impact of monetary policy in the performance of financial market

7/31/2019 Impact of Monetary Policy in the Performance of Financial Market

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Chapter-1

INTRODUCTION

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1.1 Introduction to the Study

1.1.1 Brokerage Industry

The Indian retail brokerage industry consists of companies that primarily act as agents for the

buying and selling of securities (e.g. stocks, shares, and similar financial instruments) on a

commission or transaction fee basis. It has two main interdependent segments: Primary Market and

the Secondary Market. Now this market is extended to activities like currency, commodity, mutual

fund, insurance etc

The Indian equity brokerage industry thrived on the back of equity markets which sustained a

bull run during 2003-2007. Although high competitive pressure meant continuous compression of

brokerage commissions, low electronic penetration kept operating costs high and the same time,

the industry revenue was also growing. Furthermore, the industry attracted domestic and foreign

investments interest at high valuations of up to 45x P/E multiples. During this time, many of the

key players started expanding their portfolio of services to include wealth management and

advisory services, sale of insurance and mutual fund products, consumer financing and so on.

However, post-2008, the economic downturn factors like muted trading turnover, relentless

competitive pressure and decreasing margins, continued high operating costs and high margining

requirements has put the industry under pressure. During this period, profitability lacking players

were under pressure to build scale. Expansion of scale and investments into technological systems

has the potential to lead the top brokerage firms into paths of higher growth, but the current

economic climate is clearly against heavy investments.

The basic functioning of a brokerage firm is to execute, buy and sell orders for clients.

Traditionally these firms have offered the investigation of the quality and the possibilities of

investing in a variety of investment products. It is still accustomed for brokerage firms to offer

information about possible investments free of charge. This activity of bringing free of chargestock investment report is one of the main tools that are utilized by brokerage houses to compete

against other firms and to investor it continues to be an important service.

1.1.2 The History of Stock Brokerage Firms

Stock brokerage firms have been an established feature in the financial services sector for

nearly thousand years. Dealing in debt securities, brokers employ a variety of systems to aid

investors with the purchase and sales of stocks and bonds in a variety of markets. The firms have

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changed over the years, growing to massive organizations that can affect the entire financial sector

positively or negatively with their performance. Changing with the times, the early twenty-first

century saw a rise of online trading that enabled the average investor to take part in the stock

market for the first time.

History

During the 11th century, the French began regulating and trading agricultural debts on

behalf of the banking community, creating the first brokerage system. In the 1300s, houses began

to set up in major cities like Flanders and Amsterdam in which commodity traders would hold

meetings. Soon, Venetian brokers began to trade in government securities, expanding the

importance of the firms. In 1602, the Dutch East India Company became the first publicity traded

company in which shareholders could own a portion of the business. The stocks improved the size

of companies and became the standard bearer for the modern financial system.

Significance

The earliest brokerage firms were established in London coffee houses, enabling

individuals to purchase stocks from a variety of organizations. They formally founded the London

Stock Exchange in 1801 and created regulations and memberships. The system was copied bybrokerage firms across the world, most notably on Chestnut Street in Philadelphia. Soon, the US

exchange was moved to New York city and various firms like Morgan Stanley and Merrill Lynch

were created to assist in the broking of stocks and securities. The firms limited themselves to

researching and trading stocks for investment groups and individuals.

Considerations

During the 1900s, stock brokerage firms began to move in a direction of market makers.They adopted the policy of quoting both the buying and selling price of a security. This allows a

firm to make a profit from establishing the immediate sale and purchase price to an investor. The

conflict with brokerage firms setting prices creates the concern that insider trading can result from

the sharing of information. Regulators have enforced a system called Chinese Walls to prevent

communication between different departments within the brokerage company. This has resulted in

increased profits and greater interconnection within the financial industry.

Effects

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The creation of high valued brokerage firms like Goldman Sachs and Bear Sterns created a

system of consolidation. Working with hundreds of billions of dollars, the larger firms began to

merge and take over smaller firms in the last half of the 20th century. Firms like Smith Barney were

acquired by Citi group and other investment banks, creating massive financial institutions that

valued, held, sold, insured and invested in securities. This conglomeration of the financial sector

created an environment of volatility that caused a chain reaction when other firms like Bear Sterns

and Lehman Brothers filed for bankruptcy. Trillions of dollars of assets were tied together in

different companies and resulted in a large economic collapse in late 2008.

Features

A large share of the brokerage firms have moved to an online format. Smaller brokers such

as E*Trade, TD Ameritrade and Charles Schwab have taken control of most individual investors

accounts. This added convenience and personal attention paid to the small investor has resulted in a

large influx of activities. In addition, the fact that the online resources offer up-to-the-minute

pricing and immediate trades makes their format appealing to the modern user. Discounted

commissions have lessened the price of trades, giving access to a wider swath of people and adding

liquidity to the market. The role of the stock brokerage firm is ever changing and proves to be a

boon for the future of the financial industry.

1.1.3 Full Service v/s Discounted Brokerage Houses

Full service brokerage firms continue to offer informative stock reports and a level of

service much higher than other brokerage houses. Discounted brokerage houses only dedicate

themselves to execute orders for clients. Full service brokers are sellers looking for purchasing and

selling for clients and offering more customer service than is available from discount brokers. It is

many times possible that a client will not even know who is taking care of the buy or sell order that

they placed.

1.1.4 Market Size and Characteristics

The Indian retail brokerage market is showing phenomenal growth. The total trading

volume of brokerage companies has increased from US $1239.1 billion in 2004 to US $1492.1

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Billion in 2005, and is expected to reach US $6535.7 billion by 2015. Some of the main

characteristics of the brokerage industry include growth in e-brokering; growing derivatives

market, define in brokerage fees etc.

Today, as per NSDL statistics, we have only 2.4 million investors with demat accounts in

the country. Considering various investor combinations that are holding accounts, we can presume

the country has roughly 5 - 7.5 lakh active investors now. This figure is unbelievably small

compared to the potential number of investors, which is anything between 200 million and 250

million. When we take into consideration the way transaction risk and cost in the Indian capital

market is coming down, there will be a massive surge in the number of investors and also in

volumes. The only way to manage this kind of potential growth is to adopt state-of-the-art trading

techniques.The growth of internet-based trading as a mass trading technique in the country is

unstoppable, going by the indicators available and the signals for the future. When it ultimately

gathers momentum, the biggest beneficiary will be the investor, who will be able to trade with

greater momentum; the biggest beneficiary will be the investor, who will be able to trade with

greater speed and transparency, and at lower costs.

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1.2 Theoretical Review

1.2.1 Monetary Policy

The actions of a central bank, currency board or other regulatory committee that determine the size

and rate of growth of the money supply, which in turn affects interest rates. Monetary policy is

maintained through actions such as increasing the interest rate, or changing the amount of money

banks need to keep in the vault (bank reserves).

Monetary policy is the process by which the monetary authority of a country controls the supply

of money, often targeting a rate ofinterest for the purpose of promoting economic growth and

stability. The official goals usually include relatively stable prices and

low unemployment. Monetary theoryprovides insight into how to craft optimal monetary policy.

Monetary policy is referred to as either being Expansionary or Contractionary, where an

expansionary policy increases the total supply of money in the economy more rapidly than usual,

and Contractionary policy expands the money supply more slowly than usual or even shrinks it.

Expansionary policy is traditionally used to try to combat unemployment in a recessionby

lowering interest rates in the hope that easy credit will entice businesses into expanding.

