stock market movement & its relation to economic parameters

8/9/2019 Stock Market Movement & Its Relation to Economic Parameters

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PROJECT REPORT ON

STOCK MARKET MOVEMENT & ITS RELATION TO ECONOMIC

PARAMETERS

FOR PROJECT IN FINANCIAL MANAGEMENT IN FOURTH TRIMESTER

Under the esteemed guidance of Dr. Vidya Sekhri

(Approved by AICTE, Govt. of

India)

(Equivalent to MBA)

ACADEMIC SESSION

2008-2010

Submitted to: Submitted by:

DR. VIDYA SEKHRI Vineet Kumar Sarawagi , 223

Chairperson,Finance Vinita Singh, 225

INSTITUTE OF MANAGEMENT STUDIES

LAL QUAN, PB NO-57, GHAZIABAD-201009

UTTAR PRADESH-INDIA

Acknowledgement

Institute of Management Studies, Ghaziabad 1


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Any assignment puts to litmus test of an individual knowledge credibility or experience and thus sole efforts

of an individual are not sufficient to accomplish the desire successful completion of a project involve interest

and effort of many people and so this becomes obligatory on the part to record our thanks to those who

helped us out in the successful completion of our project.

Life is a process of accumulating and discharging debts, not all of those can be measured. We cannot hope to

discharge them with simple words of thanks but we can certainly acknowledge them.

At this level of understanding it is often difficult to comprehend and assimilate a wide spectrum of

knowledge without proper guidance and advice. Hence, we would like to take this opportunity to express our

Heartfelt Gratitude to Respected DR. VIDYA SEKHRI, PGDM, IMS, Ghaziabad, for his round the clock

enthusiastic support, noble guidance and encouragement, which made this project successful. We are

extremely thankful to him for making this project worthful.

Thanking You,

DECLARATION



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This is to certify that our team under the guidance of Dr. Vidya Sekhri has done the project named

STOCK MARKET MOVEMENT AND ITS RELATION TO ECONOMIC PARAMETERS.

This project is solely the result of our combine efforts and has not been submitted by anyone anywhere for

any award.

Date:

Submitted by:

Shruti Anusha , 188

Vineet Kumar Sarawagi , 223

Vinita Singh, 225

Zarrin Zuberi, 230



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BANKBank is a financial institution where you can deposit your money. It has influenced economies and politics for

centuries. It provides a system for easily transferring money from one person or business to another. Using banks and

the many services they offer, saves an incredible amount of time, and ensures that our funds "pass hands" in a legal and

structured manner. Many other financial activities were added over time. For example banks are important players in

financial markets and offer financial services such as investment funds. The first state deposit bank, Banco di San

Giorgio (Bank of St. George), was founded in 1407 at Genoa, Italy. In some countries such as Germany, banks are the

primary owners of industrial corporations while in other countries such as the United States banks are prohibited from

owning non-financial companies. In Japan, banks are usually the nexus of a cross-share holding entity known as the

zaibatsu. In France, bancassurance is prevalent, as most banks offer insurance services (and now real estate services) to

their clients. Origin of the word The name bank derives from the Italian word banco "desk/bench", used during the

Renaissance by Florentine bankers, who used to make their transactions above a desk covered by a green tablecloth.

However, there are traces of banking activity even in ancient times.

GLOBAL OVERVIEW

The first banks were probably the religious temples of the ancient world, and were probably established sometime

during the third millennium B.C. Deposits initially consisted of grain and later other goods including cattle,

agricultural implements, and eventually precious metals such as gold, in the form of easy-to-carry compressed plates.

Temples and palaces were the safest places to store gold. Ancient Rome perfected the administrative aspect of banking

and saw greater regulation of financial institutions and financial practices. Charging interest on loans and paying

interest on deposits became more highly developed and competitive.

Beginning around 1100s, the need to transfer large sums of money to finance the Crusades stimulated the re-emergence of banking in Western Europe. In 1156, in Genoa, occurred the earliest known foreign exchange contract.

