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ABSTRACT
Stock market and foreign exchange market are the barometers of an economy and both the
markets are sensitive segments of the economy. Any changes in the policies of the country are
quickly reflected in these markets. There are different factors which affect stock markets like
interest rate, company performance, future growth prospects, inflation, political stability and
exchange rate ect. There are different factors which affect the exchange rate are like the flow of
capital between nation, inflation, interest rate, faith in government ability to protect the value of
currency, speculation etc.
But in this era of financial integration there is a lot of movements of funds between the markets and
ushered in a sea change in the financial architecture of Indian economy. This study attempts to
analyze the inter linkages between exchange rate and stock price of IT sector. The study is
conducted by considering exchange rate and stock prices from 1st April 2009 to 31st March 2011.
This is analyzed by using tools like correlation and regression. From the result it is clear that there
is no significant relationship between the exchange rate and IT share price of company.
1. Introduction
A popular theory and explanation of the contemporary changes occurring around us is
what we are in the midst of a 3rd major revolution in human civilization i.e. Third wave.
1st was agriculture revolution, 2nd Industrial revolution and 3rd we are in Information
revolution. Yet we are infact in the middle of a revolutionary jump. Are we seeing
through a continuous or discontinuous change in human society. And even if the present
era embodies a fundamental change, is the rise of IT and all its associated effect the key
dimension of change in this fundamental societal transformation? Information and
communication technology and a world wide system of information exchange has been
building growth for over 10 years and physical technology and industry is not slowing
but its accelerating.
Globalization and Financial liberalization in India have brought about sea of changes in
the financial functioning of the economy as a result of which the resultant gain of the
global integration of domestic and foreign financial markets has thrown open new
opportunities but at the same time exposed the financial system to significant risks.
Consequently it is important to understand the mutual relationship between the financial
markets from the stand point of financial stability. Though the inception of the financial
sector reforms has taken place initiated in the beginning of 1990s, particularly since 1992
there has been a dramatic change in the functioning of the financial sector of the
economy.
India is well known for IT services through the world and it is the one area where lots of
revenue and employment is generated. And all of these industry players mostly have their
clients based in other countries such as USA, Europe etc.
Though these companies struggle a lot and try to make huge profit and make big numbers
in dollars but they are unable to make it in INR because of the appreciating of rupee trend
where the dollars has been appreciated.
By these we come to know that there are certain issues which are beyond the control of
the corporate, though the companies perform well they cannot make good profit.
Theoretically the supply and demand fix the value of dollar. In the market if dollars are
more and rupee is less than the rate of dollar went down and vice versa. But in practical
no country tries to depreciate dollars as because of these there buying power also reduce
as have to pay more for that. Since many years Indian government is trying in setting
dollar value. As on now India has 293 billion dollar as foreign exchange. As of today
India is the 4th largest foreign currency holder country in the world. Out of these 293
billion dollar 65-67% is US dollar. Now if India wants to increase the value of rupee it
can bring all US dollar holding in the market to exchange with other currencies. In real
world no country want to decrease the dollar rate because if dollar falls down than India
will get less forex to buy things. In addition in future it cannot export any goods to US as
US dollar is so cheap. Indians cannot sell goods so cheap.
Likewise Indian software companies cannot export goods to US for so cheap rate. So the
result will be that India will go for slowdown, stops booming. People lose jobs. So India
wants to keep dollar value in well position so that Indians can export goods to US. Many
a times dollar lose value with respect to Euro but this manipulated this never last forever.
One day comes that India is losing money by fixing its rupees with dollars. Because oil
prices is going high Indians has to buy raw materials in the world for more money and
sell them for less. This doesn’t work for long time. Now US is going for recession of its
increased imports and decreased exports which created 9 trillion dollars of foreign debt.
Along with US, India will also enter in recession as Indian economy is now depending on
US. Whole world is entering in recession. But for India it’s a short term recession but for
US it may take decades to come up. On that time nobody knows who will be super
power. The IT sector and BPO companies have seen only good times except in early
2000. This trend of the rising rupee will force them to be more innovative in managing
their treasury, operational efficiency and their geographic footprint. For last several years
many Indian companies (top 10) were satisfies with their on-site/offshore(read India)
model.