Contractionary policy is intended to slow inflation in hopes of avoiding the resulting distortions

and deterioration of asset values.

The Monetary and Credit Policy is the policy statement, traditionally announced twice a year,

through which the Reserve Bank of India seeks to ensure price stability for the economy. These

factors include - money supply, interest rates and the inflation.

Why it is needed?

What monetary policy at its best can deliver is low and stable inflation, and thereby reduces the

volatility of the business cycle. When inflationary pressures build up, it is monetary policy only

which raises the short-term interest rate (the policy rate), which raises real rates across the

economy and squeezes consumption and investment.

The pain is not concentrated at a few points, as is the case with government interventions in

commodity markets.

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Monetary policy in India underwent significant changes in the 1990s as the Indian Economy

became increasing open and financial sector reforms were put in place. In the 1980s, monetary

policy was geared towards controlling the quantum, cost and directions of credit flow in the

economy. The quantity variables dominated as the transmission Channel of monetary policy.

Reforms during the 1990s enhanced the sensitivity of price signals from the central bank, making

interest rates the increasingly Dominant transmission channel of monetary policy in India.

1.2.2 Objectives of Monetary Policy

The objectives are to maintain price stability and ensure adequate flow of credit to the productive

sectors of the economy. Stability for the national currency (after looking at prevailing economic

conditions), growth in employment and income are also looked into. The monetary policy affects

the real sector through long and variable periods while the financial markets are also impacted

through short-term implications.

There are four main 'channels' which the RBI looks at:

Quantum channel: money supply and credit (affects real output and price level through

changes in reserves money, money supply and credit aggregates). Interest rate channel.

Exchange rate channel (linked to the currency).

Asset price.

Monetary decisions today take into account a wider range of factors, such as:

short term interest rates;

long term interest rates;

velocity of money through the economy;

exchange rate

credit quality

bonds and equities (corporate ownership and debt)

government versus private sector spending/savings

international capital flow of money on large scales

Financial derivatives such as options, swaps and future contracts etc.

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1.2.3 The new Functions of monetary policies that have emerged

To reinforce the emphasis on price stability and well-anchored inflation expectations while

ensuring a monetary and interest rate environment that supports export and investment

demand in the economy so as to enable continuation of the growth momentum.

To re-emphasize credit quality and orderly conditions in financial markets for

securing macroeconomic and, in particular, financial stability while simultaneously

pursuing greater credit penetration and financial inclusion.

To respond swiftly with all possible measures as appropriate to the evolving global and

domestic situation impinging on inflation expectations and the growth momentum

1.2.4 Challenges before monetary policy:

1. Financial markets are unperturbed: with the flattening of yield curves, the compression of

risk spreads and the search for yields continues unabated.2. Second, global imbalances have actually increased with no fears of hard landing, but with

some sense of readying for a bumpy soft landing. Movements in major exchange rates are

not reflecting fundamentals in an environment of generalized elevation in asset prices and

abundant liquidity.

3. Third, strong global economic growth could be accompanied by emerging pressures on

core inflation. the challenge facing us is to judge the compatibility of the current pace of

growth with non-accelerating inflation In the event of a judgment that the current growth

momentum is more cyclical than structural, the stance of monetary policy would need to

reflect a sensitivity to the inevitability of a downturn. On the other hand, the judgment that

structural factors predominate would warrant a different policy stance.

4. An overriding concern faced by the Reserve Bank is the persistently high growth of bank

credit, with attendant worries relating to the quality of bank credit The sharp increase in

credit to sectors such as housing, commercial real estate and retail loans have also been

worrisome on account of the vulnerability of banks to credit concentration risks.

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5. It is difficult to arrive at a clear judgment as to what rate of credit growth is too high in

relation to potential growth.

6. Some of the models integrate policy behavior with the banking system, the demand for a

broad monetary aggregate, and a rich array of goods and financial market variables,

providing a more complete understanding of the monetary transmission mechanism. Weak

economic assumptions and large models combine to reveal difficulties with sorting out

policy effects that other approaches fail to bring out.

1.2.5 Instruments of monetary policy in India

The monetary policy is nothing but controlling the supply of Money. The big Daddy, i.e. The RBI

takes a look at the present levels and also takes a call on what should be the desired level to

promote growth, bring stability of price (low inflation) and foreign exchange.

The various instruments of monetary policy that the RBI has and can use are:

A. Quantitative measures:

1. Open Market operations: Here, the RBI enters into sale and purchase of governmentsecurities and treasury bills. So the RBI can pump money into circulation by buying back

the securities and vice versa. In absence of an independent security market (all Banks are

state owned), this is not really effective in India.

2. Bank rate policy: Popularly known as repo rate and reverse repo rate, it is the rate at which

the RBI and the Banks buy or exchange money. This resuts into the flow of bank credit and

thus effects the money supply.

3. Cash Reserve ratio (CRR): This is the percentage of total deposits that the banks have to

keep with RBI. And this instrument can change the money supply overnight.

4. Statutory Liquidity Requirement (SLR): This is the proportion of deposits which Banks

have to keep liquid in addition to CRR. This also has a bearing on money supply.

B. Qualitative measures:

1. Credit rationing: Imposing limits and charging higher/lower rates of interests in selective

sectors is what you see is being done by RBI.

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2. Moral suasion: We hear of RBI's directive of priority lending in Agriculture sector. Seems

more of a directive rather than persuasion.

3. Change in lending margins :The bank advance money on a certain percentage of the valueof the mortgaged properly like land, building, jewellery, shares, stock of goods etc.The gap

between the value of the mortgaged property and amount advance is called lending margin.

4. Direct controls: Where all other methods prove ineffective, the monetary authorities resort

to direct control measures with clear directive to the banks carry out their lending activity in

a specified manner. There are however rare instances of direct control measure.

1.2.6 Effects of Monetary Policy

Generally the effects of monetary policies are related to current scenario of an economy in

short-run. As monetary policy is the regulation of country money supply i.e. the level of liquidity

in the economy by the central bank of a country. The various tools, which are used in

implementing monetary policies effect, the following determinants of growth are as follows

1. Control Inflation: - The foremost and basic impact of monetary policy is on inflation.

The goal of monetary policy is to control inflation through in monetary policy tools as when

inflation rises central bank generally raises interest rates and vice-versa. The main motto behind

keeping low inflation is to keep stable value of currency.

2. Interest Rate: - Interest rates are directly affected by monetary policy. The central bank

increases or decreases prime rate or interest rate of the loan given by the central bank to other

banks. It helps in credit contraction or expansion.

3. Business cycle- As business is a dynamic entity and always keep on changing, so it

passes through the condition of depression, stagnation and boom. Here monetary policy attempt to

minimize the speed of change in business cycle.

4. Spending and Investment - when a central bank decrease interest rate, the spending

increases and investment. This increase in spending and investment can equate to better overall

health of an economy. Likewise, when interest rates are increased, spending and investment

decreased, which is a tool to control inflation.

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5. Employment -The level of an employment is the showcase of the health of an economy.

When inflation is low and economy is stable or in Expansionary phase, employment level are

higher than when inflation is high and economy is in Contractionary phase. Changes in the

monetary policy that maintain economic stability and minimize inflation tend to keep

unemployment low.

1.2.7 Types of Monetary Policy

1.Inflation Targeting:

Under this policy, the target is to keep inflation under control. The inflation target is

achieved through periodic adjustments to the central bank interest rate target.

