulse of the Indian stock market. As the oldest index in the country, the SENSEX has over the years become one of the most prominent  brands in the country. So, in this project we emphasizes mainly on BSE-30 sensex and major Fluctuations related to it from time period of 1 st April 2006 to 31st march 2009 .in this study also we have put light on how various factors such as rising crude oil prices, inflation, concerns oveer a sl ov slow owin ing g do dow wn US econ onom omy y an and d bi big g rol olee of  Foreign

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Institutional Investors (FIIs) and FDI determin determines es market’s situation and operate SENSEX.

Introduction Crude Oil Industry

Crude oil is one of the most necessitated worldwide required commodity. Any slightest fluctuation in crude oil prices can have both direct and indirect influence on the economy of the countries. The volatility of crude oil prices drove many companies away and it’s impact the stock market also. Crude oil prices act like any other product cost with more variation taken  place during shortage and excess supply. Studies have conducted to analyze the impact of rise in crude oil price to the economic growth in the OPEC (Organization of Petroleum Exporting Countries) countries. Any massive increase or decrease in crude oil has its impact on the condition of stock markets in throughout the world. The stock exchanges of  every country keep a close eye on any up and downward movement of the crude oil price. India fulfills its major crude oil requirements by importing it from oil  producing nations. India meets more than 80% of its requirement by importing process. Therefore, any upward and downward motion of prices are closely tracked in the domestic marketplace. Many times it has been recorded that prices of essential products like crude also acts as a prime driver in becoming reason of up and down movement of price. Any fluctuation in crude oil affects the other industrial segments also. Higher crude oil price implies to the higher price of energy, which in turns negatively affects other trading practices that are directly or indirectly depends on it. Crude Oil has been traded in throughout the world and there  prices are behaving like any other commodity as swinging more during shortage and excessiveness. In the short term, price of crude oil is influenced by many factors like socio and political events, status of financial markets, whereas from medium to long run it is influenced by the fundamentals of demand and supply which thus results into self price correction mechanism.

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There are innumerable factors which influence the price movement of crude oil in throughout the world. Like methods and technology using for increase the oil production, storing up of crude oil, changes introduced in tax policy, social and political political issues , demand & supply supply etc. The crude oil prices have been buffeted by many factors, which are summarized summarized as below •

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Production: The OPEC nations are the major producer of world's crude oil. Therefore, every policy made by such countries related to the crude oil prices have their influence on crude oil prices. Any decision taken by OPEC nations for increasing or decreasing  production of crude oil impacts the price level of crude oil in international commodity markets. Natural Causes: In prevent years, global community have witnessed many events which in turns have volatility effects on the price level of  crude oil. Like hurricane katrina and other type of tropical cyclone have hit the major portion of globe, which as a result driven the crude oil prices to reach at its peak. Inventory: In throughout the world, oil producers and consumers get stock their crude oil for their future requirements. This gives rise to speculation on price expectations and sale chances in case any unexpected thing cracks during supply and demand equations. Any upward or downward movement in inventory level shoots up volatility in price index of crude oil, which generates lot of changing movement in sensex. Demand & supply: With a sharp rise in economic demand, requirement of crude oil is increasing to manifold in context to the limited supply.

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Price of  Crude oil The high demand economies of crude oil are putting undue pressure on the available fixed resources. The major gap created between demand and supply of crude oil is forcing the price curve of crude oil to rise in upward direction.

The Impact Analysis The crude oil price impacts two key aspects of our economy (1) The impor importt bill bill Since, we are a net importer of oil. The increasing import bill will widen our Trade Balance, defined as Exports minus Imports , which has been  perpetually running at a deficit and possibly wipe out our current account surplus, which is Trade Balance minus Net Invisibles, which has turned from deficit into surplus over the last few years. Higher trade balance will adversely impact the fiscal deficit, which in turn will impact the interest rates Hence, the stock market is impacted

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(2) Inflation Since petroleum products are key constituents of Wholesale and Consumer  Price Inflation Index. Higher import bill directly and indirectly impacts the rupee, while inflation impacts interest rates, and hence even the rupee. These factors obviously affect our GDP growth rates. All these factors individually and collectively could have a negative impact on the stock market.

LITERATURE REVIEW Although changes in the price of crude oil are often considered an impor importa tant nt facto factorr for und under ersta standi nding ng fluct fluctuat uation ionss in stock stock price prices, s, there is no consensus about the relation between stock prices and the price of oil among economists. Kling Kling (1985 (1985), for for exam exampl ple, e, conc conclu lude ded d that that crud crudee oil oil pric pricee increases are associated with stock market declines. Chen, Roll and Ross (1986), in contrast, suggested that oil price changes have no effect on asset pricing. Jones and Kaul (1996) reported a stable negative relationship  between oil price changes and aggregate stock returns. Huang, Masulis, and Stoll (1996), however, found no negative relationship between stock returns and changes in the price of oil futures. Wei (2003) concluded that the decline of U.S. stock prices in 1974 cannot be explained by the 1973/74 oil price increase.

