Research Article Submission

NSE CNX 500 Vs Macroeconomic Variables

To measure the effect on Capital Markets based on changes in Economic variables Macro-

Submitted By: Srikanth Kumar Konduri Murali Krishna Podile srikanthkonduri@gmail.com Contact No: 07838590567 xlnc.kris@gmail.com Contact No: 07838590304

IMT Ghaziabad 7/10/2011

NSE CNX 500 Vs Macroeconomic Variables

To measure the effect on Capital Markets based on changes in Economic variables:

Purpose of the study:

Macro-

To understand behavioural changes and long term trends prevailing between the Indian Capital markets (typically the movement of broad based stock indices) and that of macroeconomic variables.

Objective:
To choose the variables considered for study based on secondary research done previously over this topic and validating the above intuitively constructed function. At the end, interpreting the Regression results and analysing various implications.

Choosing a right index for study:

The NSE S & P CNX 500 Index, came into inception from 1994, is the most comprehensive of all the Indian Capital market indices in terms of the volume of market covered, range of companies in the composition and depth of the investor base.

Rationale behind choosing the predictor variables:

The study of Mayasami et al. (2004) about the dependence of SES All-S Equities Finance Index on the Macroeconomic variables and a similar kind of research work performed by Johansen & Juselis (1990) using vector correction model on Singapore composite index reveal that the relationship holds significance only for a few select variables which include Exchange Rate, Industrial Production, Money Supply and Inflation.

Formulation of relationship:
Further augmenting the above literature, Coleman and Tettey (2008) have adopted the below mentioned model in their research work. NSE CNX 500 = 0 (ETt) 1 (GDSt) 2e (3TBt) + (4Ift) +t For the purpose of performing multiple regression analysis using SPSS, we have initially taken the natural logarithm of the above equation and expressed the same relationship in a linear form as follows: Log (NSE CNX 500) = 0 1 Log (ETt) + 1 Log (GDSt) + [(3TBt) + (4Ift) +t] Log (e)

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NSE CNX 500 Vs Macroeconomic Variables

Table1 shows the description of variables present in above equation: (All the data considered for study is from 2000-January-01 to 2009-June-30) Variables Log (NSE CNX 500)t Log (ET)t Log (GDS)t (If)t (TB)t Definition of variables Natural Logarithm of Quarterly Average value of NSE CNX 500 Index Natural Logarith of Quarterly Average Exchange Rate value of Indian for 1 US Dollar Natural Logarith of Quarterly value of Gross Domestic Savings (GDS) of Indian Economy as a % of Gross domestic Product (GDP) Quarterly Average value of Consumer Price Index (CPI) based Inflation Quarterly Average value of 364-day Government of India T-Bill rate
Table 1: Description of Regression variables

Data Source www.nseindia.com www.gocurrency.com www.cmie.com www.inflation.eu www.cmie.com

Regression Results:
Linear regression at a confidence level of 95% is performed using SPSS software. Model Regression Residual Total Sum of Squares 2.515 .329 2.844 df 4 33 37 Mean Square .629 .010
Table 2: ANOVA

F 63.138

Sig. .000a

In Table2 above, the significance value is less than 0.001 (<0.05) suggesting that at 95% level of confidence, at least one of the independent variables is able to predict the dependent variables, thus validating the utility of this regression model. The t-Values of all the independent variables (in Table3, below), intercept are more than |2.5|, clearly suggesting that at 95% level of confidence, all of them are significant in predicting the dependent variable. Unstandardized Coefficients Std. B Error 11.534 1.412 -6.154 .722 1.232 .290 Standardized Coefficients Beta -.565 .362 95.0% Confidence Interval for B Lower Upper t Sig. Bound Bound 8.166 .000 8.660 14.407 .000 -7.622 -4.686 8.529 4.248 .000 .642 1.823

Explanatory Variable (Constant) log (ER) log (GDS)

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NSE CNX 500 Vs Macroeconomic Variables

Inflation Rate TB

.053 -.028

.012 .010

.366 -.181
Table 3: Coefficients

4.551 .000 .007 2.904

.029 -.047

.076 -.008

Model Correlations

Variables TB Inflation Rate log (ER) log (GDS)

TB 1.000 -.115 .299 .215

Inflation Rate -.115 1.000 -.244 -.676

log (ER) .299 -.244 1.000 .392

log (GDS) .215 -.676 .392 1.000

Table 4: Coefficient Correlations Table4 above shows that the maximum absolute correlation between any two explanatory variables is only 0.676 (<0.75), thus suggesting no instance of a multi-collinearity problem existing in this regression model. So, individual trend charts can be made between independent variable and all dependent variables as shown in Figure1 below: (Horizontal axis indicates No. of the Quarter under study, with No.1 = Jan00 Mar00)

log (ER)
1.8 1.7 1.6 1.5 1 6 11 16 21 26 31 36
log (ER)

TB
15 10 5 0 1 5 9 13 17 21 25 29 33 37
TB

Inflation Rate CPI

15 10 5 0 1 6 11 16 21 26 31 36
Inflation Rate CPI

log (GDS)
1.8 1.6 1.4 1.2 1 6 11 16 21 26 31 36
log (GDS)

log (CNX)
4 3.5 3 2.5 1 4 7 10 13 16 19 22 25 28 31 34 37
Figure 1: Data Set trend charts

log (CNX)

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NSE CNX 500 Vs Macroeconomic Variables

Findings from the study:

Now, the relationship equation after the variables are substituted will look as:
Log (NSE CNX 500) = 11.534 6.514 Log (ETt) + 1.232 Log (GDSt) + 0.053 (Ift) 0.028 (TBt)

Positive correlation with Gross Domestic Savings (GDSt), CPI Inflation Rate (Ift) and a Negative correlation with 364-Day Treasury Bill Rate (TBt), Exchange Rate of Indian Rupee for 1 US Dollar (ETt).
6000 5000 4000 3000 2000 1000 0 1 6 11 16 21 26 31 36 41 46
Figure 2: Correlation NSE CNX 500 - CPI Inflation

20 15 CNX Nifty 500 10 5 0 Inflation Rate CPI

As can be observed from Figure2, it is evident that the NSE CNX 500 Index is positively correlated with the rate of inflation, revealing an interesting fact that when the entire Index portfolio is considered the market is viewing it more as a supply constrained commodity thus jacking up the index value, however the coefficient value of 0.053 suggests that it is only predicting the half of change.

Limitations of the study:

As it is based on overall macro indicators, the same relationship may not hold true for different sectors, may not also hold true for other stock indices. Also, the effect of other influencing factors based on the governments Five-Year Plan strategy and special growth impetus, attractiveness of FIIs and the requirement to maintain a healthy Trade Balance have will have its effects.

Research Implications:
Provides insight for the Monetary Policy makers RBI. Important for Financial Advisors & Fund Managers to insulate their portfolios from the effects of inflation & exchange rates. Gives a broad awareness to common investor about the on-going macroeconomic trends, to increase predictability of markets.

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