Now it has become important to speed up plans to not only spread the geo-political risk
but to manage the strategic risk. Indian IT companies have also started diversifying
globally in order to reduce their exposure to the US market. For instance the big five
Indian IT companies derive about 70% of their revenues from the US have now started
focusing on Europe in a big way (Infosys, Wipro and TCS get about 20-30% revenue
from Europe).
The Indian rupee is on a rising curve in the past one month it has appreciated by 3.6% to
the dollar and since January 1 by a whopping 12% to the dollar. The rising rupee has
become a major concern among Indian IT and BPO firms, especially the smaller firms
that are not adequately hedged. Minimum alternative tax(MAT) and service tax further
add to their blues. With every 1% appreciation in the rupee the operational margins
decline almost to the tune of four basis points.
The BPO companies are primarily offshore driven. More than 95% people are from India.
This means their cost is in Indian rupees. Many of them invoice in USD and so earn in
dollars. This will have a larger impact than the IT companies with a large impact than the
IT companies with a large part of onsite component where people work in the US so their
salaries are also paid in the US. So to that extent there is less impact. Almost all Indian
companies have started hedging their currency positions. Some companies park a part of
their dollar deposits abroad. This is done to avoid the risk of currency movements.
Companies are trying to being in efficiency in various ways to mitigate the impact more
importantly new clients are coming in at higher price points. This may be difficult as
local players are not affected b this trend and compete very well with the global delivery
capabilities of the Indian companies. The rupee has in a year to date appreciated by 12%
to the US dollar. This has benefited the Indian economy by making imports cheaper
especially crude oil, on the other hand however this appreciation is likely to cause
significant harm not only to Indian exporters but also to the Indian economy in the long
run especially because most of this appreciation is occurring not due to a trade surplus
but due to large inflows of foreign exchange that can reverse itself quickly thereby
depreciating the rupee and causing massive inflation.
The relatively ‘free floating’ nature is responsible for such enormous inflows of foreign
exchange through FII, FDI and short term deposits as well as long term deposits sent by
PIO.
Rupee appreciating is already impacting the profit margins and pricing for many Indian
exporters because the cost of labour and some goods are in rupees only whereas more
than 80% of sales contracts signed by Indian exporters are in dollars.
1.1Foreign Exchange Market
The foreign exchange market (forex, FX, or currency market) is a form of exchange
for the global decentralized trading of international currencies. Financial centers around
the world function as anchors of trading between a wide range of different types of
buyers and sellers around the clock, with the exception of weekends. The foreign
exchange market determines the relative values of different currencies. The foreign
exchange market assists international trade and investment by enabling currency
conversion. For example, it permits a business in the United States to import goods from
the European Union member states especially Euro zone members and pay Euros, even
though its income is in United States dollars. It also supports direct speculation in the
value of currencies, and the carry trade, speculation on the change in interest rates in two
currencies.
In a typical foreign exchange transaction, a party purchases a quantity of one currency by
paying a quantity of another currency. The modern foreign exchange market began
forming during the 1970s after three decades of government restrictions on foreign
exchange transactions (the Bretton Woods system of monetary management established
the rules for commercial and financial relations among the world's major industrial states
after World War II), when countries gradually switched to floating exchange rates from
the previous exchange rate regime, which remained fixed as per the Bretton Woods
system.
1.2 Market participants
Unlike a stock market, the foreign exchange market is divided into levels of access. At
the top is the interbank market, which is made up of the largest commercial banks and
securities dealers. Within the interbank market, spreads, which are the difference between
the bid and ask prices, are razor sharp and not known to players outside the inner circle.
The difference between the bid and ask prices widens (for example from 0-1 pip to 1-2
pips for a currencies such as the EURO) as you go down the levels of access. This is due
to volume. If a trader can guarantee large numbers of transactions for large amounts, they
can demand a smaller difference between the bid and ask price, which is referred to as a
better spread. The levels of access that make up the foreign exchange market are
determined by the size of the "line" (the amount of money with which they are trading).
The top-tier interbank market accounts for 53% of all transactions. From there, smaller
banks, followed by large multi-national corporations (which need to hedge risk and pay
employees in different countries), large hedge funds, and even some of the retail market
makers. According to Galati and Melvin, “Pension funds, insurance companies, mutual
funds, and other institutional investors have played an increasingly important role in
financial markets in general, and in FX markets in particular, since the early 2000s.”