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EVENT ANALYSIS (2006-2009) Year 2006 at a glance In the secondary market, the uptrend continued in 2006-07 with BSE indices closing above 14000(14,015) for the first time on January 3, 2007. After a somewhat dull first half conditions on the bourses turned buoyant during the later part of the year with large inflows from Foreign Institutional Investors (FIIs) and larger participation of domestic investors. During 2006, on a  point-to-point basis, Sensex rose by 46.7%. The pickup in the stock indices could be attributed to impressive growth in the profitability of Indian corporate, overall higher growth in the economy, and other global factors such as continuation of relatively soft interest rates and fall in the international crude prices. BSE Sensex (top 30stocks) which was 9,398 at end-December 2005 and 10,3 10 ,399 99 at endend- May May 20 2006 06,, afte afterr drop droppi ping ng to 8,92 8,929 9 on June June 14 14,, 20 2006 06,, recovered soon thereafter to risesteadily to 13787 by end-December 2006. According to the number of transactions, NSE continued to occupy the third  position among the world’s biggest exchanges in 2006, as in the previous three years. BSE occupied the sixth position in 2006, slipping one position from 2005. In terms of listed companies, the BSE ranks first in the world. In terms of volatility of weekly returns, uncertainties as depicted by Indian indices indices were higher higher than those in outside outside India such as S&P 500 of United United States of America and Kospi of South Korea. The Indian indices recorded higher volatility on weekly returns during the twoyear period. January 2005 to December 2006 as compared to January 2004 to December 2005 The market valuation of Indian stocks at the end of December 2006, with the Sensex trading at a P/E multiple of 22.76 and S&P CNX Nifty at 21.26, was higher than those in most emerging markets of Asia, e.g. South Korea, Thai Th aila land nd,, Mala Malays ysia ia and and Taiw Taiwan an;; and and was was the the seco second nd high highes estt amon among g emerging markets. The better valuation could be on account of the good fundamentals and expected future growth in earnings of Indian corporate Liquidity, which serves as a fuel for the price discovery process, is one of  the main criteria sought by the investor while investing in the stock market. Market forces of demand and supply determine the price of any security at any point of time. Impact cost quantifies the impact of a small change in such forces on prices. Higher the liquidity, lower the impact cost.

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An overview of year 2006 During December 2005, the greatest demerger of Indian history between the Ambanis paved the way for 9000. And the sensex entered the year 2006 with a 9000 + figure. On Feb. 10th 2006, we saw two roaring figures, both sensex and sachin tendulkar crossing 10000 mark. But the reason behind roaring sensex was not sachin’s records rather it was rallied by strong FII inflows and robust data. The government forecasted a GDP growth of 8.1% in current year, with manufacturing and the agriculture sectors estimated to grow at 9.4% 9.4% and and 2.3% 2.3% resp respec ecti tive vely ly.. Th Thee 23 2388-po poin intt rall rally y was was cont contra rary ry to expectations as it came despite negative news flow about a fresh tussle  between Ambani brothers over transfer of ownership of the four companies demerged from erstwhile RIL. Sensex’s surge to 11000 points on 21st march 2006 was prompted by PM Manmohan Singh’s announcements on Capital Account Convertibility. On Saturday, Prime Minister Manmohan Singh hinted at moving toward a free float of the rupee and on Tuesday, the BSE responded by crossing the 11,000 mark in a lifetime intraday high. The new trading high was reached 29 days after Sensex entered the elite 10,000 club on February 6. Only  Nikkei, Hang Seng and Dow Jones could boast of being above 10,000 at that time. Since full convertibility was expected to attract more foreign money and also allow local companies to tap foreign debt markets more easily, it was evident that the move will encourage investors and boost the confidence of the markets. RBI said it was constituting a panel to thrash out the contours for full convertibility. Although the index later ended lower with investors wanting to book gains, participants said it was evident the markets had sent out a message - that the growth story of Asia’s third largest economy is intact and that liquidity flows into the bourses would continue to remain firm.

After hitting a high of 11,017.25 points in mid-afternoon trade, Sensex lost 35.91 points to close at 10,905.20, fluctuating 153 points, with most of the volatility coming in the last hour of trading. The rise in share prices was  partly attributed to a fall in oil price. The US April crude oil prices plunged 3.7% or $2.35, to settle at $60.42 a barrel, on the New York Mercantile Exchange due to ample US inventories. After falling by 307 points on 12th April 2006 on account of Heavy selling by FIIs in both cash and futures markets and a move by stock exchanges to raise margins on

