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 charge stock 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 by brokerage 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 of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment. Monetary theory provides 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 recession by 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 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 markets for securing macroeconomic and, in particular, financial stability while simultaneously

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 government securities 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 value of 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. Monetary Aggregates: 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: The formulate an appropriate monetary policy one requires to do a reliable 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

POLICY Bank Rate Repo Rate Reverse Repo CRR

2008-09 6.00% 7.75% 6.00% 7.75%

2009-10 6.00% 4.75% 3.25% 5.00%

2010-11 6.00% 5.75% 4.50% 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
1.3.1 Hedge Equities

Company Profile

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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investment policies from the different kind of assets like Equity, Commodity, Currency, Bond, Gold, Real estate, etc. The decisions taken by the WMS have a strong base based on the studies conducted by the Hedge Equities research team.

1.3.5 Management Team Alex K Babu - Managing Director Bhuvanendran - CEO Bobby J Arakunnel - COO Mr. Raj Krishnan - Director Mr. Mohanlal Director Mr. Krishnadas Director Mr. Pradeep Kumar C Director 1.3.6 Mission To create an ethical and sustainable financial services platform for our customers and partner them to build business, to provide employees with meaningful work, selfdevelopment and progression, and to achieve a consistent and competitive growth in profit and earnings for our shareholders and staff. 1.3.7 Vision Ever since its inception, Hedge Equities has been a household name among the masses owing our success to timely Professional financial assistance to our clients. This aptly articulates our vision of Evolving into a financial supermarket which will be a one stop shop for all financial solutions.

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

career with emphasis on self development and career progression.

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

cost effective.

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

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
1.4.1 Financial Market

Industry Profile

We know that, money always flows from surplus sector to deficit sector. That means persons having 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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1.4.4 Money Market The money market is a market for short-term funds, which deals in financial assets whose period of maturity is up to one year. It should be noted that money market does not deal in cash or money as such but simply provides a market for credit instruments such as bills of exchange, promissory notes, commercial paper, treasury bills, etc. These financial instruments are close substitute of money. These instruments help the business units, other organizations and the Government to borrow the funds to meet their short-term requirement. Money market does not imply to any specific market place. Rather it refers to the whole networks of financial institutions dealing in short-term funds, which provides an outlet to lenders and a source of supply for such funds to borrowers. Most of the money market transactions are taken place on telephone, fax or Internet. The Indian money market consists of Reserve Bank of India, Commercial banks, Co-operative banks, and other specialized financial institutions. The Reserve Bank of India is the leader of the money market in India. Some Non-Banking Financial Companies (NBFCs) and financial institutions like LIC, GIC, UTI, etc. also operate in the Indian money market. 1.4.5 Capital Market Capital Market may be defined as a market dealing in medium and long-term funds. It is an institutional arrangement for borrowing medium and long-term funds and which provides facilities for marketing and trading of securities. So it constitutes all long-term borrowings from banks and financial institutions, borrowings from foreign markets and raising of capital by issue various securities such as shares debentures, bonds, etc. The market where securities are traded known as Securities market. It consists of two different segments namely primary and secondary market. The primary market deals with new or fresh issue of securities and is, therefore, also known as new issue market; whereas the secondary market provides a place for purchase and sale of existing securities and is often termed as stock market or stock exchange 1.4.6 Primary Market

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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 afoot to revitalize it. In fact, as of now, BSE and NSE are the two Stock Exchanges, which enjoy nationwide 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 STOCK EXCHANGE (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 OnLine 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 CSR Award 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 STOCK EXCHANGE (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 Stock Exchange 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 setup 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 shares o To compare the impact of Repo 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; A quick 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 20082009 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 various funds 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 SL. No 1 2 3 4 5 6 7 8 Company Name ACC Ambuja Cements HDFC Bank SBI TCS Infosys Tata Motors Hero Honda Dr.Reddys 9 Laboratories 10 Cipla Standard Deviation 2008-2009 2009-2010 2010-2011 94.93 87.58 93.99 17.15 9.72 15.15 215.49 218.2 196.13 222.34 319.13 403.29 104.83 176.38 171.73 271.75 402.61 235.23 77.71 211.39 157.81 199.47 188.46 209.87 103.08 17.01 245.83 17.01 172.87 18.69

DIAGRAM - 1 DIAGRAM SHOWING STANDARD DEVIATION FOR 3 YEARS

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TABLE - 2 TABLE SHOWING BETA VALUE FOR 3 YEARS Beta of the Portfolio 2008-2009 2009-2010 2010-2011 0.79 0.81 0.83 0.84 0.76 1.07 0.83 0.78 1.46 1.16 1.16 1.88 0.82 0.83 0.36 0.67 0.68 0.41 0.54 0.78 0.31 1.26 1.23 1.12 0.46 0.45 0.53 0.57 0.21 1.35

SL. No 1 2 3 4 5 6 7 8

Company Name ACC Ambuja Cements HDFC Bank SBI TCS Infosys Tata Motors Hero Honda Dr.Reddys 9 Laboratories 10 Cipla

DIAGRAM 2 DIAGRAM SHOWING BETA VALUE FOR 3 YEARS

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TABLE - 3 Table Showing Sharpes Performance Index for 2008-2009

Company Name ACC Ambuja Cements HDFC Bank SBI TCS Infosys Hero Honda Tata Motors Dr.Reddys Lab Cipla

Average Risk free Standard Return (in %) Return (in %) Deviation Sharpe ratio 100 8.1606 94.93 0.00972 55 8.1606 17.15 0.02731 85 8.1606 215.49 0.00357 215 8.1606 222.34 0.009303 366.67 8.1606 104.83 0.034199 372.5 8.1606 271.75 0.13407 950 8.1606 77.71 0.1212 150 8.1606 199.47 0.00711 75 8.1606 103.08 0.006484 100 8.1606 17.01 0.053991 DIAGRAM - 3