The accompanying growth of Italian banking in France was the start of the Lombard moneychangers in Europe, who

moved from city to city along the busy pilgrim routes important for trade. After 1400, political forces turned against

the methods of the Italian free enterprise bankers. In 1401, King Martin I of Aragon expelled them. In 1403, Henry IV

of England prohibited them from taking profits in any way in his kingdom. In 1409, Flanders imprisoned and then

expelled Genoese bankers. In 1410, all Italian merchants were expelled from Paris. In 1401, the Bank of Barcelona

was founded. In 1407, the Bank of

Saint George was founded in Genoa. Modern Western economic and financial history is usually traced back to the

coffee houses of London. The London Royal Exchange was established in 1565. At that time moneychangers were

already called bankers, though the term "bank" usually referred to their offices, and did not carry the meaning it does

today. There was also a hierarchical order among professionals; at the top were the bankers who did business with

heads of state, next were the city exchanges, and at the bottom were the pawn shops or "Lombard's . Some European

cities today have a Lombard street where the pawn shop was located. After the siege of Antwerp, trade moved to

Amsterdam. In 1609 the Amsterdamsche Wisselband (Amsterdam Exchange Bank) was founded which made

Amsterdam the financial centre of the world until the Industrial Revolution. In the 1970s, a number of smaller crashes

tied to the policies put in place following the depression, resulted in deregulation and privatization of government-

owned enterprises in the 1980s, indicating that governments of industrial countries around the world found private-

sector solutions to problems of economic growth and development preferable to state-operated, semi-socialist



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programs. This spurred a trend that was already prevalent in the business sector, large companies becoming global and

dealing with customers, suppliers, manufacturing, and information centers all over the world. Global banking and

capital market services proliferated during the 1980s and 1990s as a result of a great increase in demand from

companies, governments, and financial institutions, but also because financial market conditions were buoyant. Interest

rates in the United States declined from about 15% for two-year U.S. Growth rate would have been lower, in the last

twenty years, were it not for the profound effects of the internationalization of financial markets especially U.S.

Foreign investments, particularly from Japan, who not only provided the funds to corporations in the U.S., but also

helped finance the federal government; thus, transforming the U.S. stock market by far into the largest in the world.

CURRENT SCENARIO:

Banking Industry has revolutionized the transaction and financial services system worldwide. Through the

development in technology banking services has been availed to the customers at all times, even after the normal

banking hours, on a 24x7 basis. Banking Industry services is nothing but the access of most of the banking related

services (such as verification of account details, going with the transactions, etc.). In todays world, progress of online

services is available to all customers of the concerned bank and can be accessed at any point of time and from

anywhere provided the place is equipped with the Internet facility. Now-a-days, almost all the banks all over the world,

especially the multinational ones, provide their customers with Online Banking facility.

When consumers turn cautious in tough times, entrepreneurs have to think out-of-the-box to get people to loosen their

purse strings. Referring to the reluctance of banks to lend despite higher liquidity, this was a global phenomenon and

mere monetary policy could not push banks on its strength to lend. Banks are more than willing to lend to companies

whose financial position is good. The problem is that banks are reluctant to lend to companies with lower credit

worthiness. We need to get banks to finance even middle level companies. The 2008/2009 recession is seeing private

consumption fall for the first time in nearly 20 years.

This indicates the depth and severity of the current recession. With consumer confidence so low, recovery will take a

long time. Consumers in the U.S. have been hard hit by the current recession, with the value of their houses dropping

and their pension savings decimated on the stock market.



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INDIAN SCENARIO

For any country (particularly for a growing economy), sound and effective banking system is essential, not only to

keep money but to have a healthy economy. Thus banking system of India should not only be hassle free but it should

be able to meet new challenges posed by the technology and any other external and internal factors. For the past three

decades India's banking system has several outstanding achievements to its credit. The most striking is its extensive

reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has

reached even to the remote corners of the country. This is one of the main reasons of India's growth process.

EARLY DEVELOPMENT:

Modern banking in India is said to be developed during the British era. In the first half of the 19th century, the BritishEast India Company established three banks the Bank of Bengal in 1809, the Bank of Bombay in 1840 and the Bank

of Madras in 1843. But in the course of time these three banks were amalgamated to a new bank called Imperial Bank,

which started as private shareholders banks, with mostly Europeans shareholders. Subsequently, banking in India

remained the exclusive domain of Europeans for next several decades until the beginning of the 20th century. Later

Imperial bank was taken over by the State Bank of India in 1955. Allahabad Bank was the first fully Indian owned

bank. The Reserve Bank of India was established in 1935 followed by other banks like Punjab National Bank, Bank of

India, Canara Bank and Indian Bank. Indian merchants in Calcutta established the Union Bank in 1839, but it failed in

1848 as a

consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and still functioning today, is

the oldest Joint Stock bank in India.

During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948.