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share share transa transacti ctions ons by about about 250 basis basis points points,, the 131 131-ye -yearar-old old BSE on Thursday, April 20, 2006 crossed yet another milestone when it breached the 12,000-point mark, backed by strong corporate earnings, higher liquidity and robust economic growth. The index was being driven by the strong flow of liquidity. Earlier, it was based on the expectations that (corporate) results would be great...and by the first few companies were more than matching those expectations Although, Sensex was beaten to the 12,000 mark by various global indices, the time it took to breach this milestone has been one of the fastest. Traders  point to the fact that foreign investors, buoyed by a booming economy, have chosen India as one of their top investment destinations.  Now, everything was going fine….perhaps it was the lull before the storm. Sudd Sudden enly ly the the Dala Dalall Stre Street et expe experi rien ence ced d its its wors worstt sing single le day day cras crash h on Thursday, 18th may 2006 as an ambiguous Government circular on taxing invest investmen mentt gains gains promp prompted ted foreig foreign n funds funds to boo book k profit profits, s, kno knocki cking ng the  bottom off the jittery stock market. Opening amidst weak global markets and reports of rising US interest rates, the BSE-30 Sensex went on to close 826.38. However the Dealers said the fall was accentuated by large-scale selling of client positions by broking firms due to margin calls or the lack of  margins. The May crash saw the Sensex shedding its market capitalization  by as much as 14% in just one month. Benchmark stock indices vaulted to new highs on Monday, oct 30th 2006 driven by a heady cocktail of strong corporate earnings, a rapidly growing economy and relatively stable crude oil prices. The Sensex ended at its high highes estt clos closin ing g leve levell of 13 1302 024. 4.26 26,, a gain gain of 11 117. 7.45 45 po poin ints ts or 0.9% 0.9%.. Marauding Marauding bulls defied the weak trend globally, globally, which was sparked sparked off by weak US GDP growth figure, pointing to a slowdown. Back home, the mood was upbeat even as some expect that the RBI may rais raisee inte intere rest st rate ratess by 25 basi basiss po poin ints ts in its its midmid-te term rm cred credit it po poli licy cy on Tuesday. Market watchers said sentiment could be affected only if the hike is more than 25 basis points, which is unlikely. Higher interest rates drive up  borrowing costs for corporate as well as the retail consumer, who could then cut back on their investments and spending, in turn causing a slack in domestic demand. The benchmark 30-share sensex briefly crossed the psychological 14,000mark on Tuesday, December 5, 2006. While foreign institutional investors have been aggressive buying stocks over the past few months, the response of domestic mutual funds has been guarded. In the last two months alone, FIIs bought net stocks worth Rs 17,001 crore while local mutual funds have  pumped in a net Rs 638.07 crore.

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Year 2007 at a glance In the second secondary ary market market segmen segment, t, the market market activi activity ty expand expanded ed furth further  er  during 2007-08 with BSE and NSE indices scaling new peaks of 21,000 and 6,300, respectively, in January 2008. Although the indices showed some intermittent fluctuations, reflecting change in the market sentiments, the indices maintained their north-bound trend during the year. This could be attributed to the larger inflows from Foreign Institutional Investors (FIIs) and wider participation of domestic investors, particularly the institutional investors. During 2007, on a point-to-point basis, Sensex and Nifty Indices rose by 47.1 and 54.8 per cent, respectively. The buoyant conditions in the Indian bourses were aided by, among other things, India posting a relatively higher GDP growth amongst the emerging economies, continued uptrend in the profitability of Indian corporate, persistence of difference in domestic and international levels of interest rates, impressive returns on equities and a strong Indian rupee on the back of larger capital inflows. The BSE Sensex (top 30 stocks) too echoed a similar trend to NSE nifty. The sell-off in Indian bourses in August 2007 could partly be attributed to the concerns on the possible fallout of the sub-prime crisis in the West. While the climb of BSE Sensex during 200708 so far was the fastest ever, the journey of BSE Sensex from 18,000 to 19,000 mark was achieved in just four trading sessions during October 2007. It further crossed the 20,000 mark in December 2007 and 21,000 in an intra-day trading in January 2008. However, BSE and NSE indices declined subsequently reflecting concerns on global developments. BSE Sensex yielded a Compounded return of 36.5 per cent per year between 2003 and 2007. In terms of simple average, BSE Sensex has given an annual return of more than 40 per cent during the last three years.

An overview of year 2007 After touching 14K mark on December 5th 2006, sensex entered into 2007 with a promising figure of 14000+, though the year started on a rather  tentative note with a marked slowdown being observed in the FII inflows into the country. The inflows received from FIIs in January and February 2007 was 48 per cent less than what was received during the same period in 2006. The return provided by the BSE Sensex for 2007 turned into negative territory following the 389-point tumble on Friday, February 23rd; the yearto-date return generated by the Sensex was negative 0.97 per cent.