Diagram Showing Sharpes Performance Index in 2008-2009

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TABLE - 4 Table Showing Sharpes Performance Index for 2009-2010 Average Risk free Standard Return (in %) Return (in %) Deviation Sharpe ratio 115 8.1606 87.58 0.0122 60 100 195 275 235 2500 60 125 100 8.1606 8.1606 8.1606 8.1606 8.1606 8.1606 8.1606 8.1606 8.1606 9.72 218.2 319.13 176.38 402.61 211.39 188.46 245.83 17.01 0.5333 0.00421 0.005855 0.01513 0.005634 0.11788 0.002751 0.004753 0.053991

Company Name ACC Ambuja Cements HDFC Bank SBI TCS Infosys Hero Honda Tata Motors Dr.Reddys Lab Cipla

DIAGRAM 4 Diagram Showing Sharpes Performance Index in 2009-2010

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TABLE 5 Table Showing Sharpes Performance Index for 2010-2011

Company Name ACC Ambuja Cements HDFC Bank SBI TCS Infosys Hero Honda Tata Motors Dr.Reddys Lab Cipla

Average Risk free Standard Return (in %) Return (in %) Deviation Sharpe ratio 152.5 8.1606 93.99 0.01536 65 120 200 500 550 1500 150 225 75 8.1606 8.1606 8.1606 8.1606 8.1606 8.1606 8.1606 8.1606 8.1606 DIAGRAM - 5 Diagram Showing Sharpes Performance Index in 2009-2010 15.15 196.13 403.29 171.73 235.23 157.81 209.87 172.87 18.69 0.3752 0.005702 0.004757 0.02864 0.023034 0.094534 0.606758 0.012543 0.035762

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TABLE 6 Table Showing Treynors Performance Index for 2008-2009 Company Name ACC Ambuja Cements HDFC Bank SBI TCS Infosys Hero Honda Tata Motors Dr.Reddys Lab Cipla Average Risk free Beta of the Treynor Return (in %) Return (in %) Portfolio Ratio 100 8.1606 0.79 1.163 55 85 215 366.67 372.5 950 150 75 100 8.1606 8.1606 8.1606 8.1606 8.1606 8.1606 8.1606 8.1606 8.1606 DIAGRAM - 6 Diagram Showing Treynors Performance Index for 2008-2009 0.84 0.83 1.16 0.82 0.67 0.54 1.26 0.46 0.45 0.558 0.926 1.783 4.372 5.438 17.44 1.126 1.453 2.041

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TABLE 7 Company Average Risk free Beta of the Treynor Name Return (in %) Return (in %) Portfolio Ratio ACC 115 8.1606 0.81 1.319 Ambuja Cements 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 2.205 Cipla 100 8.1606 0.57 1.611 Table Showing Treynors Performance Index for 2009-2010

DIAGRAM - 7 Diagram Showing Treynors Performance Index for 2009-2010

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TABLE 8 Table Showing Treynors Performance Index for 2010-2011

Company Name ACC Ambuja Cements HDFC Bank SBI TCS Infosys Hero Honda Tata Motors Dr.Reddys Lab Cipla

Average Risk free Beta of the Treynor Return (in %) Return (in %) Portfolio Ratio 152.5 8.1606 0.83 1.739 65 120 200 500 550 1500 150 225 75 8.1606 8.1606 8.1606 8.1606 8.1606 8.1606 8.1606 8.1606 8.1606 DIAGRAM - 8 1.07 1.46 1.88 0.36 0.41 0.31 1.12 0.21 1.35 0.531 0.766 1.021 13.662 13.216 48.124 1.266 10.326 0.495

Diagram Showing Treynors Performance Index for 2010-2011

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TABLE - 9 Highlights of past three years Monetary Policy POLICY Bank Rate Repo Rate Reverse Repo CRR 2008-09 6.00% 7.75% 6.00% 7.75% 2009-10 6.00% 4.75% 3.25% 5.00% 2010-11 6.00% 5.75% 4.50% 6.00%

DIAGRAM - 9 Diagram Showing Highlights of Monetary Policy

0.09 0.08 0.07 0.06 0.05 0.04 0.03 0.02 0.01 0 2008-2009 2009-2010 2010-2011 Bank Rate Repo Rate Reverse Repo Rate Cash Reserve Ratio

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TABLE - 10 Consolidated Analysis of Sharpe's and Treynor's Performance Index of Selected Companies

2008-2009 Company Name ACC Ambuja Cements HDFC Bank SBI TCS Infosys Hero Honda Tata Motors Dr.Reddys Lab Cipla Treynor Sharpe ratio Ratio 0.00972 0.02731 0.00357 0.009303 0.034199 0.13407 0.1212 0.00711 0.006484 0.053991 1.163 0.558 0.926 1.783 4.372 5.438 17.44 1.126 1.453 2.041

2009-2010 Sharpe ratio 0.0122 0.5333 0.00421 0.005855 0.01513 0.005634 0.11788 0.002751 0.004753 0.053991 Treynor Ratio 1.319 0.682 1.177 1.611 3.215 3.336 31.947 0.422 2.205 1.611

2010-2011 Sharpe ratio 0.01536 0.3752 0.005702 0.004757 0.02864 0.023034 0.094534 0.606758 0.012543 0.035762 Treynor Ratio 1.739 0.531 0.766 1.021 13.662 13.216 48.124 1.266 10.326 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 is increased. 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 and return 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 is slightly 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 AND CONCLUSION

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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 201011.

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 200809 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 200910, 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.

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