There were approximately 1100 banks, mostly small. To streamline the functioning and activities of commercial

banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking

Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with

extensive powers for the supervision of banking in India as the Central Banking Authority. During those days public

has lesser confidence in the banks. As an aftermath deposit mobilization was slow. Abreast of it the savings bank

facility provided by the Postal department was comparatively safer. Moreover, funds were largely given to traders. At

least 94 banks in India failed between

1913 and 1918 as indicated in the following table:



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After independence, Government took major steps in the form of Indian Banking Sector Reform. It initiated measures

to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the

government in 1948 envisaged a mixed economy. This resulted into greater involvement of the state in different

segments of the economy including banking and finance.

In 1955, it nationalized Imperial Bank of India with extensive banking facilities on a large scale especially in rural and

semi-urban areas. It formed State Bank of India to act as the principal agent of RBI and to handle banking transactions

of the Union and State Governments all over the country. However, despite these provisions, control and regulations,

banks in India except the State Bank of India, continued to be owned and operated by private persons. This changed

with the nationalization of major banks in India on 19 July, 1969. At the same time, Indian banking industry has

emerged as a large employer, and a debate has ensued about the possibility to nationalize the banking industry.



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LIBERALIZATION:

Like the overall economy, the Indian banking sector had severe structural problems by the end of the 1980s. By

international standards, Indian banks were even despite a rapid growth of deposits extremely unprofitable. In the

second half of the 1980s, the average return on assets was about 0.15%. The return on equity was considerably higher

at 9.5%, but merely reflected the low capitalization of banks. While in India capital and reserves stood at about 1.5%

of assets, other Asian countries reached about 4-6%. These figures do not take the differences in income recognition

and loss provisioning standards into account, which would further deteriorate the relative performance of Indian banks.

The year 1991 marked a decisive changing point in India's economic policy since Independence in 1947. Following the

1991 balance of payments crisis, structural reforms were initiated that fundamentally changed the prevailing economic



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policy in which the state was supposed to take the "commanding heights" of the economy. After decades of far

reaching government involvement in the business world, known as the "mixed economy" approach, the private sector

started to play a more prominent role. The enacted reforms not only affected the real sector of the economy, but the

banking sector as well. Characteristics of banking in India before 1991 were a significant degree of state ownership

and far reaching regulations concerning among others the allocation of credit and the setting of interest rates. The

blueprint for banking sector reforms was the 1991 report of the Narasimham Committee. Reform steps taken since then

include a deregulation of interest rates, an easing of directed credit rules under the priority sector lending

arrangements, a reduction of statutory preemptions, and a lowering of entry barriers for both domestic and foreignplayers.

There was relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given

voting rights which could exceed the present cap of 10%, at present it has gone up to 49% with some restrictions. The

new policy shook the Banking sector in India completely. Bankers, till this time, were used to the 4-6-4 method

(Borrow at 4%; Lend at 6%; Go home at 4) of functioning. The new wave ushered in a modern outlook and tech-savvy

methods of working for traditional banks. All this led to the retail boom in India. People not just demanded more from

their banks but also received more.



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Statutory preemptions

The degree of financial repression in the Indian banking sector was significantly reduced with the lowering of the CRR

and SLR, which were regarded as one of the main causes of the low profitability and high interest rate spreads in the

banking system. During the 1960s and 1970s the CRR was around 5%, but until 1991 it increased to its maximum

legal limit of 15%. From its peak in 1991, it has declined gradually to a low of 4.5% in June 2003. In October 2004 it

was slightly increased to 5% to counter inflationary pressures, but the RBI remains committed to decrease the CRR to

its statutory minimum of 3%. The SLR has seen a similar development. The peak rate of the SLR stood at 38.5% inFebruary 1992, just short of the upper legal limit of 40%. Since then, it has been gradually lowered to the statutory

minimum of 25% in October 1997. The

reduction of the CRR and SLR resulted in increased flexibility for banks in determining both the volume and terms of

lending.

Interest rate liberalization

Prior to the reforms, interest rates were a tool of cross-subsidization between different sectors of the economy. To

achieve this objective, the interest rate structure had grown increasingly complex with both lending and deposit rates

set by the RBI. The deregulation of interest rates was a major component of the banking sector reforms that aimed at

promoting financial savings and growth of the organized financial system.

Priority sector lending

Besides the high level of statutory preemptions, the priority sector advances were identified as one of the major

reasons for the below average profitability of Indian banks. The Narasimham Committee therefore recommended a

reduction from 40% to 10%. However, this recommendation has not been implemented and the targets of 40% of net

bank credit for domestic banks and 32% for foreign banks have remained the same. While the nominal targets have

remained unchanged, the effective burden of priority sector advances has been reduced by expanding the definition of

priority sector lending to include for example information technology companies.