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FIIs FIIs have have pres presse sed d subs substa tant ntia iall sale saless ov over er thos thosee days days in cont contra rast st to an intermittent surge in inflow in February 2007. As a result, the sensex which closed at 14091 on January 31st, closed at 12938 on February 28th. As per   provisional data FIIs were net sellers to the tune of Rs 613 crore on Friday 2 March, the day when Sensex had lost 273 points. Their net outflow was worth Rs 3080.80 crore in four trading sessions from 26 February to 1 March 2007. Market continued to reel under selling pressure on 5th march 2007 taking cue from weak global markets and heavy FII sales as a result of  fall over 400 points, all the indices were in red. On April 24th, The Sensex again crossed the 14K mark and was trading at 14,150.18 having gained 221.85 points or 1.59%. The midcap and smallcap indices were rather moving slow indicating that the actual movers are the large cap stocks but at the month end it finally closed at 13872. Further we can see May and June having month end figures at 14544 and 14651 respec respectiv tively ely.. The benchm benchmark ark BSE 30-Sha 30-Share re Sensit Sensitive ive Index Index (Sense (Sensex) x)  breached the 15,000-mark, to reach a record high of 15007.22, for the first time intra-day on Friday, July 06 2007 before closing at 14964.12. Despite weak weak global global cues, cues, India Indian n stocks stocks were were in great great demand demand,, especi especiall ally y auto, auto,   pharma, IT and metals stocks. On Friday, this lifted the Bombay Stock  Exchange's benchmark 30-share Sensex past the magical 15,000-mark. The Sensex took 146 sessions to cover the 1,000 point distance from 14,000 till 15,000. This is the highest since the index took 371 trading sessions to move up from 6,000 to 7,000. The sensex experienced its second bigger ever fall on 2nd august 2007. The fall fall came came in afte afterr the the Fed Fed Rese Reserv rvee cut cut its its disc discou ount nt inte intere rest st rate rate at an emergency meeting and JPMorgan Chase agreed to buy Bear Stearns for  USD 2 a share. Sensex closed down 951.03 points or 6.03% at 14809.49, When FIIs were pumping money in stock market and were Net Buyers of  Equity worth Crores; the Sensex was moving Up , Up and Up on weekly  basis. Many thought that FIIs were playing blind in Indian stock market. But when FIIs have turned Net Sellers of Equity and have started booking profit  backed by massive sell off of shares in global markets; Sensex has to go down. As expected; the Sensex plunged by 600 Points in early trading on 16th August and most of the shares were down by 4 to 5 per cent. But very soon soon the the sens sensex ex surp surpas asse sed d the the gloo gloomy my days days and and Stoc Stock k mark market etss on Wednesday, September 19th, 2007 gave thumbs up to the decision of the U.S. Fed Reserve to reduce the rates by 50 basis points, as the benchmark  30-share BSE Sensex moved up sharply by 653.63 points or 4.17 per cent at 16322.75. By staying well above the 16000- mark, it outperformed most

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Asian peers and it was the biggest single day gain. This trend shows that global cues had an influential effect on our market. On the auspicious occasion of Ganesh chaturathi, India experienced a flow of good news. The festive spirit did not end with the immersion of Ganapati. On Wednesday, it boiled over to the streets of Mumbai and its financial district, the Sensex touched the magical 17,000 number. It took Dalal Street  just 5 days to travel 1,000 points. Suddenly, tech stocks, which were the whipping boys till Tuesday, became hot favourites. Why? Hopes that the rupee will soften as a result of RBI's latest announcements to allow more outflow sparked a rally in tech stocks, pushing the Sensex to a new high of 17,073.87 during the day. At the end of the day, RBI's measures may not be enough to rein in the rupee. But there were no takers for this. The  bellwether index finally settled at 16,921.39. On October 9th, 2007, Sensex hits a record high of 18,280 on the back of eye-popping rallies in Reliance & Reliance. At the height of the dotcom mania in 199900, the easiest way to maximize returns was to buy into any stock with the suffix ‘Software’ or ‘Technologies’. Eight years on, the same seems to hold true for any stock with the prefix ‘Reliance’, given their baffling run-up over  the past one month. Eye-popping rallies in Reliance Industries, Reliance Energy and Reliance Communications lifted the 30-share Sensex to a record high of 18,327.42 intra-days. On October 15th 2007, amidst heavy buying by investors, the bull roared to  breach the 19000 mark in just 4 sessions Sensex was up by 639.63 points or  3.47 per cent at 19058.67. This rise came on the back of some strong sectors for for whic which h the the macr macro o pict pictur uree is qu quit itee brig bright ht — po powe wer, r, capi capita tall go good ods, s, infrastructure and telecom. Foreign Institutional Investors were pumping in huge money in the equity market and this too was pushing up the index. Since September, they nearly  pumped in more than Rs. 30,000 crore in the cash market. After the U.S. Federal Reserve cut interest rates by 50 basis points, a re-rating of the emerging markets had been seen wherein liquidity flows were quite robust. Then Th en sudd sudden enly ly happ happen ened ed the the seco second nd bigg bigges estt cras crash h the the sens sensex ex ever  ever  experienced when the sensex crashed by 1743 points on 17th October 2007 within minutes of opening, prompting suspension of trade for hour fallout of  regulator Sebi's move to curb Foreign Institutional Investors. In a knee-jerk  reaction to the cap proposed by the market regul regulato atorr for the Parti Particip cipato atory ry Notes, Notes, an overse overseas as deriva derivativ tivee instru instrumen mentt (ODI) (ODI),, used used by foreig foreign n instit instituti utiona onall invest investors ors (FIIs) (FIIs),, the stock stock marke markett crashed by 1743 points in intra-day, but recovered substantially later to close with a loss of 336.04 points or 1.76 per cent at 18715.82. but it was followed