(2004) In addition, he notes, “Hedge funds have grown markedly over the 2001–2004
period in terms of both number and overall size”. Central banks also participate in the
foreign exchange market to align currencies to their economic needs.
1.2.1. Commercial companies
An important part of this market comes from the financial activities of companies seeking
foreign exchange to pay for goods or services. Commercial companies often trade fairly
small amounts compared to those of banks or speculators, and their trades often have
little short term impact on market rates. Nevertheless, trade flows are an important factor
in the long-term direction of a currency's exchange rate. Some multinational companies
can have an unpredictable impact when very large positions are covered due to exposures
that are not widely known by other market participants.
1.2.2. Central banks
National central banks play an important role in the foreign exchange markets. They try
to control the money supply, inflation, and/or interest rates and often have official or
unofficial target rates for their currencies. They can use their often substantial foreign
exchange reserves to stabilize the market. Nevertheless, the effectiveness of central bank
"stabilizing speculation" is doubtful because central banks do not go bankrupt if they
make large losses, like other traders would, and there is no convincing evidence that they
do make a profit trading.
1.2.3. Foreign exchange fixing
Foreign exchange fixing is the daily monetary exchange rate fixed by the national bank of
each country. The idea is that central banks use the fixing time and exchange rate to
evaluate behavior of their currency. Fixing exchange rates reflects the real value of
equilibrium in the market. Banks, dealers and traders use fixing rates as a trend indicator.
The mere expectation or rumor of a central bank foreign exchange intervention might be
enough to stabilize a currency, but aggressive intervention might be used several times
each year in countries with a dirty float currency regime. Central banks do not always
achieve their objectives. The combined resources of the market can easily overwhelm any
central bank. Several scenarios of this nature were seen in the 1992–93 European
Exchange Rate Mechanism collapse, and in more recent times in Southeast Asia.
1.2.4. Hedge funds as speculators
About 70% to 90% of the foreign exchange transactions are speculative. In other words,
the person or institution that bought or sold the currency has no plan to actually take
delivery of the currency in the end; rather, they were solely speculating on the movement
of that particular currency. Hedge funds have gained a reputation for aggressive currency
speculation since 1996. They control billions of dollars of equity and may borrow billions
more, and thus may overwhelm intervention by central banks to support almost any
currency, if the economic fundamentals are in the hedge funds' favor.
1.2.5. Investment management firms
Investment management firms (who typically manage large accounts on behalf of
customers such as pension funds and endowments) use the foreign exchange market to
facilitate transactions in foreign securities. For example, an investment manager bearing
an international equity portfolio needs to purchase and sell several pairs of foreign
currencies to pay for foreign securities purchases.
Some investment management firms also have more speculative specialist currency
overlay operations, which manage clients' currency exposures with the aim of generating
profits as well as limiting risk. While the number of this type of specialist firms is quite
small, many have a large value of assets under management), and hence can generate
large trades.
1.2.6. Retail foreign exchange traders
Individual Retail speculative traders constitute a growing segment of this market with the
advent of retail foreign exchange platforms, both in size and importance. Currently, they
participate indirectly through brokers or banks. Retail brokers, while largely controlled
and regulated in the USA by the Commodity Futures Trading Commission and National
Futures Association have in the past been subjected to periodic Foreign exchange fraud.
To deal with the issue, in 2010 the NFA required its members that deal in the Forex
markets to register as such (I.e., Forex CTA instead of a CTA). Those NFA members that
would traditionally be subject to minimum net capital requirements, FCMs and IBs, are
subject to greater minimum net capital requirements if they deal in Forex. A number of
the foreign exchange brokers operate from the UK under Financial Services Authority
regulations where foreign exchange trading using margin is part of the wider over-the-
counter derivatives trading industry that includes Contract for differences and financial
spread betting.
There are two main types of retail FX brokers offering the opportunity for speculative
currency trading: brokers and dealers or market makers. Brokers serve as an agent of the
customer in the broader FX market, by seeking the best price in the market for a retail
order and dealing on behalf of the retail customer. They charge a commission or mark-up
in addition to the price obtained in the market. Dealers or market makers, by contrast,
typically act as principal in the transaction versus the retail customer, and quote a price
they are willing to deal at.