2. Price Level Targeting:

Price level targeting is similar to inflation targeting except that CPI growth in one year offset

in subsequent years such that over the time the price level on aggregate does not move.

3. MonetaryAggregates:

In the 1980s, several countries used an approach based on constant growth in the money

supply. This approach is also called monetarism. While most monetary policies focuses on price

signal of one term or another, this approach is focused on monetary quantities.

4. Fixed Exchange Rate:

This policy is based on maintaining a fixed exchange rate with a foreign currency. There are

varying degrees of fixed exchange rates, which can be ranked in relation to how rigid the fixed

exchange rate is with the anchor nation.

5. Gold Standard:

The gold standard is a system in which the price of the national currency as measured in

units of gold bars and is kept constant by the daily buying and selling of base currency to other

countries and nationals. The gold standard might be regarded as a special case of the "Fixed

Exchange Rate" policy. And the gold price might be regarded as a special type of "Commodity

Price Index".

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1.2.8 LIMITATIONS OF MONETARY POLICY

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The effectiveness of monetary policy, or any policy for that matter, depends on a number of

factors

1. The time lag: The first and the most important limitation in the effective working of

monetary policy is the time lag, i.e., time taken in chalking out the policy action, its

implementation and working time. The time lag is divided in two parts:

Inside lag or preparatory lag

Outside lag or responses lag

2. Problem in forecasting: Theformulate an appropriate monetary policy one requires to do areliable assessment the magnitude of the problem i.e. recession or inflation , as it helps in

determining the appropriate policy measures. What is more important is to forecast the

effects of monetary actions. Despite advancement in forecasting techniques, reliable

forecasting of macroeconomic variables remains an enigma. In this regard, it is interesting to

quote Stephen Mcnees

How can forecasters go wrong? They may not predict disturbances; they may misread the

current state of the economy and hence base their forecasts on a wrong picture of the present

situation; and they may misjudge the timings and the vigor of the governments monetary

and fiscal responses to booms or recessions. The fact is that forecasting has not reached

perfection, particularly at major turning points in the economy.

3. Non-banking financial intermediaries: The structural change in the financial market has

also reached the scope of effectiveness of monetary policy. The proliferation of non-banking

financial intermediaries including industrial finance corporations, industrial development

banks, mutual saving funds, insurance companies, chits and funds etc. has reduced the share

of the commercial banks in the total credit. Although financial intermediaries cannot create

credit through the process of credit multiplier, their huge share in the financial operations

reduces the effectiveness of monetary policy.

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4. Underdevelopment of money and capital markets: In addition, the effectiveness of

monetary policy in less developed countries is reduced considerably because of the

underdeveloped character of their money and capital markets. Their money and capital

markets are fragmented while effective working of monetary policy requires that money

market and the sub-markets of the capital market work interdependently. For this reason, the

effects of change in money supply and particularly in the interest rate remain confined to the

banking sector.

5. Limitation of discount rate policy:-The discount rate policy has lost its effectiveness as a

variation in the discount rate works effectively only when commercial banks have built their

financial resources. They are not dependent on the central bank for their financial support.Therefore, their discount rate is not affected when the central bank raises the bank rate.

6. Limitation of CRR as an Instrument of Monetary Control:- This method alone is

effective when others measures fail. It proves handier where open market operation and bank

rate policy prove less effective. However, its effectiveness in terms of impact on capital

market depends upon the share of the banking credit in the credit market. It is more effective

in the advanced countries with advanced banking system accounting for a major share in the

capital market.

1.2.9 HIGHLIGHTS OF PAST 3 YEARS RBI'S MONETARY POLICY

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POLICY 2008-09 2009-10 2010-11

Bank Rate 6.00% 6.00% 6.00%

Repo Rate 7.75% 4.75% 5.75%

Reverse Repo 6.00% 3.25% 4.50%

CRR 7.75% 5.00% 6.00%


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1.2.10 TOOLS USED FOR PORTFOLIO EVALUATION

SHARPES PERFORMANCE INDEX

A ratio developed by Nobel laureate William F. Sharpe to measure risk-adjusted

performance. The Sharpe ratio is calculated by subtracting the risk-free rate - such as that

of the 10-year U.S. Treasury bond - from the rate of return for a portfolio and dividing the

result by the standard deviation of the portfolio returns. The Sharpe ratio formula is:

The Sharpe ratio tells us whether a portfolio's returns are due to smart investment decisions

or a result of excess risk. This measurement is very useful because although one portfolio

or fund can reap higher returns than its peers, it is only a good investment if those higher

returns do not come with too much additional risk. The greater a portfolio's Sharpe ratio,

the better its risk-adjusted performance has been. A negative Sharpe ratio indicates that a

risk-less asset would perform better than the security being analyzed.

A variation of the Sharpe ratio is the Sortino ratio, which removes the effects of upward

price movements on standard deviation to measure only return against downward price

volatility.

TREYNORS PERFORMANCE INDEX

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A ratio developed by Jack Treynor that measures returns earned in excess of that which

could have been earned on a riskless investment per each unit of market risk.

The Treynor ratio is calculated as:

(Average Return of the Portfolio - Average Return of the Risk-Free Rate) / Beta of

the Portfolio

In other words, the Treynor ratio is a risk-adjusted measure of return based on systematic

risk. It is similar to the Sharpe ratio, with the difference being that the Treynor ratio uses

beta as the measurement of volatility.Also known as the "reward-to-volatility ratio".

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1.3 Company Profile

1.3.1 Hedge Equities

Hedge Equities is one of the leading Financial Services Company in India. It offers equity, futures,

options, depository services, commodity broking and mutual funds distribution to its customers.

Hedge Equities is a coming together of over 25 years of cutting edge experience of its founders in

various industries backed with a strong expertise in global financial markets. The board comprises

of veterans from six power houses in their respective fields: Fedex Securities, Baby Marine

Exports, Thakker Developers, Smart Financial, S.M.Hegde (CFO, Videocon Industries), and

Padmashree Mohanlal.

1.3.2 Hedge Portfolio Management Services

With a view to capitalizing on its experience in the share market, the Hedge Equities has launched

portfolio management services in the year 2010. They believe that with the launch of PMS, the

company can set a target of 400 more clients. The number of outlets will be increased to 100 from

the present 75 with coverage in South Indian cities and in Other States in the North by the end of

2011.

1.3.3 Hedge School of Applied Economics

In its efforts to promote financial education in the country, Hedge Equities has launched the School

of Applied Economics in the year 2010 with the objective of creating professionals for the

financial markets. The focus is to groom students in share trading, banking, insurance or wealth

management, by implementing innovative solutions.

1.3.4 Hedge Equities Wealth Management Services

As a part of national wise service development, Hedge Equities launched its Wealth Management

Service (WMS) during December 2010. The services include portfolio management services,

portfolio advisory services and Mutual Fund Advisory services. This service offering will have

tailor-made investment solutions for each client-based on their risk appetite.

The main objective of this WMS is to make a customer into a successful investor. In order to

understand the customers behavior and their risk bearing capacity, Hedge Equities appointed

certain wealth management service teams. They will collect details regarding customers through

questionnaires. After studying consumers expectations and goals they will prepare special

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1.3.8 Corporate Social Responsibility

Being a Responsible Corporate Citizen, Hedge Equities has initiated a Non Profit

movement Hedge Yuva which focuses on educating the masses about Stock Market. Themovement has also formulated various scholarship programs for young and dynamic youth.