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 by a huge one-day gain as on October 23 when the BSE barometer rose 878.85 points after market regulator SEBI allowed sub-accounts of Foreign Institutional Investors (FIIS) to trade It took the index a little over 20 years to reach the first 10,000 mark, but just a little over 20 months to double that score and the sensex made history with touching the 20000 mark on October  29 2007. Significantly, it was the local institutions that were in the driver’s seat. As per BSE data, foreign funds have net sold over Rs 1,100 crore worth of shares over the last three trading sessions while local funds have net bought over Rs 2,300 crore worth of shares. Sceptics point to the fact that there were only a handful of stocks that was driving the market higher. On 13th November, BSE Sensex registered its biggest ever gain in a single of 89 893. 3.58 58 po poin ints ts to sett settle le at the the thir thirdd-hi high ghes estt leve levell ever ever on bu buyi ying ng by inve invest stor orss in bank bank coun counte ters rs and and blue blue chip chip comp compan anie iess such such as Reli Relian ance ce Indu Indust stri ries es.. Th Thee mark market et gain gain was was beca becaus usee of glob global al cues cues.. Besi Beside des, s, the the  political development also gelled well with the sentiment. The rally was driven by short covering, strong buying by domestic investors. However, there was not much involvement of foreign investors. But in December 2007, sensex again experienced a black Monday on 17th December. The market succumbed to profit booking, that came in due to weak global cues as well as profit booking by FIIs in the holiday season. The Sensex ended losing 769 points from the previous close, at 19,261. Sensex during year 2008 After scaling new heights of 20000+, sensex entered year 2008 with rosy   pictu pictures res.. The trade trade pun pundit dits, s, broker brokerss and even even invest investors ors predi predicte cted d new heights for the year. And they felt their predictions coming true when sensex touched the 21000 mark on 8th January 2008. It’s interesting if one sees in terms of flows; the journey from 20,000 to 21,000 is dominated by domestic institutional investors; FIIs were negative sellers, they sold in the cash market to the tune of USD 45 billion. So if one has to take out some pointers from this journey from 20,000 to 21,000, it is the longest journey which we have seen in the last 5,000 marks, the midcaps and smallcaps have been outperformers and in terms of flows, it has been domestic institutional investors which have been really putting the money. But the rosy picture soon turned gloomy. The skyrocketing sensex suddenly started heading south and Sensex saw the biggest absolute fall in history, shedding 2062 points intra-day. It closed at 17,605.35, down 1408.35 points or 7.4 per cent. It fell to a low of  16,951.50. The fall was triggered as a result of weakness in global markets,   but the impact of the global rout was the biggest in India. The market

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tumbled on account of a broad based sell-off that emerged in global equity markets. Fears over the solvency of major Western banks rattled stocks in Asia and Europe. After the worst January in the last 20 years for Indian equities, February turned out to be a flat month with the BSE sensex down 0.4%. India finished the month as the second worst emerging market. The underperformance can   partly be attributed to the fact that Indian markets outperformed global markets in the last two months of 2007and hence we were seeing the lagged impact of that outperformance. In the shorter term, developments in the US econ econom omy y and and US mark market etss cont contin inue ued d to do domi mina nate te inve invest stor or sent sentim imen ents ts globally and we saw volatility move up sharply across most markets. The Bombay Stock Exchange (BSE) Sensex fell 4.44 percent on Monday, 31st march the last day of the financial quarter, to end the quarter of March down 22.9 percent, its biggest quarterly fall since the June 1992 quarter, as reports of rising inflation and global economic slowdown dampened market sentiments. Financial stocks led the Sensex slide along with IT. According to market analysts, IT stocks fell on worries about the health of the US economy. Indian IT firms depend on the US clients for amajor share of their  revenues. Reasoning for the slowdown (FY 08-09)

The first month of the financial year 08-09 proved to be a good one for  investors with the month ending on a positive note. The BSE sensex showed a gain of 10.5% to close at 17287 points. A combination of firming global markets and technical factors like short covering were the main reasons for  the up move in the markets. Though inflation touched a high of 7.57% against 6.68% in march 2008 as a result RBI hiked CRR by 50 bps to take the figure to 8%, still emergence of retail investors was also seen; a fact reinforced by the strong movement in the mid-cap and small- cap index that rose 16% and 18% respectively. So April was the last month to close positive. Then after nobody saw a stable sensex even. Sometimes it surged by 600+ points, but very next day it   plunged by some 800 odd points and this story is still continuing. Every  prediction, every forecasting has failed. The sensex is dancing on the music of lifetime high inflation rates, historic crude  prices, tightening RBI policies, weak industrial production data, political uncertainties and obviously the sentiments of domestic as well as FIIs. The only relief came in the form of weakening Indian rupees which enlightened the the IT sect sector or and and most most rece recent ntly ly the the UPA UPA gain gainin ing g vo vote te of conf confid iden ence ce..