1.2.7. Non-bank foreign exchange companies
Non-bank foreign exchange companies offer currency exchange and international
payments to private individuals and companies. These are also known as foreign
exchange brokers but are distinct in that they do not offer speculative trading but rather
currency exchange with payments (i.e., there is usually a physical delivery of currency to
a bank account).
It is estimated that in the UK, 14% of currency transfers/payments are made via Foreign
Exchange Companies. These companies' selling point is usually that they will offer better
exchange rates or cheaper payments than the customer's bank. These companies differ
from Money Transfer/Remittance Companies in that they generally offer higher-value
services.
1.2.8. Money transfer/remittance companies and bureaux de change
Money transfer companies/remittance companies perform high-volume low-value
transfers generally by economic migrants back to their home country. In 2007, the Aite
Group estimated that there were $369 billion of remittances (an increase of 8% on the
previous year). The four largest markets (India, China, Mexico and the Philippines)
receive $95 billion. The largest and best known provider is Western Union with 345,000
agents globally followed by UAE Exchange.
Bureaux de change or currency transfer companies provide low value foreign exchange
services for travelers. These are typically located at airports and stations or at tourist
locations and allow physical notes to be exchanged from one currency to another. They
access the foreign exchange markets via banks or non bank foreign exchange companies.
1.3. Factors affecting exchange rate
The following theories explain the fluctuations in exchange rates in a floating exchange
rate regime (In a fixed exchange rate regime, rates are decided by its government):
International parity conditions: Relative Purchasing Power Parity, interest rate parity,
Domestic Fisher effect, International Fisher effect. Though to some extent the above
theories provide logical explanation for the fluctuations in exchange rates, yet these
theories falter as they are based on challengeable assumptions [e.g., free flow of goods,
services and capital] which seldom hold true in the real world.
Balance of payments model (see exchange rate): This model, however, focuses largely on
tradable goods and services, ignoring the increasing role of global capital flows. It failed
to provide any explanation for continuous appreciation of dollar during 1980s and most
part of 1990s in face of soaring US current account deficit.
Asset market model (see exchange rate): views currencies as an important asset class for
constructing investment portfolios. Assets prices are influenced mostly by people's
willingness to hold the existing quantities of assets, which in turn depends on their
expectations on the future worth of these assets. The asset market model of exchange rate
determination states that “the exchange rate between two currencies represents the price
that just balances the relative supplies of, and demand for, assets denominated in those
currencies.”
None of the models developed so far succeed to explain exchange rates and volatility in
the longer time frames. For shorter time frames (less than a few days) algorithms can be
devised to predict prices. It is understood from the above models that many
macroeconomic factors affect the exchange rates and in the end currency prices are a
result of dual forces of demand and supply. The world's currency markets can be viewed
as a huge melting pot: in a large and ever-changing mix of current events, supply and
demand factors are constantly shifting, and the price of one currency in relation to
another shifts accordingly. No other market encompasses (and distills) as much of what is
going on in the world at any given time as foreign exchange.
Supply and demand for any given currency, and thus its value, are not influenced by any
single element, but rather by several. These elements generally fall into three categories:
economic factors, political conditions and market psychology.
1.3.1 Economic factors
These include: (a) economic policy, disseminated by government agencies and central
banks, (b) economic conditions, generally revealed through economic reports, and other
economic indicators.
Economic policy comprises government fiscal policy (budget/spending practices)
and monetary policy (the means by which a government's central bank influences
the supply and "cost" of money, which is reflected by the level of interest rates).
Government budget deficits or surpluses: The market usually reacts negatively to
widening government budget deficits, and positively to narrowing budget deficits.
The impact is reflected in the value of a country's currency.
Balance of trade levels and trends: The trade flow between countries illustrates
the demand for goods and services, which in turn indicates demand for a country's
currency to conduct trade. Surpluses and deficits in trade of goods and services
reflect the competitiveness of a nation's economy. For example, trade deficits may
have a negative impact on a nation's currency.
Inflation levels and trends: Typically a currency will lose value if there is a high
level of inflation in the country or if inflation levels are perceived to be rising.
This is because inflation erodes purchasing power, thus demand, for that
particular currency. However, a currency may sometimes strengthen when
inflation rises because of expectations that the central bank will raise short-term
interest rates to combat rising inflation.
