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NSE NIFTY and its correlation with sectorial indexes

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 International Journal of Conceptions on Management and Social Sciences
Vol. 2, Issue. 1, March’ 2014; ISSN: 2357 - 2787

NSE NIFTY and its correlation with sectorial indexes

M Nagendra, M Haritha Ravi V

Department of MBA, Department of Management Studies,
RR Institute of Advanced Studies, Acharya Institute of Management and Science,
Bangalore, India. Bangalore, India.
[Link]@[Link] [Link].m@[Link]

Abstract— The NSE NIFTY Index tracks the behaviour of a country. NSE was set up by leading institutions to provide a
portfolio of blue chip companies, the largest and most liquid modern, fully automated screen-based trading system with
Indian securities. The Index is well studied for benchmarking, national reach. The Exchange has brought in relation to
index funds and index based derivatives. The persuading power unparalleled transparency, speed & efficiency, safety and
of NSE Nifty is very high on other indices especially NSE market integrity. It has set up amenities that serve as sculpt for
sectorial indices. Performance of the economy influences industry the securities industry in terms of systems, practices and
sector returns differently and changes over time periods. Thus, procedures.
changing pattern of correlations between sectors is vital for
investment purpose. The present study approximates the NSE has played a catalytic role in reforming the Indian
correlations between NSE Nifty and Industry sectors in India. securities market in terms of microstructure, market practices
and trading volumes. The market today uses state-of-art
Keywords- Index, NSE Nifty, Sectorial Indices and Correlation information technology to offer an efficient and transparent
trading, clearing and settlement mechanism, and has witnessed
I. INTRODUCTION several innovations in products & services viz.
demutualization of stock exchange governance, screen based
An Index is used to give information about the price
trading, compression of settlement cycles, dematerialisation
movements of products in the financial, commodities or any
and electronic transfer of securities, securities lending and
other markets. Financial indexes are constructed to quantify
borrowing, professionalization of trading members, fine-tuned
price movements of stocks, bonds, T-bills and other forms of
risk management systems, emergence of clearing corporations
investments. Stock market indexes are meant to confine the
to assume counterparty risks, market of debt and derivative
overall behaviour of equity markets. A stock market index is
instruments and intensive use of information technology.
shaped by selecting a group of stocks that are representative of
the entire market or a specified sector or segment of the
market. An Index is designed with reference to a base period B. NIFTY
and a base index value. The S&P CNX Nifty is the title index on the National
Stock market indexes are useful for a variety of reasons. Stock Exchange of India Ltd. (NSE). The Index tracks the
Some of them are: behaviour of a portfolio of blue chip companies, the leading
and most liquid Indian securities. It includes 50 of the roughly
 They provide a historical comparison of returns on 1430 companies listed on the NSE, captures approximately
money invested in the stock market aligned with other forms 65% of its float-adjusted market capitalization and is a true
of investments such as gold or debt. reflection of the Indian stock market. The S&P CNX Nifty
covers 21 sectors of the Indian economy and offers investment
 They can be used as a touchstone against which to
compare the performance of an equity fund. Table - 1: Index Stocks weight age in NSE Nifty Index

 It is a pilot indicator of the performance of the S. No Indices Stocks Weightag

overall economy or a sector of the economy e
 Stock indexes replicate highly up to date information 1 Auto Index Stocks 8.17
 Modern financial applications such as Index Funds, 2 Bank Index Stocks 20.67
Index Futures, Index Options play a significant role in
financial investments and risk management 3 Energy Index Stocks 16.19
4 FMCG Index Stocks 11.32
A. NSE
5 IT Index Stocks 12.38
The National Stock Exchange (NSE) is India's foremost
stock exchange casing various cities and towns crosswise the 6 Metal Index Stocks 5.88

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 International Journal of Conceptions on Management and Social Sciences
Vol. 2, Issue. 1, March’ 2014; ISSN: 2357 - 2787