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Presently it is revolving around the figures of 14000 and no one knows what next? The 30-share BSE Sensex fell 117.89 points or 0.67% at 17,373.01 on Tuesday, 6 May 2008. The key benchmark indices ended lower as investors resorted to profit booking due to lack of positive triggers in the market. On 30th May an imminent hike in domestic retail fuel prices due to soaring crude oil prices weighed on the market last week. Foreign institutional investors sold close to Rs 2204 crore in the first three trading sessions of the week which accentuated the downfall. However better than expected Q4 gross gross domest domestic ic produc productt figure figuress provid provided ed some some relief relief to the bou bourse rsess on Friday. IT stocks gained on slipping rupee. BSE Sensex rose in two out of  five trading sessions. In May, Indian inflation stood at 8.2%. The market declined sharply as a hike in fuel prices by about 10% announced by the Union government on Wednesday, 4 June 2008, triggered possibility of a surge in inflation to double digit level. The BSE Sensex declined 843.39 points or 5.14% to 15,572.18 in the week ended 6 June 2008. The S&P CNX Nifty fell 242.3  points or 4.97% to 4627.80 in the week. On 6 June 2008, local benchmark indices underperformed their global peers, hit by rumours that the Reserve Bank of India (RBI) may hike cash reserve ratio (CRR) or interest rate later in the day to tame runaway inflation. The 30-share BSE Sensex declined 197.54 points or 1.25% to settle at 15,572.18. On 9th June 2008, Bombay’s Sensex index closed 506.08 points down at 15,066.10, having earlier fallen 4.4% and slipped below 15,000 for the first time since March. Oil prices surged to record levels, fanning fears that they will keep climbing and hurt world growth. Central banks across the globe warned that interest rates may have to rise as they look to keep inflation under control, despite the fact that economic growth is slowing in key nations such as the US and UK. On the week  endi ending ng 27 27th th June June 20 2008 08 Sens Sensex ex decl declin ined ed 76 769. 9.07 07 po poin ints ts or 5.28 5.28% % to 13,802.22. The S&P CNX Nifty lost 210.90 points or 4.85% to 4136.65 in the week. Equities extended losses for the fifth straight day on 24 June 2008 with the  barometer index BSE Sensex falling below the psychologically important 14,000 mark for the first time in 10 months since late August 2007. On 25 June 2008, equities staged a solid rebound after touching fresh calendar  2008 lows in early trade. The initial jolt was caused by the Reserve Bank of  India's move to hike the key lending rate. A setback to stocks in Asia and US, sharp spurt in crude oil prices and political uncertainty due to Indo- US nuclear deal rattled bourses on 27 June 2008.

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On July 15th 2008, Indian shares fell 4.9 per cent to their lowest close in 15 months, joining a world equities rout as investors dumped financials on concerns about the fallout from worsening global credit turmoil. Although Indian banks have no direct exposure to the US subprime mortgage sector, the global financial sector turmoil impacts sentiment in the local market and raises worries of more withdrawals by foreign funds. An 800+ point surge was experienced in the market on the day following UPA gaining vote of  confidence but the very next day market couldn’t maintain the momentum and since then its in a doldrums’ position. Presently, we can saw market plunging after the RBI announced further  hikes in Repo rate as well as CRR both increased to 9%. Also, the serial  blasts at Ahmadabad and Bangalore adding to the worries and enhancing the negative sentiments. And above all we can't see any positive trigger that can dilute the flow of negative news. OBJECTIVE OF THE PROJECT •

•

To Study the relation between crude oil price and movement of Indian stock market. To study the major Episodes of volatility in Indian stock market and analyzing the factors or variables like FII ,FDI, INFLATION etc and their impact on sensex

LIMITATIONS OF STUDY Existing studies of the relationship between crude oil prices and market returns suffer from three limitations. (1) We can’t conclude that the crude oil price price is the only variable variable which impacts the stock market. There are many variables like inflation , FII FDI, political issues , government monetary polices etc which are also Influence the stock market. (2) Many previous empirical and theoretical models of the link between

oil prices and stock prices have been constructed under the premise that one can think of varying the price of crude oil, while holding all other variables in the model constant . In other words, oil prices are treated as strictly exogenous with respect to the global economy. This premise is not credible (see,

20

e.g., Barsky and Kilian 2002, 2004; Hamilton 2003). There are good theoretical reasons and there is strong empirical evidence that global macroeconomic fluctuations fluctuations have influenced the price of crude oil since the 1970s (see Kilian 2008a,c). For example, it is widely accepted that a global business cycle expansion (as in recent years) tends to raise the price of crude oil. The fact that the same economic shocks that drive macroeconomic aggregates (and thus stock returns) may also drive the price of crude oil makes it difficult to separate cause and effect in studying the relationship between oil prices and stock returns. (3) Even if we were to control for reverse causality, existing models  postulate that the effect of an exogenous increase in the price of oil is the same, regardless of which underlying shock in the oil market is responsible for driving up the price of crude oil. Recent work by Kilian (2008c) has shown that the effects of demand and supply shocks in the crude oil market on indian stock market. macroeconomic aggregates are qualitatively and quantitatively different, depending depending on whether the oil price increase is driven by oil production shortfalls, by a booming world economy, or by shifts in precautionary demand for crude oil that reflect increased concerns about future oil supply shortfalls. It is quite natural to expect similar  differences in the effect of these shocks on stock returns. Since major oil  price shocks historically have been driven by varying combinations of these demand and supply shocks, their effect on stock returns is bound to be different from one episode to the next. Moreover, to the extent that exogenous demand shocks in the crude oil market have direct effects on the indian economy in addition to their indirect effects through the real price of oil, and to the extent that they affect other industrial commodity prices, prices, it is not possible to think of an innovation to the real price of oil while holding everything else constant.