1.3.9 PROMISE

To our Customers: We exist to serve and meet your needs. Our focus is to create an

ethical and sustainable financial services platform that places your unique needs over and

above everything else.

To our Employees: We will provide our employees with a meaningful and rewarding

career with emphasis on self development and career progression.

To our Shareholders: We will spare no efforts to achieve a consistent and competitive

growth in earnings and profitability.

1.3.10 The HEDGE Advantage

At Hedge Equities, the needs of our Customers stand before everything else.

SEBI Registered Portfolio Manager with a dedicated Wealth Management Services

desk that aims to provide objective guidance tailored to meet each customers individual

needs.

Strong Research Team backed with best of breed data mining and analysis.

Industry leading technology solutions that make portfolio administration simpler and

cost effective.

A Global Outlook blended with a Local Flavor and backed with a growing network of

over 120 service outlets, 450 qualified employees, and over 200 support associates.

The Trust and Goodwill of over 20,000 satisfied customers.

Member of BSE, NSE, MCX, MCXSX,NMC, and Depository Participant in CDSL

Rated as the top brand by the investor community of Asianet channel

Growing overseas presence with operations in Middle East and an expanding presence

in the European region and North America.

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Upcoming Projects

Drawing inspiration from our qualitative performance of last two years, Hedge Equities has

outlined ambitious and profitable plans for the future. We are all set to open 100 new Hi-Tech

service outlets across India and register a pan India presence. The 2010-2011 financial year will

also witness our entry into other global markets with proposed marketing offices in New York,

London and Singapore.

Hedge Credits & Finance Limited, a 100 Crore NBFC will be functional in the early half of

2011. The new financial services firm would provide Margin Funding as well as securitized loans

(e.g., gold loans) to our customer base.

1.3.11 Services Offered

Online Trading

Depository Services

Derivative Trading

Knowledge Centre

Equity Research

Portfolio Management Services

Commodity Trading

Mutual Funds, Bonds, etc

Currency Trading

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1.4 Industry Profile1.4.1 Financial Market

We know that, money always flows from surplus sector to deficit sector. That means personshaving excess of money lend it to those who need money to fulfill their requirement.

Similarly, in business sectors the surplus money flows from the investors or lenders to the

businessmen for the purpose of production or sale of goods and services. There are two different

groups, one who invest money or lend money and the others, who borrow or use the money.

The financial markets act as a link between these two different groups. It facilitates this function by

acting as an intermediary between the borrowers and lenders of money. So, financial market may

be defined as a transmission mechanism between investors (or lenders) and the borrowers (or

users) through which transfer of funds is facilitated. It consists of individual investors, financial

institutions and other intermediaries who are linked by a formal trading rules and communication

network for trading the various financial assets and credit instruments.

1.4.2 Main Functions of Financial Market

It provides facilities for interaction between the investors and the borrowers.

It provides pricing information resulting from the interaction between buyers and sellers in

the market when they trade the financial assets.

It provides security to dealings in financial assets.

It ensures liquidity by providing a mechanism for an investor to sell the financial assets.

It ensures low cost of transactions and information.

1.4.3 Types of Financial Market

A financial market consists of two major segments:

Money Market; and

Capital Market.

While the money market deals in short-term credit, the capital market handles the medium term

and long-term credit.

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The Primary Market consists of arrangements, which facilitate the procurement of long-term funds

by companies by making fresh issue of shares and debentures. Companies make fresh issue of

shares and/or debentures at their formation stage and, if necessary, subsequently for the expansion

of business. It is usually done through private placement to friends, relatives and financial

institutions or by making public issue.

1.4.7 Secondary Market

The secondary market known as stock market or stock exchange plays an equally important role in

mobilizing long-term funds by providing the necessary liquidity to holdings in shares and

debentures. It provides a place where these securities can be encashed without any difficulty and

delay. It is an organized market where shares and debentures are traded regularly with high degree

of transparency and security. In fact, an active secondary market facilitates the growth of primary

market as the investors in the primary market are assured of a continuous market for liquidity of

their holdings. The major players in the primary market are merchant bankers, mutual funds,

financial institutions, and the individual investors; and in the secondary market you have all these

and the stockbrokers who are members of the stock exchange who facilitate the trading.

1.4.8 Stock Exchange

As indicated above, stock exchange is the term commonly used for a secondary market, which

provide a place where different types of existing securities such as shares, debentures and bonds,

government securities can be bought and sold on a regular basis. A stock exchange is generally

organized as an association, a society or a company with a limited number of members. It is open

only to these members who act as brokers for the buyers and sellers. The Securities Contract

(Regulation) Act has defined stock exchange as an association, organization or body of

individuals, whether incorporated or not, established for the purpose of assisting, regulating and

controlling business of buying, selling and dealing in securities.

The main characteristics of a stock exchange are:

1. It is an organized market.

2. It provides a place where existing and approved securities can be bought and sold easily.

3. In a stock exchange, transactions take place between its members or their authorized

agents.

4. All transactions are regulated by rules and by laws of the concerned stock exchange.

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5. It makes complete information available to public in regard to prices and volume of

transactions taking place every day.

1.4.9 Stock Exchange in India

The first organized stock exchange in India was started in Mumbai known as Bombay Stock

Exchange (BSE). It was followed by Ahmadabad Stock Exchange in 1894 and Kolkata Stock

Exchange in 1908. The number of stock exchanges in India went up to 7 by 1939 and it increased

to 21 by 1945 on account of heavy speculation activity during Second World War. A number of

unorganized stock exchanges also functioned in the country without any formal set-up and were

known as kerb market. The Security Contracts (Regulation) Act was passed in 1956 for recognition

and regulation of Stock Exchanges in India. At present we have 23 stock exchanges in the country.

Of these, the most prominent stock exchange that came up is National Stock Exchange (NSE). It is

also based in Mumbai and was promoted by the leading financial institutions in India. It was

incorporated in 1992 and commenced operations in 1994. This stock exchange has a corporate

structure, fully automated screen-based trading and nation-wide coverage.

Another stock exchange that needs special mention is Over The Counter Exchange of India

(OTCEI). It was also promoted by the financial institutions like UTI, ICICI, IDBI, IFCI, LIC etc.

in September 1992 specially to cater to small and medium sized companies with equity capital of

more than Rs.30 lakhs and less than Rs.25 Crore. It helps entrepreneurs in raising finances for their

new projects in a cost effective manner. It provides for nationwide online ring less trading with 20

plus representative offices in all major cities of the country. On this stock exchange, securities of

those companies can be traded which are exclusively listed on OTCEI only. In addition, certain

shares and debentures listed with other stock exchanges in India and the units of UTI and other

mutual funds are also allowed to be traded on OTCEI as permitted securities. It has been noticed

that, of late, the turnover at this stock exchange has considerably reduced and steps have been afootto revitalize it. In fact, as of now, BSE and NSE are the two Stock Exchanges, which enjoy nation-

wide coverage and handle most of the business in securities in the country.

1.4.10 Regulations of Stock Exchange

Stock exchanges suffer from certain limitations and require strict control over their activities in

order to ensure safety in dealings thereon. Hence, as early as 1956, the Securities Contracts

(Regulation) Act was passed which provided for recognition of stock exchanges by the central

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Government. It has also the provision of framing of proper bylaws by every stock exchange for

regulation and control of their functioning subject to the approval by the Government. All stock

exchanges are required submit information relating to its affairs as required by the Government

from time to time. The Government was given wide powers relating to listing of securities, make

or amend bylaws, withdraw recognition to, or supersede the governing bodies of stock exchange in

extraordinary/abnormal situations. Under the Act, the Government promulgated the Securities

Regulations (Rules) 1957, which provided inter alia for the procedures to be followed for

recognition of the stock exchanges, submission of periodical returns and annual returns by

recognized stock exchanges, inquiry into the affairs of recognized stock exchanges and their

members, and requirements for listing of securities.