Entry barriers

Before the start of the 1991 reforms, there was little effective competition in the Indian banking system for at least tworeasons. First, the detailed prescriptions of the RBI concerning for example the setting of interest rates left the banks

with limited degrees of freedom to differentiate themselves in the marketplace. Second, India had strict entry

restrictions for new banks, which effectively shielded the incumbents from competition.

Through the lowering of entry barriers, competition has significantly increased since the beginning of the 1990s. Seven

new private banks entered the market between 1994 and 2000. In addition, over 20 foreign banks started operations in

India since 1994. By March 2004, the new private sector banks and the foreign banks had a combined share of almost

20% of total assets.

Prudential norms

The report of the Narasimham Committee was the basis for the strengthening of prudential norms and the supervisory

framework. Starting with the guidelines on income recognition, asset classification, provisioning and capital adequacy

the RBI issued in 1992/93, there have been continuous efforts to enhance the transparency and accountability of the

banking sector. The improvements of the prudential and supervisory framework were accompanied by a paradigm shift

from micro-regulation of the banking sector to a strategy of macro-management.



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REGULATIONS AND POLICIES

RBI regulates and directs the working of bank in many ways. Some of the regulation imposed

by it is as following:

RESERVE BANK OF INDIA (AMENDMENT) ACT, 2006 This law was enacted in June 2006. Some of the regulations are as follows:

The min. CRR level has been fixed at 3% and the max. at 20%. However, the banks have to maintain the avg. CRR as

issued by the RBI.

Co-Operative banks have been exempted from maintaining average CRR with effect from June 22, 2006, but they to

maintain the statutory min. CRR of 3% on its total demand and time liabilities.

Banks can invest Net Owned Fund of Rs. 25 lac. And max. 25 crore, in the approved securities in India- min.5% and

max. 25% of total deposits outstanding at the close of business of the last working day.

Banks need to create a min. of 25% of its annual net profit before declaring any dividend.



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BANKING REGULATION ACT-1949 Tenure of CMD cannot exceed 5 years at a time.

Min. ratio of banks authorsided ;Subscribed Paid-Up capital:4:2:1

Banks cannot pay commission, brokerage, etc. more than 2.5% of paid-up value of one share.

Prior RBI permission required for opening a new branch.

RBI to specify period for which the banks are supposed to preserve books a/cs instruments etc.

AMENDEMENT TO THE BANKING COMPANIES (ACCQOSITION AND TRANSFER

OF UNDERTAKING) ACT, 1970/1980 The number of whole-time directors to be increased from two to four.

The Reserve bank empowered to appoint one or more additional directors.

The shareholders are empowered to discuss, adopt and approve the Directors report, the annual accounts and the

balance sheet at the annual general meeting.

THE NEGOTIABLE INSTRUMENTS ACT, 1881 When the marker or holder of an negotiable instrument signs the same, otherwise than as such maker, for the purposeof negotiation, one the back or face thereof or on a slip of paper annexed thereto, or so signs for the same purpose a

stamped paper intended to be completed as a negotiable instrument, he is said to indorse the same, and is called the

endorser.

The term negotiable instrument does not include Bills of Lading, MTR/RR, LIC Policy, Share certificate, FDR,

Hundies and similar other documents. But, it applies to Bank Draft, Certificate of Deposit, Commercial Paper,

Treasury Bill, Share Warrant, Dividend Warrant.

The various types of negotiable instruments are: Ambiguous Instruments, Bearer/Order instruments, Inland/foreign

instruments, Inchoate Stamped Instruments.

THE NEGOTIABLE INSTRUMENTS (AMENDEMENT & MISC. PROVISIONS) ACT

2002 This law was amended because according to earlier law to receive cash from a cheque, the receiver and the cheque

where supposed to be physically. But, this law was amended for cheque truncation.

"a truncated cheque" means a cheque which is truncated during the course of a clearing cycle, either by the clearing

house or by the bank whether paying or receiving payment, immediately on generation of an electronic image for

transmission, substituting the further physical movement of the cheque in writing.

The banker is supposed to keep the physical copy for at least one year and the image is to preserved for 8 years.

MERGERS AND ACQUISITIONSIndians banks are not big enough to compete with the other bigger banks of the world. To compete with those banks,

India needs at least seven banks like the State bank of India (SBI) in terms of the size (in this context it is noteworthy

to mention that SBI is the biggest bank in India). According to a survey conducted by The Federation of Indian

Chamber of Commerce and Industries (FICCI), a merger of some Indian banks to form bigger banks is necessary to

remain in the global competition.