RESEARCH METHODOLOGY In order to does the research on movement of stock market (Sensex) with the movement of crude oil price, FII, FDI, Inflation. We have study the last three year 1st April 2006 to 31st March 2009. Data Description

21

To study the market movement we have collected the secondary data from various sources. in the present study we have taken the last three year (20062009) BSE-30 (sensex) monthly wise closing data from the BSE. And the monthly wise crude oil closing data from the BSE and the monthly wise crude oil price from the energy information administration year (2006-2009) and we have taken the monthly wise FII movement from RBI. And the past event the stock market information has been taken from various news  bulletins, magazines, journal, and websites. Method In this study we have taken the BSE-30 (Sensex) as dependent variable and crude oil price, FII, and as well as past Sensex closing price as independent variable. To find out the relation between dependent variable and independent variable, we have run the regression model with the help of SPSS software and also we find the correlation between dependent variable and independent variable, coefficient of variation and T-test by using these statistical tools we will prove whether all the independent variable impact the dependent variable or not.

HYPOTHESIS TESTING Let the null hypotheses is Ho=µ= All the independent variable doesn’t have any impact on stock  market (Sensex). And Alternative hypothesis is H1=µ= All the independent variable have impact on stock market (Sensex).

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Observations comparative comparative analyse 25,000.00

160

140 20,000.00 120

100   e

15,000.00   x   e   s   n   e   s

80 10,000.00

60

  c    i   r   p    l    i   o   e    d   u   r   c

SEN CRU CRU

40 5,000.00 20

0.00

0

   7    7   8   8   8   0  8   0  8   0  8   0  8   0  8   0  8   0  8   0  8  0  8   0  9   0  9   0  9   0  9    7    7    7   0    7    7    7    7   0   6   6   6   0  6   0  6   0  6   0  6  -  0  6  0  6   0    7    7    7   0 -   r - -   y -  0  n -  0  u -   r - -   y -   n -   u -   y -  0  n -  0  u -   v -   c -  0  n -  0   b -  0  a  r -   0    l - -   g  -  0  p -  0  c  t -   0    l - -   g  -   p -   c  t - -   v -   c -   n -    b -   a  r - -   p  r -    l - -   g  -   p -   c  t - -   o  v   c -   n -    b -  0  a  r -   0   r -   0   p   p   p   o   a   u   a   a   u   e   u   e   e   u   e   J   J   A   M   J   A   S   O   N   D   J   F   M   A   M   J   A   S   O   N   D  e   J  a   F  e   M   A   M  a   J  u   J   A  u   S  e   O   N  o  D  e   J  a   F  e   M   A

From the above graph we can see that as the crude oil price increases the sensex decline. •

COMPARATIVE ANALYSIS 25,000.00

25000.00 20000.00

20,000.00

15000.00

   N    I    S    O    L    C 15,000.00    X    E    D    N    I    X 10,000.00    E    S    N    E    S

10000.00 5000.00 0.00 -5000.00 -10000.00

5,000.00

-15000.00 0.00

-20000.00

  6   6  0  6  0  6  0  6  0  6  0  6  0  6  0  6  0  7  0  7  0  7  0  7  0  7  0  7  0  7  0  7  0  7  0  7  0  7  0  7  0  8  0  8  0  8  0  8  0  8  0  8  0  8  0  8  0  8  0  8  0  8  0  8  0  9  0  9  0  9  0  9  -  n -  u  l - -  g  -  p -   t - -   v -  c -   n -  b -   r - -   r - -   y -  n -   l - -  g  -  p -   t - -   v -  c -   n -  b -   r - -   r - -   y -  n -   l - -  g  -  p -   t - -   v -  c -   n -  b -   r - -   r - -   y  0   r -   0   u   u   p   a   A  M   J  u   J  A  u  S  e  O  c  N  o  D  e  J  a  F  e  M  a  A  p  M  a  J  u   J  A  u  S  e  O  c  N  o  D  e  J  a  F  e  M  a  A  p  M  a  J  u   J  A  u  S  e  O  c  N  o  D  e  J  a  F  e  M  a  A  p MONTHS

Comparative analysis between FII and SENSEX

   I    I    F

SE FII

23

After run the regression model the taking consideration dependent variable and independent variable we have found the following observation if we refer the table-1 Variables Entered/Removed(b Entered/Removed(b))

Model 1

Variables Entered

Variables Removed

SENPRICE, CRUDEOIL, FII(a)

Method .

Enter  

a All requested requested variables variables entered. b Dependent Variable: Variable: SENSEX SENSEX Table-1

Variables entered /removed In the table 1, we can see that the dependent variable is Sensex and independent variables and Sensex price, crude oil and FII.  Note:- Sensex price- Sensex price (closing).

Table-2 –Model summary Model Summary(b) Adjusted R Std. Error of  R R Square Square the Estimate .882(a) .779 .757 1518.23119 a Predictors: (Constant), SENPRICE, SENPRICE, CRUDEOIL, CRUDEOIL, FII b Dependent Variable: Variable: SENSEX SENSEX Model 1

From the model summary table, we can know the following things about our  research model. i)

Here Here R=.8 R=.882 82 =88. =88.2% 2% , whic which h show show that that corr correl elat atio ion n coef coeffi fici cien entt which is positive correlation it means in this model all the independent variables have positive correlation collectively . ii) ii) R² = coco-ef effi fici cien entt of det deter ermi mina nati tion on = expl explai aine ned d vari variab able le/t /tot otal al variable. R² signified the strength of the model and strength of the relationship  between dependent variable and independent variables.

