Significance of BSE-30 index in the current market environment

Abstract

In the times of recession the Information technology sector is one of the few sectors, which is the favourite of the bourses. The BSE-Sensex did not have any representation from the Information technology sector. Our initial objective was that we would undertake a study of all the stocks in the information technology sector. We would apply the criteria for inclusion in the BSE-Sensex. Based on the results, we shall come up with the IT stocks to be included in the BSE-Sensex. This Objective was prompted when four stocks were replaced in the Sensex, Infosys and NIIT were the new representatives of the IT sector having a share of around 7% in the BSE-Sensex. We shifted the focus to see if the BSE-Sensex represented the sentiment of the market with the limitati9n of having only 30 stocks. We conducted some statistical studies on the BSE-Sensex and other indices. We have questioned the hypothesis that whether the BSE-30 index reflected the market sentiment or not? For this purpose, the index is compared with other stock market indexes available in India. The tests performed would give us an idea on how well the index is behaving. We compared BSE-30 against BSE-100, BSE-200 and N5E-50 and found out correlation coefficient and the chi-square value, We got correlation coefficient greater than 0.96 and chi-square value within the specified limit. With this we can conclude that the BSE-30 is a good market indicator. We also questioned that whether BSE-30 can give us an idea on the state of the economy. If the economy is growing, then the index should also grow at the same rate. For this test, we compared at the companies in the BSE-30, their contribution to the economy in terms of sales and the contribution to the stock market in terms of market capitalisation in the BSE-30 by finding out the correlation coefficient. We concluded that the BSE-30 is a poor indicator of the state of the economy as the correlation is low (0.32). The primary reason being that the some companies has a large market capitalisation and very low contribution in the economy.