1.4.11 Role of SEBI

As part of economic reforms programme started in June 1991, the Government of India initiated

several capital market reforms, which included the abolition of the office of the Controller of

Capital Issues (CCI) and granting statutory recognition to Securities Exchange Board of India

(SEBI) in 1992 for:

Protecting the interest of investors in securities;

Promoting the development of securities market;

Regulating the securities market; and

Matters connected there with or incidental thereto.

SEBI has been vested with necessary powers concerning various aspects of capital market such as:

Regulating the business in stock exchanges and any other securities market;

Registering and regulating the working of various intermediaries and mutual funds;

Promoting and regulating self regulatory organizations;

Promoting investors education and training of intermediaries;

Prohibiting insider trading and unfair trade practices;

Regulating substantial acquisition of shares and takeover of companies;

Calling for information, undertaking inspection, conducting inquiries and audit of stock

exchanges, and intermediaries and self regulation organizations in the stock market; and

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Performing such functions and exercising such powers under the provisions of the Capital

Issues (Control) Act, 1947 and the Securities Contracts (Regulation) Act, 1956 as may be

delegated to it by the Central Government.

1.4.12 BOMBAY STOCKEXCHANGE (BSE)

Bombay Stock Exchange is the oldest stock exchange in Asia What is now popularly known as the

BSE was established as "The Native Share & Stock Brokers' Association" in 1875. Over the past

135 years, BSE has facilitated the growth of the Indian corporate sector by providing it with an

efficient capital raising platform.

Today, BSE is the world's number 1 exchange in the world in terms of the number of listed

companies (over 4900). It is the world's 5th most active in terms of number of transactions handled

through its electronic trading system. And it is in the top ten of global exchanges in terms of the

market capitalization of its listed companies (as of December 31, 2009). The companies listed on

BSE command a total market capitalization of USD Trillion 1.28 as of Feb, 2010.

BSE is the first exchange in India and the second in the world to obtain an ISO 9001:2000

certifications. It is also the first Exchange in the country and second in the world to receive

Information Security Management System Standard BS 7799-2-2002 certification for its BSE On-

Line trading System (BOLT). Presently, we are ISO 27001:2005 certified, which is a ISO version

of BS 7799 for Information Security.

The BSE Index, SENSEX, is India's first and most popular Stock Market benchmark index.

Exchange traded funds (ETF) on SENSEX, are listed on BSE and in Hong Kong. Futures and

options on the index are also traded at BSE.

BSE continues to innovate:

Became the first national exchange to launch its website in Gujarati and Hindi and now

Marathi

Purchased of Marketplace Technologies in 2009 to enhance the in-house technology

development capabilities of the BSE and allow faster time-to-market for new products

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Launched a reporting platform for corporate bonds christened the ICDM or Indian

Corporate Debt Market

Acquired a 15% stake in United Stock Exchange (USE) to drive the development and

growth of the currency and interest rate derivatives markets

Launched 'BSE StAR MF' Mutual fund trading platform, which enables exchange members

to use its existing infrastructure for transaction in MF schemes.

BSE now offers AMFI Certification for Mutual Fund Advisors through BSE Training

Institute (BTI)

Co-location facilities for Algorithmic trading

BSE also successfully launched the BSE IPO index and PSU website

BSE revamped its website with wide range of new features like 'Live streaming quotes for

SENSEX companies', 'Advanced Stock Reach', 'SENSEX View', 'Market Galaxy', and

'Members'

Launched 'BSE SENSEX MOBILE STREAMER'

With its tradition of serving the community, BSE has been undertaking Corporate Social

Responsibility (CSR) initiatives with a focus on Education, Health and Environment. BSE has

been awarded by the World Council of Corporate Governance the Golden Peacock Global CSRAward for its initiatives in Corporate Social Responsibility (CSR).

Other Awards:

The Annual Reports and Accounts of BSE for the year ended March 31, 2006 and March

31, 2007 have been awarded the ICAI awards for excellence in financial reporting.

The Human Resource Management at BSE has won the Asia - Pacific HRM awards for its

efforts in employer branding through talent management at work, health management at

work and excellence in HR through technology

Drawing from its rich past and its equally robust performance in the recent times, BSE will

continue to remain an icon in the Indian capital market.

1.4.13 Vision

"Emerge as the premier Indian stock exchange by establishing global benchmarks"

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1.4.14 NATIONAL STOCKEXCHANGE (NSE)

The National Stock Exchange of India Limited has genesis in the report of the High Powered Study

Group on Establishment of New Stock Exchanges. It recommended promotion of a National StockExchange by financial institutions (FIs) to provide access to investors from all across the country

on an equal footing. Based on the recommendations, NSE was promoted by leading Financial

Institutions at the behest of the Government of India and was incorporated in November 1992 as a

tax-paying company unlike other stock exchanges in the country.

The National Stock Exchange (NSE) operates a nation-wide, electronic market, offering trading in

Capital Market, Derivatives Market and Currency Derivatives segments including equities, equities

based derivatives, Currency futures and options, equity based ETFs, Gold ETF and Retail

Government Securities. Today NSE network stretches to more than 1,500 locations in the country

and supports more than 2, 30,000 terminals.

With more than 10 asset classes in offering, NSE has taken many initiatives to strengthen the

securities industry and provides several new products like Mini Nifty, Long Dated Options and

Mutual Fund Service System. Responding to market needs, NSE has introduced services like

DMA, FIX capabilities, co-location facility and mobile trading to cater to the evolving need of the

market and various categories of market participants.

NSE has made its global presence felt with cross-listing arrangements, including license

agreements covering benchmark indexes for U.S. and Indian equities with CME Group and has

also signed a Memorandum of Understanding (MOU) with Singapore Exchange (SGX) to

cooperate in the development of a market for India-linked products and services to be listed on

SGX. The two exchanges also will look into a bilateral securities trading link to enable investors in

one country to seamlessly trade on the other countrys exchange.

NSE is committed to operate a market ecosystem which is transparent and at the same time offers

high levels of safety, integrity and corporate governance, providing ever growing trading &

investment opportunities for investors.

1.4.15 Mission

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NSE's mission is setting the agenda for change in the securities markets in India. The NSE was set-

up with the main objectives of:

Establishing a nation-wide trading facility for equities, debt instruments and hybrids, Ensuring equal access to investors all over the country through an appropriate

communication network,

Providing a fair, efficient and transparent securities market to investors using electronic

trading systems,

Enabling shorter settlement cycles and book entry settlements systems, and

Meeting the current international standards of securities markets.

The standards set by NSE in terms of market practices and technologies have become industry

benchmarks and are being emulated by other market participants. NSE is more than a mere market

facilitator. It's that force which is guiding the industry towards new horizons and greater

opportunities.

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1.5 Need for the study

Monetary policy, at its best can deliver is low and stable inflation, and thereby reduces the

volatility of the business cycle. When inflationary pressures build up, it is monetary policy only

which raises the short-term interest rate (the policy rate), which raises real rates across the

economy and squeezes consumption and investment. So there is a direct relationship between

monetary policy and stock performances.

