International Journal of Innovative Research and Development

Abstract

In the recent years, the issue on ballooning investments by foreign investors into Indian markets through non-normal routes has been discussed but with less result-orientation. The issue on governance and need for reforms on participatory notes (PNs) has been raised by financial markets and also has been a point of discussion among practitioners and policy makers. The support from financial markets have been wary and negative to any discussion on participatory notes. Thus, any decisions from the government and the regulatory bodies have been casted away for further reconsiderations. The recently published report by Special investigation team (SIT) on PNs cautioned the regulators on misuse of the investments. According to the report, not following stricter know your client (KYC) norms in case of PNs might have led to rapid growth in investments by “unknown beneficial owners” which itself is a cautionary trend. This growth in investments by foreign investors through registered Foreign Institutional Investors (FIIs) is believed to follow systematic patterns but has not be dealt with. Thus, considering this backdrop, study was conducted to find out, if there existed any patterns in the investments cycle of foreign investors. The monthly data on total value of investments in equities, debt instruments and derivatives (including or excluding) in the form of PNs were collected for the period 2003-2015. The ratio-to-moving average method was considered in the study to develop seasonal index. From the analysis, we conclude that, significant seasonal patterns exists in the investments done in the form of PNs by the foreign investors. June and September months were found to have on average, the lowest and highest investments respectively for the study period. The pattern found appears not to be random in nature, and results obtained point towards presence of seasonality in investments.

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Expectations of the markets are always perceived to be rational in nature. These expectations are a result of cumulative experiences of market participants who are expected to foresee the near term changes in political and economic scenarios in the country and outside the country. One such rational decision making scenario is when a clue regarding future vision of the country are laid down by the finance ministers in the form of a Union Budget. Announcements of various reform measures by either the existing governments in power for long periods or by any new governments in power depends upon the economic scenario of that country, and reflects the areas which needs immediate emphasis. The study thus reflects upon the perceptions of the markets especially considering the broader market and sectoral markets towards the announcements of budget by finance ministers from period 1993 to 2014. More than 600 event studies were conducted across 27 indices in the study. The results obtained infer that Budget announcement has no significant impact on the broader and sectoral indices over the years and trading strategies cannot be adopted by investors in making investment decisions during this shorter time frames as markets correct themselves to any future expectations from the budget as time passes.

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The study examines the impact of stock market returns to the announcement of monetary policy changes with respect to key rates such as CRR Rate, Repo rate and Reverse repo rate. If the markets are semi-strong efficient as assumed by the market efficiency theories, then investors would not have any opportunities to make abnormal profits by forming various trading strategies considering the various announcements declared by companies, governments or central bank of India. The central Bank of India plays a very important role in tackling the monetary issues in the country. The study is exhaustive enough in encompassing major events. The study thus aims at examining the impact of monetary steps taken by central bank of India in the form of changes to monetary rates on the stock market returns. Banks are always assumed in the literature to be impacted by the monetary changes first and foremost since they are linked directly with the credit delivery. Standard Event study methodology and sample t-test for equal means was used to analyse the impact of changes in the Key monetary rates mainly the CRR, Repo and Reverse Repo rate. 448 event studies were conducted considering 14 bank stock prices for a period 2006-2013. From the analysis, we find no significant differences in the stock mean returns around the announcement dates. Thus we infer that, the markets are semi-strong efficient and Investors should consider fundamental intrinsic strength of the companies before making decisions. The retail investors and institutional investors should thus avoid these rallies around the announcement dates and should consider policies with long term vision in selection of portfolios.

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