According to a survey by the global consultancy firm major KPMG, India is emerging as one of the most preferred



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private banking destinations at a time when the global private banking and wealth management industry is witnessing a

boom in the M&A activity. Being the second populist country in the world, it has the inherent characteristics of robust

and liquid financial markets which, in turn, enables exit on a timely basis to realize gains. Moreover, it is a good

resource deployment avenue to provide substantial rate of return for the banks and financial institutions.

MERGERS:

When two or more companies combine into one company it is said to merge. They may either merge with the existingcompany or they can form a new company. In India merger is also called Amalgamation.

Reasons for Post nationalization mergers

1. High corporate growth

2. Repositioning of company

3. Increasing geographical spread

ACQUISITION:

An Acquisition may be an act of acquiring effective control by one company over assets or management of another

company without any combination of companies. Companies may remain independent, separate but there may be

change in control of companies.



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PRESENT INDIAN SCENARIO

Overview:

The Indian economy, after exhibiting strong growth during the second quarter of 2008-09, has experienced



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moderation in the wake of the global economic slowdown. Although agricultural outlook remains satisfactory,

industrial growth has decelerated sharply and services sector is slowing. The economic slowdown, during the second

quarter vis--vis the first quarter of 2008-09, was primarily driven by a moderation of consumption growth and

widening of trade deficit, offset partially by an acceleration in investment demand.

The balance of payments (BoP) for the first half of 2008-09 reflected a widening of the current account deficit and

moderation in capital flows. Net capital inflows reduced sharply and remained volatile during 2008-09 with foreign

direct investment inflows showing an increase, while portfolio investments recording a substantial outflow. The growth of non-food credit remained high during 2008-09, so far, albeit with some moderation in recent months.

Continued high growth in time deposits enabled the banking system to sustain the credit expansion while the non-

banking sources of funds to the commercial sector declined.

The total flow of resources from banks and other sources to the commercial sector during 2008-09, so far, has been

somewhat lower than the comparable period of 2007-08.

Financial markets in India, which, by and large, remained orderly from April 2008 to mid-September 2008, witnessed

heightened volatility subsequently reflecting the knock-on effects of the disruptions in the international financial

markets and the uncertainty that followed. This necessitated the Reserve Bank to undertake a series of measures to

inject rupee and foreign exchange liquidity from mid-September 2008 onwards. Liquidity conditions turned around

and became comfortable from mid-November 2008.

Headline inflation has declined in major economies since July/August 2008. In India, inflation measured as year-on-

year variation in the wholesale price index (WPI) has declined sharply since August 2008 and was at 0.44 per cent as

of March 19, 2009.

On the macroeconomic front, the downside risks for economic growth emanate from global economic slowdown,

deterioration in global financial markets and slowing down in domestic demand. On the positive side, factors include

expected increase in consumption demand mainly reflecting rise in basic exemption limits and tax slabs, Sixth Pay

Commission awards, debt waiver for farmers and pre-election expenditure. The easing of international oil prices and

commodity prices may help in softening the inflationary pressure. The Indian economy continued to record strong

growth during 2007-08, albeit with some moderation. Real gross domestic product (GDP) growth rate at 9.0 per cent

during 2007-08 moderated from 9.6 per cent during 2006-07, reflecting some slow down in industry and services. A

positive feature during the year was a recovery in the growth of real GDP originating in the agricultural sector, afterthe slowdown experienced in the previous year. Despite this moderation, the overall growth rate of the Indian economy

during 2007-08 was noteworthy in the global context. 1.17 During 2007-08, the growth of real GDP originating from

the industrial sector decelerated to 8.2 per cent as against 10.6 per cent in 2006-07. In terms of Index of

Industrial Production (IIP), industrial growth was at 8.5 per cent as against 11.5 per cent in 2006-07. Manufacturing

sector growth at 9.0 per cent during 2007-08 (12.5 per cent during 2006- 07) was the lowest in the last four years. The

mining and electricity sectors also grew at a slower pace during 2007-08. In terms of use based classification, the

performance of the capital goods sector was particularly impressive with 18.0 per cent growth. However, the basic

goods, intermediate goods and consumer goods sectors recorded decelerated growth of 7.0 per cent, 8.9 per cent and

6.1 per cent, respectively, during 2007- 08. The performance of the industrial sector was also affected by the subdued

performance of the infrastructure sector, registering 5.6 per cent growth during 2007-08. The services sector recorded

double digit growth consistently in the last three years. It grew by 10.7 per cent during 2007-08, on top of 11.2 per cent

growth in 2006-07.