Economic growth and health: Reports such as GDP, employment levels, retail
sales, capacity utilization and others, detail the levels of a country's economic
growth and health. Generally, the more healthy and robust a country's economy,
the better its currency will perform, and the more demand for it there will be.
Productivity of an economy: Increasing productivity in an economy should
positively influence the value of its currency. Its effects are more prominent if the
increase is in the traded sector.
1.3.2. Political conditions
Internal, regional, and international political conditions and events can have a
profound effect on currency markets.
All exchange rates are susceptible to political instability and anticipations about
the new ruling party. Political upheaval and instability can have a negative impact
on a nation's economy. For example, destabilization of coalition governments in
Pakistan and Thailand can negatively affect the value of their currencies.
Similarly, in a country experiencing financial difficulties, the rise of a political
faction that is perceived to be fiscally responsible can have the opposite effect.
Also, events in one country in a region may spur positive/negative interest in a
neighboring country and, in the process, affect its currency.
1.3.3. Market psychology
Market psychology and trader perceptions influence the foreign exchange market in a
variety of ways:
Flights to quality: Unsettling international events can lead to a "flight to quality",
a type of capital flight whereby investors move their assets to a perceived "safe
haven". There will be a greater demand, thus a higher price, for currencies
perceived as stronger over their relatively weaker counterparts. The U.S. dollar,
Swiss franc and gold have been traditional safe havens during times of political or
economic uncertainty.
Long-term trends: Currency markets often move in visible long-term trends.
Although currencies do not have an annual growing season like physical
commodities, business cycles do make themselves felt. Cycle analysis looks at
longer-term price trends that may rise from economic or political trends.
"Buy the rumor, sell the fact": This market truism can apply to many currency
situations. It is the tendency for the price of a currency to reflect the impact of a
particular action before it occurs and, when the anticipated event comes to pass,
react in exactly the opposite direction. This may also be referred to as a market
being "oversold" or "overbought".[18] To buy the rumor or sell the fact can also be
an example of the cognitive bias known as anchoring, when investors focus too
much on the relevance of outside events to currency prices.
Economic numbers: While economic numbers can certainly reflect economic
policy, some reports and numbers take on a talisman-like effect: the number itself
becomes important to market psychology and may have an immediate impact on
short-term market moves. "What to watch" can change over time. In recent years,
for example, money supply, employment, trade balance figures and inflation
numbers have all taken turns in the spotlight.
Technical trading considerations: As in other markets, the accumulated price
movements in a currency pair such as EUR/USD can form apparent patterns that
traders may attempt to use. Many traders study price charts in order to identify
such patterns.
1.4. Indian Financial System
The term financial system is a set of inter-related activities/services working together to
achieve some predetermined purpose or goal. In simple words it is a system that allows
the transfer of money between savers and borrowers.
It includes different markets, the institutions, instruments, services and mechanisms
which influence the generation of savings, investment capital formation and growth.
Financial system helps in organization planning and actions plans. The components of
financial system are explained below.
1.4.1. Financial Market
A market for the exchange of capital and credit, including the money markets and the
capital markets. Financial market is a mechanism that allows people to buy and financial
securities, commodities and other tangible items of value at low transaction costs and at
prices that reflect the efficient market hypothesis. In finance, financial market facilitate:
The raising of capital
The transfer of risk
International trade
1.4.2. Types of Financial Markets
A financial market consists of two major segments:
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.
Capital Market: While the money market deals in short-term credit, the capital market
handles the medium term and long-term credit.
Debt Market: The debt market is also called bond market. It is a financial market where
participants buy and sell debt securities, usually in the form of bonds.
1.4.2.1. Money Markets
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.
1.4.2.1.1. Money Market Instruments
Following are some of the important money market instruments or securities.
(a) Call Money: Call money is mainly used by the banks to meet their temporary
requirement of cash. They borrow and lend money from each other normally on a daily
basis. It is repayable on demand and its maturity period varies in between one day to a
fortnight. The rate of interest paid on call money loan is known as call rate.
(b) Treasury Bill: A treasury bill is a promissory note issued by the RBI to meet the
short-term requirement of funds. Treasury bills are highly liquid instruments, that means,
at any time the holder of treasury bills can transfer of or get it discounted from RBI.