24

Here, R² = .779 =77.9%, it shows that the independent variables (crude oil price, FII, index closing) are explained the model or dependent variable 77.9%, means all the independent variable have impact on the dependent variable up to 77.9% . And rest of 22.1% is not explained by our dependent variables. Hence 22.1% and the other factor which influence the stock market. iii) iii)

here here the the adj adjus uste ted d R squa square re = 75. 75.7% 7% whi which ch mea means ns the the 75. 75.7% 7% explained by the independent variable with perfect, where no error  means the real strength of the model. Table-3(ANOVA) ANOVA(b) Sum of  Squares df Mean Square Regressio 251237908 3 83745969.424 n .273 Residual 71455804. 31 2305025.938 075 Total 322693712 34 .347 a Predictors: (Constant), SENPRICE, SENPRICE, CRUDEOIL, CRUDEOIL, FII b Dependent Variable: Variable: SENSEX SENSEX Model 1

F

Sig.

36.332

.000(a)

If we look to the ANOVA table means analysis of variance the ANOVA table signifies the statistical validity of the model. In this table F value(calculated value) = 36.332. The degree of freedom for variables = (n-1)=(4-1)=3 (n-1)=(4-1)=3 The degree of freedom for observation (sample)=n-1 =35-1=34  Now if we refer the F table with degree of freedom=3 and degree of  freedom of observation = 34 with pre-determinant level of significant =0.01% =99% level of confident. T.V=4.31 & C.V=36.332 Hence, C.V> T.V =>36.332>4.31. Since, C.V>T.V  Null hypothesis =Ho=µ is rejected Accept the alternative hypothesis =H1

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Hence, all the independent variables have impact on the stock market

Table-4(coefficient Table-4(coefficient table) Coefficients(a) Unstandardized Coefficients Model 1

B (Constant ) CRUDEOI L FII

Standardized Coefficients

Std. Error

1822.162

1345.230

48.690

12.171

.027 SENPRIC .609 E a Dependent Variable: Variable: SENSEX SENSEX

Beta

t

Sig.

1.355

.185

.394

4.001

.000

.041

.069

.659

.515

.112

.619

5.429

.000

Histogram Dependent Variable: SENSEX 12

10

8

6

     y      c      n      e      u      q      e      r        F

4 Std. Dev = .95 2

Mean = 0.00 N = 35.00

0 -2.50

-1.50 -2.00

-.50 -1.00

.50 0.00

1.50 1.00

Re ression ression Standardi Standardiz zed Residua Residuall

2.00

If we refer to the co-efficient table from this table we can know which and the most important variable which have impact on the dependent variable and which are the variable who have no impact on the dependent

26

variables by referring T-Table, T table value explains the statistical validity or significant of the variables value.

Model= a+bı(crude oil)+b2(FII)+b3(index)+ε. where,b1, b2,b3 ……..and the regression co-efficient between DV and IV. So, model is Sensex=1822.162+48.69(crude Sensex=1822.162+48.69(crude oil)+.029(FII)+.609(I oil)+.029(FII)+.609(INDEX) NDEX)  Now, if we move to T column T value for 99% of pre-determinant level of confident T.V= T-value=2.423  Now we have to take these T.V will have higher impact on the D.V. Hence, Sensex= f(crude oil, index). Hence, crude oil price and BSE – index closing. Are statistically insufficient Here, index closing price explain Maximum Variation in the D.V Sensex = 61.9% and followed by crude oil price= 39.4% Conclusion Correlations SENSEX SENSEX

Pearson Correlation Sig. (2-tailed) N

CRUDEOIL

Pearson Correlation Sig. (2-tailed) N

FII

Pearson Correlation Sig. (2-tailed) N

SENPRICE

Pearson Correlation Sig. (2-tailed) N

CRUDEOIL

FII

SENPRICE

1

.659(**)

.350(*)

.812(**)

.

.000

.034

.000

37

37

37

35

.659(**)

1

-.062

.402(*)

.000

.

.716

.017

37

37

37

35

.350(*)

-.062

1

.509(**)

.034

.716

.

.002

37

37

37

35

.812(**)

.402(*)

.509(**)

1

.000

.017

.002

.

35

35

35

35

** Correlation is significant at the 0.01 level (2-tailed). (2-tailed). * Correlation is significant at the 0.05 level (2-tailed). (2-tailed).

(1) In the correlation correlation table correlation correlation between sensex D.V with with I.V crude oil price, FII, and index closing are .659, .350 and .812

27

respectively at the 0.01 level of significant. This shows the positive correlation among the variables. Hence, we can conclude that here is positive relation between the movement of crude oil price on the stock market. So crude oil price impact the sensex.

References 1. www.bse.com 2. www.rbi.org.in 3

http://tonto.eia.doe.gov/dnav/pet/hist/wtotworldw.htm