Headline inflation in India, based on movement in the wholesale price index (WPI), increased to 7.7 per cent at end-

March 2008 from 5.9 per cent a year earlier. Inflation softened initially up to mid-October 2007, partly reflecting

moderation in the prices of some primary food articles and some manufactured products as also due to the base effect.

Inflation, however, hardened subsequently to reach an intra-year high of 8.0 per cent on March 15, 2008, reflecting

tightening of supply-side pressures on key commodities and surge in international fuel prices. Headline WPI inflation



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in 2007-08 was mainly driven by 12 items/groups, viz., rice, wheat, milk, raw cotton, oilseeds, iron ore, coal mining,

mineral oils, edible oils, oil cakes, basic heavy inorganic chemicals and metals, with a combined weight of about 35

per cent in the WPI basket accounting for almost 82 per cent of WPI inflation, on a year-on-year basis, as on March

29, 2008 (as compared with 56 per cent a year ago). Among the major groups, primary articles, fuel group and

manufactured products exhibited inflation of 9.7 per cent, 6.8 per cent and 7.3 per cent, respectively.

The key deficit indicators for the Central and State Governments were placed lower in the revised estimates (RE) vis-

-vis the budget estimates for 2007-08. The revenue deficit of the Central Government estimated at Rs.63,488 crore or1.4 per cent of GDP was lower than 1.5 per cent of GDP in the budget estimates for 2007-08 and in 2006-07. The

combined gross fiscal deficit (GFD) for 2007- 08 at Rs.2,47,831 crore constituted 5.3 per cent of GDP as against 5.6

per cent in the previous year. The primary balance continued to remain in surplus. The improvement in key fiscal

indicators was facilitated by buoyancy in tax revenue, especially direct tax revenues. The combined outstanding

liabilities as a proportion to GDP at 77.0 per cent at end- March 2008 (RE) were the same as at end- March 2007. The

increase in the outstanding liabilities of the Central Government was offset by the decline in the liabilities of the State

Governments.

Broad money (M3) growth at 20.8 per cent as on March 31, 2008 was above the indicative trajectory of 17.0-17.5 per

cent for 2007-08 set out in the Annual Policy Statement in April 2007. However, the rate of growth of M3 dipped from

mid-February 2008, reflecting some moderation in the growth of time deposits. Non-food credit growth moderated in

2007-08 and remained marginally lower than the Reserve Banks policy projection of 24.0-25.0 per cent (April 2007).

Banks investments in SLR securities increased in tandem with growth in deposits. As a result, their SLR investments

as a proportion of their NDTL remained almost at the same level as at end-March 2007. Demand for commercial credit

at 20.6 per cent in 2007- 08 showed some

moderation from 25.8 per cent during 2006-07. Commercial banks credit to Government increased during the year,

while net RBI credit to Government declined, as a result of MSS issuance. The banking sectors net foreign exchange

assets increased by 41.8 per cent. Accretion to net foreign exchange assets continued to be a major source of monetary

expansion, while growth of bank credit to the commercial sector moderated.

Domestic financial markets conditions remained orderly during 2007-08, barring a brief spell of volatility in the callmoney market and occasional bouts of volatility in the equity market during the second-half of August 2007, second-

half of December 2007 and beginning of the second week of January 2008 broadly in tandem with trends in

international equity markets. The primary market segment of the capital market, which had witnessed increased

activity till early January 2008, turned subdued thereafter, due to volatility in the secondary market. Yields in the

Government securities market softened during the large part of the year.

Brief spells of volatility were observed in the money market on account of changes in capital flows band cash

balances of the Central Government with the Reserve Bank. The money market was also affected by the imposition of

the ceiling of Rs.3,000 crore on reverse repo acceptances under the liquidity adjustment facility (LAF) from March 5,

2007 to August 5, 2007. Call/ notice rates softened to below the reverse repo rate during June- July 2007. Interest rates

in overnight money markets subsequently moved broadly in the reverse repo and repo corridor for the most part of the

year after the withdrawal of the ceiling of Rs.3,000 crore on reverse repo acceptances under the LAF in August 2007.