So it is very important to study and understand the impacts of monetary policy in the performance

of financial market

1.6 Objectives of the Study

1.6.1 Primary Objective:

o To study the impact of monetary policy in the performance of the financial market

1.6.2 Secondary Objectives:

o To assess the level of share performance of selected companies through Sharpes,

and Treynors ratios

o To compare the impact of Bank Rate on the performance of selected companies

shareso To compare the impact ofRepo Rate on the performance of selected companies

shares

o To compare the impact of Reverse Repo Rate on the performance of selected

companies shares

o To compare the impact of Cash Reserve Ratio on the performance of selected

companies shares

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Chapter-2

REVIEW OF LITERATURE

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REVIEW OF LITERATURE

For any research endeavor, a review of literature is paramount important. Such an effort will

highlight the past attempts made and provide a clear comprehension of similar studies.

Reviewing of all literature on the area of research is a preliminary step before attending to plan the

study. It is essential to review all the relevant materials connected with the problem chosen. It is

necessary to show how the problem under the study relates to the previous research studies. It is

also equally important to show how this work is differed from existing literature.

The review of previous literature is an existing task calling for deep insight and clear prospective

of the entire field. No experienced researcher can think of undertaking study without acquainting

himself with the contribution of previous investigators.

1. Mr.Ankur Sharma a student of Institute of Integrated Learning in Management, in his

Research study about economic environment and policy, he critically analyzed the

monetary policy and measured the effectiveness of monetary policy in India. He concluded

that the specter of inflation has led the RBI to repeatedly raise interest rates and increase

banks reserve requirements in classic monetary policy responses and also stated that RBI

also faces the challenge of simultaneously managing the exchange rate in the face of porous

controls on international capital flows

2. Ms.Aakriti Agarwal, student of Jaipuria Institute of Management, Lucknow, in her report

on Indian brokerage industry, stated that RBIs monetary policy have a greater impact in

stock performances. She concluded that expected changes in RBIs policy create positive

changes in the stock performances.

3. Mr.Yoon Je Cho, Professor of Graduate School of International Studies, Sogang, Korea

In his article about Indian Capital Market, Recent Developments and policy issues he

explained about influence of RBIs policies in performance of stocks and in regulating

overall money supply in Indian Economy. He further stated that RBIs role in the capital

market decisions regarding foreign exchange control liquidity support to market

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participants and debt management primary dealers. He also stated that securities

transactions that involve a foreign exchange transaction need the permission of RBI.

4. Mr.Payel Jain, Vinod Kothari and Company, in their article Indian financial market; Aquick Introduction they speak out about the role of RBIs policies in the overall

performance of financial market

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Chapter-3

RESEARCH METHODOLOGY

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Research Methodology is a way to systematically solve the research problem..The source

of data for the study is collected from the Annual Report, NSE Indices and Historical documents.

The nature of data collected is secondary data .The period of the study covered 3 years from 2008-

2009 to 2010-2011. Techniques used for the analysis are Sharpe Ratio and Treynor Ratio.

3.1 Research Design

The study carried out here is an Analytical Research

3.2 Data Collection

The nature of data collected is secondary and it is mainly from Annual Reports of the

companies, NSE Indices and Historical documents from NSE website

3.3 Sampling

Samples are selected purely based on Market Capitalization of the companies listed in NSE

3.4 Market Capitalization

Market cap or market capitalization is simply the worth of a company in terms of its shares.

3.5 Data Analysis

Financial tools used for data analysis are:

Sharpes Performance Index

Treynors Performance Index

3.6 Period of Study

Period of this study is 3 years, ranging from 2008 to 2009

3.7 Limitations of the study

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This study is conducted on the basis of performance of 10 companies from 5 sectors, which

may not represent a true picture of all the listed companies

This analysis is conducted for 3 years performance only

This study is purely based in historical data, which may not exactly represent the future

performance

The limitations of the tools used, blindly apply to this study also

All the limitations of secondary data analysis also hold for this project

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Chapter-4

DATA ANALYSIS

AND

INTERPRETATION

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SHARPE PERFORMANCE INDEX

Sharpes performance index gives a single value to be used for the performance ranking of variousfunds or portfolios. Sharpe index measures the risk premium of the portfolio relative to the total

amount of risk in the portfolio. The risk premium is the difference between the portfolios average

rate of return and the riskless rate of return. The standard deviation of the portfolio indicates the

risk.

S= (Average Return-Risk Free Return)/Standard Deviation

TREYNORS PERFORMANCE INDEX

Treynors performance index is based on the concept of Characteristic line. The relationship

between a given market return and the funds return is given by the characteristic line. The funds

performance is measured in relation to the market performance. The ideal funds return rises at a

faster rate than the general market performance when the market is moving upwards and its rate of

return declines slowly than the market return, in the decline. The ideal fund may place its fund in

the treasury bills or short sell the stock during the decline and earn positive return.

T= (Average Return of the Portfolio - Average Return of the Risk-Free Rate) / Beta of the

Portfolio

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TABLE 1

TABLE SHOWING STANDARD DEVIATION FOR 3 YEARS

DIAGRAM - 1

DIAGRAM SHOWING STANDARD DEVIATION FOR 3 YEARS

Page | 39

SL. No Company Name

Standard Deviation

2008-2009 2009-2010 2010-2011

1 ACC 94.93 87.58 93.99

2 Ambuja Cements 17.15 9.72 15.15

3 HDFC Bank 215.49 218.2 196.13

4 SBI 222.34 319.13 403.29

5 TCS 104.83 176.38 171.73

6 Infosys 271.75 402.61 235.23

7 Tata Motors 77.71 211.39 157.81

8 Hero Honda 199.47 188.46 209.87

9Dr.ReddysLaboratories 103.08 245.83 172.87

10 Cipla 17.01 17.01 18.69


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TABLE - 2

TABLE SHOWING BETA VALUE FOR 3 YEARS

DIAGRAM 2

DIAGRAM SHOWING BETA VALUE FOR 3 YEARS

Page | 41

SL. No Company NameBeta of the Portfolio

2008-2009 2009-2010 2010-2011

1 ACC 0.79 0.81 0.83

2 Ambuja Cements 0.84 0.76 1.07

3 HDFC Bank 0.83 0.78 1.46

4 SBI 1.16 1.16 1.88

5 TCS 0.82 0.83 0.36

6 Infosys 0.67 0.68 0.41

7 Tata Motors 0.54 0.78 0.31

8 Hero Honda 1.26 1.23 1.12

9Dr.ReddysLaboratories 0.46 0.53 0.21

10 Cipla 0.45 0.57 1.35


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TABLE - 3

DIAGRAM - 3

Diagram Showing Sharpes Performance Index in 2008-2009

Page | 43

Company Name

Average

Return (in %)

Risk free

Return (in %)

Standard

Deviation Sharpe ratio

ACC 100 8.1606 94.93 0.00972

Ambuja Cements 55 8.1606 17.15 0.02731

HDFC Bank 85 8.1606 215.49 0.00357

SBI 215 8.1606 222.34 0.009303

TCS 366.67 8.1606 104.83 0.034199

Infosys 372.5 8.1606 271.75 0.13407

Hero Honda 950 8.1606 77.71 0.1212

Tata Motors 150 8.1606 199.47 0.00711

Dr.Reddys Lab 75 8.1606 103.08 0.006484

Cipla 100 8.1606 17.01 0.053991

Table Showing Sharpes Performance Index for 2008-2009


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TABLE - 4


DIAGRAM 4


Page | 44

CompanyName

AverageReturn (in %)

