Sensex – The Dancing Beauty of Indian Stock Market


M. Subramanian
Senior Faculty (Finance Area)
R.L. Institute of Management Studies
TVR Nagar, Madurai-625 022

Main Contribution - Backbone Support by II MBA (Finance – Batch 2004-06)
Krishnan, Gomathisankar, Anuchakravarthy, Karthikeyan, Vetrivel, Priyardarshi Bal, Alamelu, Shyamala, Abhishek Geo, Saravanan, Shaji Sameul, Sijo George, Nithya, Rampriya, Kalyana Sundara Rajan, Chandru, Selvin Anish, Arun Gobinath.


'Sensex' the glamorous dancing beauty of traditional Indian stock market. In the recent past this glamorous stock market indicator dances aggressively. This paper is aimed at throwing lights on various factors that made our sensex baby to dance fast with lots of forward steps. Does the movement of Sensex or Nifty really mean any thing to the investors, fund managers, investment advisors, and last but not the least to the regulators? Do these numbers have any significance? Do they have any scientific basis? How does a layman understand these numbers? What exactly that goes into these numbers?

In recent years, indexes have come to the forefront owing to direct applications in finance in the form of index funds and index derivatives. Index derivatives allow people to cheaply alter their risk exposure to an index (hedging) and to implement forecasts about index movements (speculation). Hedging using index derivatives has become a central part of risk management in the modern economy. Securities market indexes have been constructed to give a quick answer to the question: What is the-market- doing?


An index is a number, which measures the change in a set of values over a period of time. A stock index represents the change in value of a set of stocks, which constitute the index. More specifically, a stock index number is the current relative value of a weighted average of the prices of a pre-defined group of equities. It is a relative value because it is expressed relative to the weighted average of prices at some arbitrarily chosen starting date or base period. The starting value or base of the index is usually set to a number such as 100 or 1000.


    • A good stock market index is one, which captures the behavior of the overall equity market.
    • It should represent the market; it should be well diversified and yet highly liquid.
    • Movements of the index should represent the returns obtained by "typical" portfolios in the country.

A market index is very important for its use

A market index is very important for its use of the following factors:

  • as a barometer for market behavior,
  • as a benchmark portfolio performance,
  • as an underlying in derivative instruments like index futures, and in passive fund management by index funds


1. News about the company (e.g. a product launch, or the closure of a factory)
2. News about the country (e.g. nuclear bombs, or a budget announcement)

The job of an index is to purely capture the second part, the movements of the stock market as a whole (i.e. news about the country). This is achieved by averaging. Each stock contains a mixture of two elements - stock news and index news. When we take an average of returns on many stocks, the individual stock news tends to cancel out and the only thing left is news that is common to all stocks.

Sensex Watch – January 2005 to July 2005

  • If you look at the sensex movement from January 2005 to July 2005, it looks smart & cute.
  • The market had responded well to all the qualitative and quantitative news and has capitalized in a good shape.
  • Here comes the core part of this paper, which indicates various factors that had been a reason for sensex movement:



Remarks on the Market / Sensex

Quarter - 4

(Jan'05 to Mar'05)

  • Heavy selling pressure continued.
  • Threat of inflation.
  • Hike in interest rate.
  • Dollar was strong.
  • Slowdown in foreign fund flow.
  • High international crude oil price.
  • Q-3 results of corporates.
  • Good buy in cement, auto, bank and IT segment.
  • Quota system was introduced in Textile industry.
  • IPO size of over Rs.4500 crore hit the primary market.
  • Increase in FDI capital in telecom industry – 74%
  • US Poll results – IT in favour.
  • Govt. clears autonomy package for PSU banks.
  • Govt. allows 100% FDI in construction sector.
  • Mergers like: Dabur-Balsara, Mahindra-Renault etc.,

Quarter - 1

(April'05 to June'05)

  • Implementation of VAT.
  • Special Economic Zone Bill 2005.
  • Huge investment by FII's – because in expectation of interest rate cut in US.
  • Announcement of banking reforms on – acquisition, revision of SLR and CRR & rising of dividend ceiling.
  • FY-05 NP increased for most of premium companies.
  • Mid cap companies too showed a high positive results in their previous FY.
  • During month May'05 the Sensex raised upto 468 points.

Quarter - 1

(April'05 to June'05)

  • Sensex sets new record at 7178 in the beginning of June'05.
  • Ambani brothers settlement.
  • Stronger money flow started.
  • FII's restarts pumping investment in to Indian stock market.
  • Mutual Funds did a good business.
  • IT export growth expected @ 30%
  • Monsoon sets in India.
  • PSU banks and Private banks performed well.

July 2005

  • Corporate governance issue of Reliance Company.
  • Strong FII's inflows.
  • RBI released the BOP data for 2004-05.
  • Banking stocks were in the limelight.
  • YES bank listed its share on July 12th.
  • India and US agrees to 8 major initiatives.
  • Tax Protocol comes into effect on August 1st so that Indian companies can access Singapore technology at lower cost.
  • China finds Indian cotton yarn attractive. Textile companies finds a good time.
  • ICICI bank enters and exits NTPC.
  • Profit making PSU's to get more financial autonomy.

  • "Speed of the stock market index is the speed of the economy" a new saying, the author have coined.
  • Within 7 months time the sensex has crossed the benchmark – all time high more than 7500 points.
  • This shows the potential of Indian Capital Market to react positively to the market news, which are genuine and which also fetches good returns even to naοve investors.
  • Let us all hope that the Sexy Sensex should cross sooner 8000 mark. The author and his team positively believes in this.

About the Author

M. Subramanian, Senior Faculty (Finance Area), R.L. Institute of Management Studies, TVR Nagar, Madurai – 625 007. Has published several articles and papers in international (1 paper) and national level conferences (4 papers). He has more than 9 years of experience: 5 years industry & 4+ years in teaching. He now teaches Management Accounting to I MBA students and to II MBA (Finance) – Indian Capital Markets and Fundamental Technical Analysis.
Author's Qualification: B.Com, BGL, MFC, MBM, MBA, M.Phil (Mgt), DIRPM, PGDMM.

About the Backbone Students Team

Highly committed students, with a passion to learn for growth. They do lot of field study in the field of finance, to gain practical experience. These students are born to win, that as a faculty I can assure that this batch will deliver the best in the market and surely bring lot of laurels to the institute. Readers of this article can approach our students for projects and placement in the following email address.
Email: (or)

M. Subramanian
Senior Faculty (Finance Area)
R.L. Institute of Management Studies
TVR Nagar, Madurai-625 022

Source: E-mail September 1, 2005


Back to Articles 1-99 / 100 onwards / Faculty Column Main Page


Important Note :
Site Best Viewed in Internet
Explorer in 1024x768 pixels
Browser text size: Medium