During 2007-08, interest rates averaged 5.20 per cent, 5.50 per cent and 6.07 per cent, respectively, in collateralised

borrowing and lending obligation (CBLO), market repo and call/notice money market (6.24 per cent, 6.34 per cent and

7.22 per cent, respectively, a year earlier).The weighted average rate for all the three money market segments

combined together was 5.48 per cent during 2007-08, as compared with 6.57 per cent a year ago, partly due to low

overnight interest rates during March to August period when there was a ceiling of Rs.3,000 crore on LAF absorption.

Indian financial markets have generally remained orderly during 2008-09 so far. Money market rates moderated at the



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beginning of the first quarter of 2008-09, but mostly hovered above/around the repo rate during the second quarter of

2008-09, reflecting the impact of, inter alia, the hikes in the cash reserve ratio (CRR) and the repo rate as well as

foreign exchange market operations of the Reserve Bank. In view of the tight liquidity conditions in the domestic

money markets in September 2008, the Reserve Bank announced a series of measures beginning September 16, 2008

(detailed in Chapter II). As a result, the average call rate, which was at 10.52 per cent, declined to 7.57 per cent in

November 2008.

The Reserve Bank during 2007-08 had to contend with large variations in liquidity not only due to swings in cashbalances of the Central Government, but also on account of large and volatile capital flows. The Reserve Bank

judiciously used the CRR, LAF and MSS to manage such swings in liquidity conditions, consistent with the objectives

of price and financial stability. As a whole, there was a net absorption of liquidity on 171 days and net injection of

liquidity on 75 days during 2007- 08. The average daily net outstanding balances under LAF varied between injection

of Rs.10,804 crore during December 2007 to absorption of Rs.36,665 crore in October 2007. Net issuances under the

Market Stabilisation Scheme (MSS) during 2007-08 amounted to Rs.1,05,691 crore.

The Indian economy experienced a cyclical moderation in growth accompanied by high inflation in the first half of

2008-09. There is now distinct evidence of further slowdown as a consequence of the global downturn.

CURRENTSCENARIO

The knock-on effects of the global financial crisis, economic slowdown, and falling commodity prices are affecting the

Indian economy in several ways. Capital flow reversals intensified in September and October 2008 though they have

stabilised since then; international credit channels continue to be constrained; capital market valuations remain low;

industrial production growth has slackened; export growth has turned negative during October-November 2008; and

overall business sentiment has deteriorated. On the positive side, the headline inflation has decelerated, though

consumer price inflation is yet to show moderation; and the domestic financial markets are functioning in an orderly

manner. Although bank credit growth has been higher than during the previous year, rough calculation shows that flow

of overall financial resources to thecommercial sector in the current financial year has declined marginally as compared with the previous year. This was

on account of decline in other sources of funding such as resource mobilisation from the capital market and external

commercial borrowings. The Reserve Bank has acted aggressively and pre-emptively on monetary policy

accommodation, particularly through interest rate cuts in terms of both magnitude and pace. In the space of just one

quarter, the repo rate has been reduced from 9.0 per cent to 5.5 per cent and the reverse repo rate from 6.0 per cent to

4.0 per cent, thereby bringing down both of them to historically lowest levels.

The transmission of the policy interest rate signal has been effective in the money and government securities markets;

however, the transmission in the credit market has so far been subdued. From the real economy perspective, however,

for monetary policy to have demand inducing effects, lending rates will have to come down. Most banks have reduced

lending and deposit rates to some extent, but a few have yet to do so. In the Reserve Bank's view, the policy easing

done by it in the last few months allows for considerable room for banks to respond more actively to the policy cues.

Value Added Intellectual Coefficient (VAIC)



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Pulic (1998) proposed the Value Added Intellectual Coefficient (VAIC) to provide information about the

value creation efficiency of tangible and intangible assets within a company. It was further developed by

Manfred Boremann (1999). It gives a new insight to measures of value creation and monitors the value

creation efficiency in companies using basic accounting figures. VAIC is designed to effectively monitor and

evaluate the 'efficiency' in adding value (VA) to a firm's total resources and each major resource component,

focusing on value addition in an organization and not on cost control (Pulic 2000, Boremann 1999). VAIC

TM is an analytical procedure designed to enable management, shareholders and other relevant stakeholders

to effectively monitor and evaluate the efficiency of Value Added (VA) by a firm's total resources and each

major resource component. Intellectual capital is a term with various definitions in different theories of

management and economics. Accordingly, its only truly neutral definition is as a debate over economic

"intangibles". Ambiguous combinations of human capital, instructional capital and individual capital

employed in productive enterprise are usually what is meant by the term, when it is used to actually refer to a

capital asset whose yield is intellectual property rights.