7 Pharma Index Stocks 4.91 Index has a base date of Jan 1, 2001 and a base value of 1000.
The CNX Energy Index represents about 11.05% of the free
8 Other Stocks 28.65 float market capitalization of the stocks listed on NSE and
Source: National Stock Exchange 82.65% of the free float market capitalization of the stocks
forming fraction of the Energy sector
managers exposure to the Indian market in one efficient
portfolio. The Index has been trading since April 1996 and is F. FMCG Index
well suited for benchmarking, index funds and index based
derivatives. Major indices stocks weightage in NSE Nifty as FMCG’ s (Fast Moving Consumer Goods) are those goods
shown in the above table. and products, which are non-durable, mass consumption
products and accessible off the shelf. The CNX FMCG Index
C. Sectorial Indices comprises of 15 companies who fabricate such products which
are listed on the National Stock Exchange (NSE). The index is
The CNX Auto Index is premeditated to reflect the computed using free float market capitalization method with
behaviour and performance of the Automobiles sector which the base period as December, 1995 indexed to a base value of
includes manufacturers of cars & motorcycles, heavy vehicles, 1000 wherein the level of the index reflects total free float
auto ancillaries, tyres, etc. The CNX Auto Index comprises of market value of all the stocks in the index relative to a
15 stocks that are listed on the National Stock Exchange. The particular base market capitalization value. The CNX FMCG
CNX Auto Index is computed using free float market Index represents about 10.14% of the free float market
capitalization technique with a base date of January 1, 2004 capitalization of the stocks listed on NSE and 92.91% of the
indexed to a base value of 1000, wherein the level of the index free float market capitalization of the stocks forming part of
reflects the total free float market value of all the stocks in the the FMCG.
index relative to particular base market capitalization value.
The CNX Auto Index represents about 6.78% of the free float G. IT Index
market capitalization of the stocks listed on NSE and 93.74%
of the free float market capitalization of the stocks forming Information Technology (IT) industry has played a chief
part of the Automobiles sector. role in the Indian economy during the last few years. A
number of large, gainful Indian companies today belong to the
D. Bank Index IT sector and a great deal of investment interest is now
focused on the IT sector. CNX IT provides investors and
CNX Bank Index is an index comprised of the most liquid market intermediaries with an apt benchmark that captures the
and huge capitalised Indian Banking stocks. It provides performance of the IT segment of the market. Companies in
investors and market intermediaries with a standard that this index are those that have more than 50% of their turnover
captures the capital market performance of Indian Banks. The from IT related activities like IT Infrastructure , IT Education
index will have 12 stocks from the banking sector which trade and Software Training , Telecommunication Services and
on the National Stock Exchange. CNX Bank Index is Networking Infrastructure, Software Development, Hardware
computed using free float market capitalization method with Manufacturer’s, Vending, Support and Maintenance. The
base date of Jan 1, 2000 indexed to base value of 1000, CNX IT index is computed using free float market
wherein the level of the index reflects total free float market capitalization method with a base date of Jan 1, 1996 indexed
value of all the stocks in the index relative to a particular base to a base value of 1000wherein the level of the index reflects
market capitalization value. The CNX Bank Index symbolize total free float market value of all the stocks in the index
about 15.37% of the free float market capitalization of the relative to a particular base market capitalization value. The
stocks listed on NSE and 88.11% of the free float market base value of the index was revised from 1000 to 100 with
capitalization of the stocks forming part of the Banking sector. effect from May 28, 2004. The CNX IT Index represents
about 9.48% of the free float market capitalization of the
E. Energy Index stocks listed on NSE and 94.05% of the free float market
Energy sector is unanimously renowned as one of the most capitalization of the stocks forming part of the IT sector
major inputs for economic growth. The growth of a nation,
encompassing all sectors of the economy and all sections of H. Metal Index
society, is contingent on meeting its energy requirements The CNX Metal Index is premeditated to reflect the
tolerably. As a fast-growing economy, India has become one behaviour and performance of the Metals sector including
of the biggest energy intensive countries in the World. Energy mining. The CNX Metal Index comprises of 15 stocks that are
is a crucial input for India's development process. Energy listed on the National Stock Exchange. CNX Metal Index is
sector Index will include companies belonging to Petroleum, computed using free float market capitalization method with a
Gas and Power sub sectors. With Effective from October, 11, base date of January 1, 2004 indexed to a base value of 1000,
2010, CNX Energy Index is computed using free float market wherein the level of the index reflects the total free float
capitalization weighted method, wherein the level of the index market value of all the stocks in the index related to particular
reflects the total free float market value of all the stocks in the base market capitalization value. The CNX Metal Index
index relative to a particular base period. The CNX Energy

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 International Journal of Conceptions on Management and Social Sciences
Vol. 2, Issue. 1, March’ 2014; ISSN: 2357 - 2787