These bills are normally issued at a price less than their face value; and redeemed at face
value. So the difference between the issue price and the face value of the treasury bill
represents the interest on the investment. These bills are secured instruments and are
issued for a period of not exceeding 364 days. Banks, Financial institutions and
corporations normally play major role in the Treasury bill market.
(c) Commercial Paper: Commercial paper (CP) is a popular instrument for financing
working capital requirements of companies. The CP is an unsecured instrument issued in
the form of promissory note. This instrument was introduced in 1990 to enable the
corporate borrowers to raise short-term funds. It can be issued for period ranging from 15
days to one year. Commercial papers are transferable by endorsement and delivery. The
highly reputed companies (Blue Chip companies) are the major player of commercial
paper market.
(d) Certificate of Deposit: Certificate of Deposit (CDs) are short-term instruments issued
by Commercial Banks and Special Financial Institutions (SFIs), which are freely
transferable from one party to another. The maturity period of CDs ranges from 91 days
to one year. These can be issued to individuals, co-operatives and companies.
(e) Trade Bill: Normally the traders buy goods from the wholesalers or manufactures on
credit. The sellers get payment after the end of the credit period. But if any seller does not
want to wait or in immediate need of money he/she can draw a bill of exchange in favour
of the buyer. When buyer accepts the bill it becomes a negotiable instrument and is
termed as bill of exchange or trade bill. This trade bill can now be discounted with a bank
before its maturity. On maturity the bank gets the payment from the drawee i.e., the buyer
of goods. When trade bills are accepted by Commercial Banks it is known as Commercial
Bills. So trade bill is an instrument, which enables the drawer of the bill to get funds for
short period to meet the working capital needs.
1.4.2.2. Debt Market
The bond market (also known as the credit, or fixed income market) is a financial market
where participants can issue new debt, known as the primary market, or buy and sell debt
securities, known as the Secondary market, usually in the form of bonds.
The primary goal of the bond market is to provide a mechanism for long term funding of
public and private expenditures. Traditionally, the bond market was largely dominated by
the United States, but today the US is about 44% of the market. As of 2009, the size of
the worldwide bond market (total debt outstanding) is an estimated $82.2 trillion, of
which the size of the outstanding U.S. bond market debt was $31.2 trillion according to
Bank for International Settlements (BIS), or alternatively $35.2 trillion as of Q2 2011
according to Securities Industry and Financial Markets Association (SIFMA).
Nearly all of the $822 billion average daily trading volume in the U.S. bond market takes
place between broker-dealers and large institutions in a decentralized, over-the-counter
(OTC) market. However, a small number of bonds, primarily corporate, are listed on
exchanges.
References to the "bond market" usually refer to the government bond market, because of
its size, liquidity, relative lack of credit risk and, therefore, sensitivity to interest rates.
Because of the inverse relationship between bond valuation and interest rates, the bond
market is often used to indicate changes in interest rates or the shape of the yield curve.
The yield curve is the measure of "cost of funding".
1.4.2.3. 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.
1.4.2.4. Primary Market
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.
1.4.2.5.Secondary Market
The secondary market known as stock market or stock exchange plays an equally
important role in mobilising 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.
1.4.2.6.Distinction Between Primary Market And Secondary Market:
1. Function : While the main function of primary market is to raise long-term funds
through fresh issue of securities, the main function of secondary market is to provide
continuous and ready market for the existing long-term securities.
2. Participants: While the major players in the primary market are financial institutions,
mutual funds, underwriters and individual investors, the major players in secondary
market are all of these and the stockbrokers who are members of the stock exchange.
3. Listing Requirement: While only those securities can be dealt within the secondary
market, which have been approved for the purpose (listed), there is no such requirement
in case of primary market.
4. Determination of prices: In case of primary market, the prices are determined by the
management with due compliance with SEBI requirement for new issue of securities. But
in case of secondary market, the price of the securities is determined by forces of demand
and supply of the market and keeps on fluctuating.
1.5 Stock Exchange
Stock Exchange (also called Stock Market or Share Market) is one important constituent
of capital market. Stock Exchange is an organized market for the purchase and sale of
industrial and financial security. It is convenient place where trading in securities is
conducted in systematic manner i.e. as per certain rules and regulations.