The VAIC approach is based on five assumptions. Firstly, to find out the competence of a company in

'creating' or value added (VA) the difference between output and input should first be calculated. Then, it is

necessary to determine how much new value has been created by one unit of investment capital employed,with the Secondstep being the calculation of the relation of value added and capital employed (including

physical and financial capital) The Thirdstep is to assess the relation between value added and human capital

employed, to indicate how much value added has been created by one financial unit invested in employees.

theFourth step is to find the relation between VA and SC, indicating the share of SC in created value. The

Fifth step is to assess each resource that helps to create or produce VA.

Higher the Ratio, higher is the contribution of Intellectual Capital in improving the

Performance or Profitability at banks

CALCULATIONS-

AXIS BANK



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2009 2008 2007 2006

V.A 6300.97 1166.51 866.75 562.58

H.C 2454.03 1387.06 925.19 572.11

S.C 4517.19 220.55 58.44 9.53

ASSETS 109577.81 73257.21 49731.13 37743.70

HCE 3.53 0.84 0.94 0.983

SCE 0.717 0.18 0.067 0.017

CEE 8.80 2.071 1.55 1.027

VAIC 4.047 3.091 2.557 2.027

CITY UNION

2006 2007 2008 2009

V.A 131.01 152.66 117.1 158.49

H.C 85.1 107.99 110.09 136.76

S.C 46.01 44.67 7.01 21.73

ASSETS 3495.41 4127.05 5363.01 7348.97

HCE 1.54 1.41 1.06 1.16

SCE 0.35 0.29 0.059 0.137

CEE 2.72 3.18 2.32 2.476

VAIC 4.61 4.88 3.43 3.77

FEDERAL BANK

2006 2007 2008 2009



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V.A 274.38 361.84 539.59 602.08

H.C 449.64 471.06 495.39 660.93

S.C 175.26 109.22 44.2 58.85

ASSETS 16820.97 20642.92 25089.93 32506.44

HCE 0.61 0.77 1.08 0.91

SCE 0.63 0.30 0.08 0.09

CEE 2.09 2.11 3.5 1.76

VAIC 3.33 3.18 4.31 2.76

HDFC

2006 2007 2008 2009

V.A 13438.7 19787.3 25639.1 37654.1

H.C 10854 16910.90 24208 37456.2

S.C 2584.7 2876.4 1431.1 197.9

ASSETS 7083.20 8550.80 9666.70 11751.30

HCE 1.24 1.17 1.06 1.01

SCE 0.192 0.145 0.06 0.01

CEE 1.9 2.31 2.65 3.2

VAIC 3.33 3.63 3.77 4.22

ICICI

2006 2007 2008 2009

V.A 25960.02 46906.7 54259.15 68087.32



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H.C 32991.48 44795.17 66905.56 81541.82

S.C 3431.46 2111.53 12646.41 13454.5

ASSETS 40380.36 36807.12 39324.23 41088.98

HCE 0.90 1.05 0.81 0.83

SCE 0.12 0.05 0.23 0.20

CEE 0.73 1.18 1.38 1.66

VAIC 1.51 2.28 1.96 2.29

CORPORATION BANK

2006 2007 2008 2009

V.A 874.77 791.09 912.61 998.05

H.C 752.92 933.76 989.85 1014.96

S.C 121.18 142.67 77.24 16.91

ASSETS 33923.86 40506.63 52720.65 66596.67

HCE 1.16 0.84 0.92 0.98

SCE 0.138 0.18 0.084 0.016

CEE 6.098 5.515 6.36 6.96

VAIC 7.396 6.535 7.364 7.964



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DENA BANK

2006 2007 2008 2009

V.A 171.92 383.41 377.38 456.59

H.C 825.86 798.25 899.42 914.45

S.C 653.94 414.84 522.04 457.85

ASSETS 24028.54 26545.34 31450.65 38641.73

HCE 0.208 0.48 0.419 0.499

SCE 3.80 1.08 1.383 1

CEE 0.59 1.336 1.315 1.59

VAIC 4.598 2.896 3.117 3.091

OBC

2006 2007 2008 2009

V.A 466.84 923.97 1177.66 931.8

H.C 960.54 971.16 879.23 890.14

S.C 493.7 47.19 298.43 11.66

ASSETS 54069.46 58937.37 73936.27 90705.32

HCE 0.48 0.95 1.33 1.046

SCE 1.057 0.05 0.253 0.044

CEE 2.42 4.79 6.116 4.839

VAIC 3.957 5.79 7.699 5.92



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23

stock market movement & its relation to economic parameters

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