represents about 4.23% of the free float market capitalization Rakesh Gupta & Parikshit. K. Basu (2008) analysed the
of the stocks listed on NSE and 75.60% of the free float importance of industry selection in portfolio selection has
market capitalization of the stocks forming part of the Metals been tested in this study using a sample of 10 industry sectors
for equity markets in India. They argued that if industry
I. Pharma Index selection is important so the correlations within the industry
pairs are important for portfolio optimization purpose so as to
Pharmaceuticals sector is one of the key sectors where enhance portfolio returns. If correlations within the industry
Indian companies have created a global brand for themselves are important, than an accurate estimate of correlations
besides software. Indian companies have taken advantage of becomes evident and Theoretically Asymmetric DCC
the opportunities in the synchronized generics market in the GARCH estimates should provide us with a better estimate of
western countries and made deep inroads especially in correlations and the results indicate correlations do change
providing low cost equivalents of expensive drugs. Pharma over time.
outsourcing into India and low cost Healthcare services are
expected to be the key areas of growth in the near future. In
addition, the inherent potential of biotechnology has also
Tarun Chordia, Amit Goyal & Qing Tong (2011) paper
attracted many new companies and this is also a key growth searches for the source of the asymmetric correlations between
area for Indian companies. Effective October, 11, 2010, CNX individual stocks. They found that the trading activity governs
Pharma Index is computed using free float market the asymmetric correlation phenomenon in individual stocks
capitalization weighted method, wherein the level of the index with high retail concentrations (i.e. small stocks/low
reflects the total free float market value of all the stocks in the institutional-holding stocks). More specifically, the positive
index relative to a particular base period. The CNX Pharma
coefficient in the regression of correlation on negative returns
Index has a base date as Jan. 01, 2001 and a base value of is entirely captured by the interaction of return and the trading
1000. The CNX Pharma Index represents about 4.39% of the activity. An increase in trading volume when returns are
free float market capitalization of the stocks listed on NSE and negative leads to an increase in correlations. The results
77.26% of the free float market capitalization of the stocks
suggest that co-ordinated selling activity across stocks drives
forming part of the Pharmaceutical sector the asymmetry in correlations in small stocks.
J. Correlation The above literature provides an insight of correlation used
to study the relationship between different variables. There
In the world of finance, a statistical gauge of how two was no comprehensive study carried out in Indian Stock
securities or indexes moves in relation to each other. Markets to study the Market Index correlation with sectorial
Correlations are used in advanced portfolio management. indexes. Thus an attempt has been made in this study to
Correlation is computed into what is known as the correlation analyse the Nifty and its correlation with Sectorial Indices.
coefficient, which ranges between -1 and +1. Perfect positive
correlation (a correlation co-efficient of +1) implies that as
one index moves, either up or down, the other index will move III. OBJECTIVES
in lockstep, in the same direction. Alternatively, perfect The main intent of this study is to find out if there is
negative correlation means that if one index moves in either correlation between NSE Nifty returns and Sectorial Index
direction the index that is perfectly negatively correlated will returns. Secondary objective of this study is to find out if there
move in the opposite direction. If the correlation is 0, the is correlation between among Sectorial indices.
movements of the indexes are said to have no correlation; they
are completely random. IV. METHODOLOGY
A measure that determines the degree to which two The target Indexes for this study are NSE NIFTY and NSE
variable's movements are allied. seven primary industry indexes. The study has been conducted
The correlation coefficient is calculated as: for 8 sample size, for samples convenient sample has been
used. For data analysis correlation test has been used to find
correlation between NSE Nifty monthly returns and Sectorial
Indexes monthly returns during 2006 - 2010.
=
V. SCOPE
II. LITERATURE REVIEW
The present study is limited to NSE Nifty and seven NSE
Philipp Fasnacht & Henri Loeberge (2007) Studied
Sectorial Indexes in 2006-2010. Seven NSE Indexes are Auto,
International stock market correlations: A sectorial approach
Bank, Energy, FMCG, IT, Metal and Pharma.
and they found that sectorial correlations between markets are
more stable over time than correlation at the market level as
well as sectorial correlations within countries. Sectors such as VI. LIMITATIONS
Industry, Financials and Consumer services present however a 1. The samples taken for the study may not symbolize the true
rather high proportion of inconsistent correlation coefficients. population.

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 International Journal of Conceptions on Management and Social Sciences
Vol. 2, Issue. 1, March’ 2014; ISSN: 2357 - 2787

2. The market condition is always vague; the result reflects the Nifty
market of that period. Inde 0.8 0.8 0.92 0.69 0.8 0.9 0.7
x 85 71 4 9 35 15 71 1
VII. DATA ANALYSIS Table 3 exhibits that, Energy index has highest correlation
Table 2 shows that, Auto index has highest correlation with NSE Nifty at 0.924 fallows by Metal Index correlation
with NSE Nifty at 0.863 fallows by Metal Index correlation with nifty is 0.915 and FMCG has slightest correlation with
with nifty is 0.824 and FMCG has least correlation with NSE NSE Nifty index at 0.699. It has been found that, all the seven
Nifty index at 0.625. It has been found that, all the seven Indexes correlations with NSE Nifty is more than 0.60, it
Indexes correlations with NSE Nifty is more than 0.60, it means that all the indexes returns are moving along with NSE
means that all the indexes returns are moving along with NSE Nifty indices. Correlations among the sectorial indices, it is
Nifty indices. Correlations among the sectorial indices, it is found that from table – 3, between Auto and Metal correlation
found that from table – 2, IT and Metal correlation is highest is highest at 0.879 and least at 0.577 between Metal and
at 0.765 and least at 0.271 between IT and FMCG Indices. FMCG Indices. Energy, Metal and Auto Indices correlations
Auto Indices correlations with other indices are above 0.6 and with other indices are above 0.7 except with FMCG Indices
FMCG correlations with other indices is very low. and as usual FMCG correlations with other indices are low.
Table – 2: One Year Monthly Average Returns Correlations Table – 4: 5 Years Monthly Average Returns