Risk freeReturn (in %)

StandardDeviation Sharpe ratio

ACC 115 8.1606 87.58 0.0122

AmbujaCements 60 8.1606 9.72 0.5333

HDFC Bank 100 8.1606 218.2 0.00421

SBI 195 8.1606 319.13 0.005855

TCS 275 8.1606 176.38 0.01513

Infosys 235 8.1606 402.61 0.005634

Hero Honda 2500 8.1606 211.39 0.11788

Tata Motors 60 8.1606 188.46 0.002751Dr.Reddys Lab 125 8.1606 245.83 0.004753

Cipla 100 8.1606 17.01 0.053991


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TABLE 5


Company

Name

Average

Return (in %)

Risk free

Return (in %)

Standard

Deviation Sharpe ratio

ACC 152.5 8.1606 93.99 0.01536

AmbujaCements 65 8.1606 15.15 0.3752

HDFC Bank 120 8.1606 196.13 0.005702

SBI 200 8.1606 403.29 0.004757

TCS 500 8.1606 171.73 0.02864

Infosys 550 8.1606 235.23 0.023034

Hero Honda 1500 8.1606 157.81 0.094534

Tata Motors 150 8.1606 209.87 0.606758

Dr.Reddys Lab 225 8.1606 172.87 0.012543

Cipla 75 8.1606 18.69 0.035762

DIAGRAM - 5


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TABLE 6

Table Showing Treynors Performance Index for 2008-2009

Company

Name

Average

Return (in %)

Risk free

Return (in %)

Beta of the

Portfolio

Treynor

Ratio

ACC 100 8.1606 0.79 1.163

AmbujaCements 55 8.1606 0.84 0.558

HDFC Bank 85 8.1606 0.83 0.926

SBI 215 8.1606 1.16 1.783

TCS 366.67 8.1606 0.82 4.372

Infosys 372.5 8.1606 0.67 5.438

Hero Honda 950 8.1606 0.54 17.44Tata Motors 150 8.1606 1.26 1.126

Dr.Reddys Lab 75 8.1606 0.46 1.453

Cipla 100 8.1606 0.45 2.041

DIAGRAM - 6

Diagram Showing Treynors Performance Index for 2008-2009

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TABLE 7


DIAGRAM - 7


Page | 47

Company

Name

Average

Return (in %)

Risk free

Return (in %)

Beta of the

Portfolio

Treynor

Ratio

ACC 115 8.1606 0.81 1.319

AmbujaCements 60 8.1606 0.76 0.682

HDFC Bank 100 8.1606 0.78 1.177

SBI 195 8.1606 1.16 1.611

TCS 275 8.1606 0.83 3.215

Infosys 235 8.1606 0.68 3.336

Hero Honda 2500 8.1606 0.78 31.947

Tata Motors 60 8.1606 1.23 0.422

Dr.Reddys Lab 125 8.1606 0.53 2.205Cipla 100 8.1606 0.57 1.611


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TABLE 8


Company

Name

Average

Return (in %)

Risk free

Return (in %)

Beta of the

Portfolio

Treynor

Ratio

ACC 152.5 8.1606 0.83 1.739

AmbujaCements 65 8.1606 1.07 0.531

HDFC Bank 120 8.1606 1.46 0.766

SBI 200 8.1606 1.88 1.021

TCS 500 8.1606 0.36 13.662Infosys 550 8.1606 0.41 13.216

Hero Honda 1500 8.1606 0.31 48.124

Tata Motors 150 8.1606 1.12 1.266

Dr.Reddys Lab 225 8.1606 0.21 10.326

Cipla 75 8.1606 1.35 0.495

DIAGRAM - 8


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TABLE - 9

Highlights of past three years Monetary Policy

DIAGRAM - 9

Diagram Showing Highlights of Monetary Policy

0

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08

0.09

2008-2009 2009-2010 2010-2011

Bank Rate

Repo Rate

Reverse Repo Rate

Cash Reserve Ratio

Page | 50

POLICY 2008-09 2009-10 2010-11

Bank Rate 6.00% 6.00% 6.00%

Repo Rate 7.75% 4.75% 5.75%

Reverse Repo 6.00% 3.25% 4.50%

CRR

7.75% 5.00% 6.00%


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TABLE - 10

Consolidated Analysis of Sharpe's and Treynor's Performance Index of Selected Companies

Page | 51

Company

Name

2008-2009 2009-2010 2010-2011

Sharpe ratio

Treynor

Ratio

Sharpe

ratio

Treynor

Ratio

Sharpe

ratio

Treynor

Ratio

ACC 0.00972 1.163 0.0122 1.319 0.01536 1.739

AmbujaCements 0.02731 0.558 0.5333 0.682 0.3752 0.531

HDFC Bank 0.00357 0.926 0.00421 1.177 0.005702 0.766

SBI 0.009303 1.783 0.005855 1.611 0.004757 1.021

TCS 0.034199 4.372 0.01513 3.215 0.02864 13.662

Infosys 0.13407 5.438 0.005634 3.336 0.023034 13.216

Hero Honda 0.1212 17.44 0.11788 31.947 0.094534 48.124

Tata Motors 0.00711 1.126 0.002751 0.422 0.606758 1.266

Dr.Reddys Lab 0.006484 1.453 0.004753 2.205 0.012543 10.326

Cipla 0.053991 2.041 0.053991 1.611 0.035762 0.495


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DIAGRAM 10

Diagram Showing Consolidated Analysis of Sharpe's and Treynor's Performance Index of

Selected Companies

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Interpretations

There is no change in Bank Rate for the past 3 years, so it does not have any influence in the

Performance of selected companys shares in the Financial Market

ACC: In 2008-09, the Sharpe Ratio is 0.00972, Treynor Ratio is 1.163 and the various

Policy Rates are 7.75%, 6.00%, and 7.75% Repo Rate, Reverse Repo Rate and Cash

Reserve Ratio respectively. In 2009-10, Sharpe Ratio and Treynor Ratio have increased.

Sharpe Ratio increased to 0.0122 and Treynor Ratio increased to 1.319, it may be due to

the decrease in various policies, i.e. Repo rate decreased to 4.75%, Reverse Repo to 3.25%

and CRR to 5%. It indicates high risk and high return situation. In 2010-11, the various

Policy Rates are increased but Sharpe Ratio decreased to 0.01536, it means risk in

investment is reduced and Treynor Ratio is increased to 1.739, it means the chance of

return is high. It indicates a low risk and high return situation.

Ambuja Cements: In 2008-09, the Sharpe Ratio and Treynor Ratio is 0.02731 and 0.558

respectively. It is moderately low risk and low return situation. In 2009-10, the Sharpe

Ratio is increased to 0.5333 and Treynor Ratio is slightly increased to 0.682, it may be

because of the change in Monetary Policy. So the risk and return of investment isincreased. In 2010-11, Sharpe Ratio is decreased to 0.3752 and Treynor Ratio is decreased

to 0.531. It indicates the slight changes in the risk and return.

HDFC Bank: In 2008-09, Sharpe Ratio and Treynor Ratio is 0.00357 and 0.926, which

indicates low risk and high return situation. In 2009-10, the Sharpe Ratio is slightly

increased to 0.00421 and Treynor Ratio is increased to 1.177, it shows that, the return on

investment is high at a moderately less risk and in 2010-11; the Sharpe Ratio has again

increased slightly to 0.005702 and Treynor ratio has decreased to 0.766. Here the risk andreturn is positive.

