Decoupling in Indian Economy (With Special Focus to Stock Market)


By

S. Shankari
B.E., MBA, (Mphil)
Faculty in Finance
R. Suganya
MBA, Mphil, (PhD)
Faculty in Finance
R.L. Institute of Management Studies
T.V.R. Nagar, Aruppukottai Road, Madurai-625022
 


Keywords: Decoupling, stock market, world indices, economic indicators..

1. INTRODUCTION:

Double-dips, Deflation and deleveraging may be the talk of most developed economies, but in emerging markets like India, the relevant "D" is once again "Decoupling".  The coupling and decoupling of economies in general are analyzed in terms of synchronization of business cycles among different countries or regions.

Most of the empirical work supported the idea of synchronization of cycles, after the financial and trade integration that began in the late 1970s. But the recent experience in advanced economies versus emerging market and developing economies (EDEs) developing Asia, and in particular India and China shows that there is a need to look not only at the direction of business cycles, but also at the relative levels of performance.

2. DECOUPLING EFFECT:

IMF data show that during the period 1980-2000, the growth rates in global output as also in the advanced and EDEs were synchronised, both in terms of direction and levels. But, since 2000, while the direction shows coordinated movement, in terms of levels, the growth rates in EDEs reached greater heights, and were sustained during the post-crisis period as well. India's performance stands out during most of the period since 1980.Opposite of contagion is decoupling effect.

When one is able to keep oneself safe from the financial shocks of one's financially close country or firm, it is said that decoupling has started. Because of not affected by downturn global market,
we can say that our market is showing decoupling effect


For this, we can use the stock market's performance for the last two years (2009 & 2010) to show the decoupling effect happened to our economy.

3. PERFORMANCE OF INDIAN STOCK MARKET WITH WORLD MARKET:

Nifty touched 6000 mark and BSE Sensex touched 21,000 marks a 32 month high since Jan '2008. The rally started from 5000mark, a 21% gain in the market in last two months. While comparing with other economies, we can identify a decoupling effect happened in India.

3.1. Stock market returns for various countries:

Table No: 3.1.a) Indices levels during 2008-2010 for various countries:

Country

Indian indices

U S indices

Asian Indices

European indices

Month&year

Nifty

Sensex

Nasdaq

Nikkie

Hangsung

FTSE

DAX

Dow

2009-Jan-09

3046

9424

1180

7994

13278

4149

4338

8000

Dec-09

5122

17464

1860

10546

21872

5412

5957

10428

2010-Jan-10

5232

16357

1818

10198

20121

5188

5608

10067

Nov-10

6117

20309

2131

9827

24027

5820

6790

11052

           Source: yahoofinance.com


By calculating the year wise returns for various world indices by using the month wise indices level, we can get the following table:

Table No: 3.1.b) Stock market returns from various countries:

Month & year

Nifty

Sensex

Nasdaq

Dow

Nikkie

Hangsung

FTSE

DAX

Year 2009(in %)

68

85

57

32

31

65

30

37

year 2010(in %)

17

24

17

-4

-4

19

12

21

              Source: secondary data

From the table, it is inferred that our Indian market has given some good return when compared with Europea and Asan markets during the last two years.

3.2. Correlation technique to measure the relationship between Indian market with other markets:

In statistics, Pearson product-movement correlation coefficient between two variables, giving a value between +1 and -1 inclusive. It is widely used in the sciences as a measure of the strength of linear dependence between two variables.

* A value of "0" implies that there is no linear relationship between the variables.
* A "+1" indicates a perfect positive relationship and "-1" indicates a negative linear relationship

Correlation(r) = NXY - (X)(Y) / Sqrt([NX2 - (X)2][NY2 - (Y)2])

After applying the above mentioned formula for monthly index value of world indices from 2008 to 2010 and the results are shown in the following table:

Table No: 3.2.a) Correlation of sensex with other indices:

Correlation of nifty & sensex

Correlation co efficient

Inference

SENSEX

NIFTY

with NASDAQ

-0.69

-0.53

Shows negative relationship

With DOWJONES

-0.16

-0.10

Shows  negative relationship

With NIKKIE

-0.31

0.12

Shows  negative relationship

With Hangsung

-0.83

-0.06

Shows negative relationship

with FTSE

-0.78

-0.13

Shows negative relationship

With DAX

-0.78

-0.16

Shows negative relationship


From the above table, it is inferred that the movement of sensex is showing negative relationship with other indices.
 

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Source: E-mail December 7, 2010

          

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