Nifty Nifty
Auto Bank Energy FMCG IT Metal Pharma Aut Ba Ener FM Met Pha
Index IT Inde
o nk gy CG al rma
x
Auto 1
Auto 1
Bank 0.721 1
0.7
Energy 0.696 0.481 1 Bank 16 1
FMCG 0.658 0.585 0.764 1 Ener 0.7 0.7
IT 0.651 0.364 0.537 0.271 1 gy 34 68 1

Metal 0.728 0.683 0.485 0.317 0.765 1 FMC 0.6 0.5 0.62
G 55 65 8 1
Pharma 0.672 0.421 0.594 0.357 0.501 0.557 1
0.7 0.6 0.60 0.56
Nifty IT 92 09 9 8 1
Index 0.863 0.766 0.722 0.625 0.695 0.824 0.666 1
Meta 0.7 0.7 0.83 0.57 0.7
l 85 26 8 7 36 1
Table – 3: 3 Years Monthly Average Returns Correlations Phar 0.7 0.6 0.65 0.69 0.7 0.7
Nifty ma 24 04 6 3 26 09 1
Aut Ba Ener FM Met Pha
IT Inde Nifty
o nk gy CG al rma
x Inde 0.8 0.8 0.92 0.68 0.7 0.9 0.7
Auto 1 x 43 54 5 3 66 08 53 1

0.7
Bank 61 1 Table 4 reveals that, Energy index has highest correlation
Ener 0.8 0.7 with NSE Nifty at 0.925 fallows by Metal Index correlation
gy 33 74 1 with nifty is 0.908 and FMCG has least correlation with NSE
Nifty index at 0.683. It has been found that, all the seven
FMC 0.6 0.6 0.67 Indexes correlations with NSE Nifty is more than 0.60, it
G 26 52 6 1 means that all the indexes returns are moving along with NSE
Nifty indices. Correlations among the sectorial indices, it is
0.8 0.6 0.74 0.63 found that from table – 4, between Energy and Metal
IT 17 83 7 6 1 correlation is highest at 0.838 and least at 0.565 between Bank
Meta 0.8 0.7 0.83 0.57 0.8 and FMCG Indices. Energy, Metal and Auto Indices
l 79 68 8 7 55 1 correlations with other indices are above 0.7 except with
FMCG Indices and as usual FMCG correlations with other
Phar 0.6 0.6 0.69 0.62 0.7 0.7 indices are low.
ma 87 13 7 3 55 76 1

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 International Journal of Conceptions on Management and Social Sciences
Vol. 2, Issue. 1, March’ 2014; ISSN: 2357 - 2787

It has been found from above tables that, NSE Nifty Indices monthly average returns, it also means that many indexes
correlations are excellent with all sectorial indices in all the performance is along with NSE Nifty. Some of the Index stock
time periods. Especially Nifty correlations with Energy, Metal weightages is more in NSE Nifty, but influence is less than
and Auto indices are high and whereas correlations with other index stocks it means weightage is only not influence the
FMCG and Pharma indices it is normal. From the table 1 it has correlations between indexes. From the foregoing analysis, it
been observed that, Bank stocks weightage is more than can be conclude that Nifty influence the performance of
Energy, Metal and Auto stocks but Bank indices correlation is sectorial indices performance and FMCG and Pharma indexes
lesser than the Energy and Metal Indices correlations. It is also less influenced by other sectorial indexes.
been observed that, IT and FMCG stocks weightages in Nifty
are more than Auto and Metal stocks weightage, but IT and REFERENCES
FMCG indices correlations with Nifty are lesser than those
[1] Philipp Fasnacht & Henri Loeberge (2007), International Stock Market
indices. Among sectorial indexes FMCG and Pharma correlations: A Sectorial Approach, Finance International Meeting
correlations are low with other indexes in all the time periods AFFI-EUROFIDAI, Paris, December’ 2007 Paper.
and Energy, Metal and Auto correlations are elevated with [2] Rakesh Gupta & Parikshit. K. Basu (2008), Portfolio Optimization in the
other indexes. Indian Stock Market – Industry Sector Analysis, Delhi Business Review
X Vol. 9, No. 1 (January - June 2008)
VIII. CONCLUSION [3] Tarun Chordia, Amit Goyal & Qing Tong (2011), Asymmetric
Correlations, Emory University Seminar 2011.
NSE NIFTY monthly average returns for diverse time [4] [Link]
periods have been correlated with most of the sectorial indexes [5] [Link]

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