State Bank of India: In 2008-09, Sharpe and Treynor Ratios are 0.009303 and 1.783

respectively; its a low risk and high return situation. In 2009-10, Sharpe Ratio decreased to

0.005855, it means the risk on investment is reduced and Treynor Ratio decreased to 1.611,

it shows that the return from investment has reduced slightly. In 2010-11, the Sharpe Ratio

is reduced to 0.004757, it means the level of risk is reduced, and Treynor Ratio is reduced

to 1.021, it means the chance of getting high return is reduced

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Tata Consultancy Services: In 2008-09, the Sharpe Ratio is 0.034199 and Treynor Ratio

is 4.372. It indicates a High return and moderately low risk situation. In 2009-10, Sharpe

Ratio is reduced to 0.01513, i.e., risk on investment is reduced slightly and Treynor ratio is

reduced to 3.215, it means Chance of return also reduced compared to 2008-09. In 2010-11,

Sharpe and Treynor ratios are 0.02864 and 13.662 respectively. That means there is a high

increase in return; it may be because of the changes in monetary policy.

Infosys: In 2008-09, Sharpe and Treynor Ratios are 0.13407 and 5.438 respectively. It is

moderately low risk and high return situation. In 2009-10, both these ratios are reduced to

0.005634 and 3.336 respectively, i.e. risk and return level is slightly decreased. In 2010-11,

Sharpe Ratio slightly increased to 0.023034 and Treynor Ratio showed a sudden increase to

13.216. It may be due to the changes in the monetary policy.

Hero Honda: In 2008-09, Sharpe Ratio is 0.1212 and Treynor Ratio is 17.44. It indicates

that a low risk and high return situation. In 2009-10, Sharpe ratio slightly varied to 0.11788

and there is a huge change in Treynor Ratio to 31.947. This change may be due to the

change in monetary policy. In 2010-11, Sharpe Ratio is decreased to 0.094534, i.e. the risk

situation is slightly reduced and Treynor Ratio is increased to 48.124.

Tata Motors: In 2008-09, Sharpe Ratio is 0.00711 and Treynor Ratio is 1.126. Here the

risk is comparatively low and moderately high return. In 2009-10, the Sharpe Ratio isslightly decreased to 0.002751 and Treynor Ratio is decreased to 0.422. It means the

chance of risk and return is slightly reduced. In 2010-11, the Sharpe Ratio increased to

0.606758 and Treynor Ratio is increased to 1.266. It is comparatively risky and profitable

situation.

Dr.Reddys Laboratories: In 2008-09, Sharpe Ratio is 0.006484 and Treynor Ratio is

1.453. It is reasonably good situation for investment. In 2009-10, Sharpe Ratio slightly

varied to 0.004753 and Treynor Ratio is slightly increased to 2.205. And in 2010-11,Sharpe Ratio is 0.012543 and Treynor Ratio is 10.326. It indicates moderately low risk and

high return situation

Cipla: In 2008-09, Sharpe and Treynor Ratios are 0.053991 and 2.041 respectively. It is

reasonably good situation for investment. In 2009-10, the Sharpe Ratio remains constant

and Treynor Ratio slightly decreased to 1.611. Here there is no change in risk level and

return level is slightly reduced. In 2010-11, Sharpe Ratio is slightly varied to 0.035762 and

Treynor Ratio reduced to 0.495. It shows a low risk and low return situation. This may be

because of the changes in monetary policy.

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Chapter-5

FINDINGS, SUGGESTIONS

ANDCONCLUSION

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5.1 FINDINGS

Bank Rate remains the same for the 3 years. So it doesnt have any influence in

the performance of the selected companys shares in the financial market.

Sharpe Ratio and Treynors Ratio for ACC Ltd is 0.00972 and 1.163 in 2008-09

and it showed an increasing trend in 2009-10 and then Sharpe Ratio decreased in

2010-11. It may be because of the changes in Repo, Reverse Repo or CRR.

In the case of Ambuja Cements, the Sharpe and Treynor Ratios are 0.02731 and

0.558 respectively, and it slightly increased in 2009-10 then it went down in 2010-

11.

The performance of Cement sector in the Financial Market have a influence of

Repo, Reverse Repo and CRR

Sharpe Ratio and Treynors Ratio for HDFC Bank are 0.00357 and 0.926 in 2008-

09 and in 2009-10 both these ratios are increased then in 2010-11, Treynor Ratio

Comes down and Sharpe Ratio goes up.

Sharpe and Treynor Ratios of SBI is 0.009303 and 1.783 in 2008-09 and in 2009-

10, both these ratios are decreased. And in 2010-11 also it shows a decreasing

trend. Overall it shows a decreasing trend.

The performance of Bank Sector is highly influenced by these policy rates.

Because Bank Sector is directly linked with RBIs decisions

In the case of Tata Consultancy Services, these policy rates dont have much

influence. Because Sharpe Ratio and Treynor Ratio shows an increasing trend in

these 3 years, and in 2010-11 the Treynor Ratio goes very higher rate, i.e., to

13.662

Sharpe Ratio and Treynor Ratio of Infosys also show moderately an increasing

trend. And in 2010-11 the Treynor Ratio is 13.216.

The performance of IT sector doesnt have a greater influence of Repo, Reverse

Repo and CRR

Sharpe Ratio and Treynor Ratio of Hero Honda is 0.1212 and 17.44 respectively.

Here the Treynor ratio is very high and it again increased to 31.947 in 2009-10 and

to 48.124 in 2010-11. So it shows an increasing trend in these 3 years. So it shows

a positive trend

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In the case of Tata Motors, the Sharpe and Treynor Ratios are 0.00711 and 1.126

in 2008-09 and then both these ratios are decreased in 2009-10 and then it

increased. It may due to the changes in RBIs policy regarding Repo Rate, Reverse

Repo Rate and Cash Reserve Ratio.

The performance of Automobile Sector have an influence of these Major RBI

Rates

Sharpe and Treynor Ratios of Dr.Reddys Laboratories, is 0.006484 and 1.453

respectively. And in 2009-10 and 2010-11, both these ratio shows a positive trend.

In the case of Cipla, Sharpe and Treynor Ratios are 0.053991 and 2.041

respectively. Then it shows a downward trend in 2009-10 and 2010-11.

The performance of Pharmaceutical Sector doesnt have much influence of Repo

Rate, Reverse Repo Rate and Cash Reserve Ratio.

The major finding is that, the expected change in Policy rates impacts the

Financial Market with a positive change in the performance of shares.

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5.2 SUGGESTIONS

Companies should be ready to face the inflation situation in the economy.

Companies should increase their dividend percentage at the time of changes in

monetary policy.

Make the investor aware about the changes in the policy rates.

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5.3 Conclusion

In the present scenario, one of the major problem faces by the Indian Economy is

Inflation. RBI always tries to control this inflation and try to stabilize the market. The

major tools used by RBI for this purpose is Bank Rate, Repo Rate, Reverse Repo Rate

and Cash Reserve Ratio. By amending these policy rates, RBI is able to keep the market

stable for some extent. So for this purpose RBI keep changing these rates and it influence

the performance of Shares in Financial market.

Expected Changes in these rates create a positive impact in the financial market. And

more than or less than the expected changes may lead to negative or positive change in

the market. It may lead to increase or decrease in the risk for the investment and return

from the investment.

impact of monetary policy in the performance of financial market

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