It performs various functions and offers useful services to investors and borrowing
companies. It is an investment intermediary and facilitates economic and industrial
development of a country.
1.5.1 Characteristics or features of stock exchange
Market for securities : Stock exchange is a market, where securities of corporate
bodies, government and semi-government bodies are bought and sold.
Deals in second hand securities : It deals with shares, debentures bonds and such
securities already issued by the companies. In short it deals with existing or
second hand securities and hence it is called secondary market.
Regulates trade in securities : Stock exchange does not buy or sell any securities
on its own account. It merely provides the necessary infrastructure and facilities
for trade in securities to its members and brokers who trade in securities. It
regulates the trade activities so as to ensure free and fair trade
Allows dealings only in listed securities : In fact, stock exchanges maintain an
official list of securities that could be purchased and sold on its floor. Securities
which do not figure in the official list of stock exchange are called unlisted
securities. Such unlisted securities cannot be traded in the stock exchange.
Transactions effected only through members : All the transactions in securities at
the stock exchange are effected only through its authorized brokers and members.
Outsiders or direct investors are not allowed to enter in the trading circles of the
stock exchange. Investors have to buy or sell the securities at the stock exchange
through the authorized brokers only.
Association of persons : A stock exchange is an association of persons or body of
individuals which may be registered or unregistered.
Recognition from Central Government : Stock exchange is an organized market.
It requires recognition from the Central Government.
Working as per rules : Buying and selling transactions in securities at the stock
exchange are governed by the rules and regulations of stock exchange as well
as SEBI Guidelines. No deviation from the rules and guidelines is allowed in any
case.
Specific location : Stock exchange is a particular market place where authorized
brokers come together daily (i.e. on working days) on the floor of market called
trading circles and conduct trading activities. The prices of different securities
traded are shown on electronic boards. After the working hours market is closed.
All the working of stock exchanges is conducted and controlled through
computers and electronic system.
Financial Barometers : Stock exchanges are the financial barometers and
development indicators of national economy of the country. Industrial growth and
stability is reflected in the index of stock exchange.
Ref:-http://kalyan-city.blogspot.in/2010/11/what-is-stock-exchange-its-definitions.html
1.5.2 Functions of stock exchange
Continuous and ready market for securities:-Stock exchange provides a ready and
continuous market for purchase and sale of securities. It provides ready outlet for
buying and selling of securities. Stock exchange also acts as an outlet/counter for
the sale of listed securities.
Facilitates evaluation of securities:-Stock exchange is useful for the evaluation of
industrial securities. This enables investors to know the true worth of their
holdings at any time. Comparison of companies in the same industry is possible
through stock exchange quotations (i.e price list).
Encourages capital formation:-Stock exchange accelerates the process of capital
formation. It creates the habit of saving, investing and risk taking among the
investing class and converts their savings into profitable investment. It acts as an
instrument of capital formation. In addition, it also acts as a channel for right (safe
and profitable) investment.
Provides safety and security in dealings:-Stock exchange provides safety, security
and equity (justice) in dealings as transactions are conducted as per well defined
rules and regulations. The managing body of the exchange keeps control on the
members. Fraudulent practices are also checked effectively. Due to various rules
and regulations, stock exchange functions as the custodian of funds of genuine
investors.
Regulates company management:-Listed companies have to comply with rules
and regulations of concerned stock exchange and work under the vigilance (i.e
supervision) of stock exchange authorities.
Facilitates public borrowing:-Stock exchange serves as a platform for marketing
Government securities. It enables government to raise public debt easily and
quickly.
Provides clearing house facility:-Stock exchange provides a clearing house
facility to members. It settles the transactions among the members quickly and
with ease. The members have to pay or receive only the net dues (balance
amounts) because of the clearing house facility.
Facilitates healthy speculation:-Healthy speculation, keeps the exchange active.
Normal speculation is not dangerous but provides more business to the exchange.
However, excessive speculation is undesirable as it is dangerous to investors &
the growth of corporate sector.
Serves as Economic Barometer:-Stock exchange indicates the state of health of
companies and the national economy. It acts as a barometer of the economic
situation / conditions.
Facilitates Bank Lending:-Banks easily know the prices of quoted securities. They
offer loans to customers against corporate securities. This gives convenience to
the owners of securities.
Ref:-http://kalyan-city.blogspot.in/2010/11/functions-of-stock-exchange-main.html
2.1 Introduction
India is one of the fastest growing economies in world. The backbone of any economy is
services sector in which the Banking sector holds a prominent place. An economy is said
to be developed when services sector contributes more than 60% of the GDP.
Theoretically the value of dollar is determined by supply and demand. If dollars are more
and rupees are less in the market automatically the dollar goes down. However practically
since last five to six years Indian government has been actively involved in setting the
dollar value. IT industry is one of the fastest growing industries in India and contributes a
lot to the economy. It gives employment and generates foreign exchange revenue for the
country. As US is the major customer of Indian IT sector and generates major part of the
revenue so this sector is highly dependent on US and its currency. Further much of the
transactions are designated in dollars so if something wrong happens to the US economy
then this sector suffers the most. There is a huge impact on this sector of US currency
rate. If dollar rate increases as compared to Indian rupee, it results in increase in the share
prices of IT stocks and vice versa.
Due to globalization exchange rate plays a significant role in the economy in today
world. Any wrong decisions impact the exchange market significantly as it appreciate or
depreciates the currency. In IT industry money rate plays very important role as most of
the revenue come from US market so if Indian rupee rate is appreciated then dollar will
fall which reduce the income of the company. This creates lots of problem for the
company. As company is not able to meet their target revenue the companies share
performance in the stock market is impacted. Hence we can see that the fluctuation of US
dollar rate as compared to Indian rupee has huge impact on IT companies of India.
2.2 Literature review
1. Aggarwal (1981)was the first to conduct a study to examine the relationship
between stock prices and floating values of dollars. He found that the value of US
dollar and US stock prices were positively correlated for period of 1974-1978.
2. Jorian (1990) has explored the sensitivity of a firm’s value to exchange rate
exposure of US multinationals. This study observes such relationship as positive
and it is largely related to the degree of foreign operations. The study has used the
rates of foreign sales to total sales as a proxy for foreign involvement.
3. Apte (1997) has examined the exchange rate exposure of stock prices by
considering monthly shares prices of 143 firms from CMIE corporate database
during 1990-1997. Considering trade weighted indices of NEER and REER, the
study estimated the exchange beta and regressed it with firm specific
characteristics like export ratio and import ratio. The result obtained from NEER
and REER indicate that 32 firms out of 143 samples are having significant
exchange rate exposure out of which 8 are negative and rest are positive exposure.
Thus it reveals that exchange rate risk is behaving as a systematic risk over and
above market risk in case of many Indian companies.
4. Apte (2001) investigated the relationship between the volatility of the stock
market and the nominal exchange rate of India by using EGARCH specification
on the daily closing USD/INR exchange rate, BSE 30(Sensex) & NIFTY – 50
over the period 1991 to 2000. The study suggest that there appears to be a spill
over from the foreign exchange market to the stock market but not the reverse.
5. Yamini and Kawadia (2002) have examined the relationship between sectoral
indices and exchange rates by considering sectoral indices like BSE-IT, BSE-CG,
BSE-FMCG, BSE-CD and BSE-HC. Their results show that the impact of
SENSEX on exchange rate is positive and significant on various indices. FMCG
and IT sectors do not seem to have any significant exchange exposure.
6. Nath and Samanta (2003) have tested whether returns in stock market are
interrelated with return in capital market considering a period from March 1993 to
December 2002, using daily NSE-50 index price and daily INR/USD value. The
Granger-casualty test conducted to find the relationship between exchange rate
and stock price with a lag of 5 days suggest that these two market does not have
any casual relationship. If one goes into specific years to see whether the
liberalizations in both the markets have brought them together or not, than even
no significant casual relationship is observable between exchange rate and stock
price except for the years 1993,2001 and 2002, during which the period
unidirectional casual influence from stock index returns to returns in forex market
is detected (with corresponding F statistics significant at 5% level of
significance). Very mild casual influence is reverse direction is also found in
some years (1997,2002).
7. Nath and Samanta (2003) in another paper examined the extent of integration
between foreign exchange and Indian stock markets during the liberalization era.
Considering NIFTY index and exchange rate on Indian Rupee to Dollar for a
period of 10 financial years from April 1993 to March 2003, the study tried to
employ two methodologies, Granger’s causality in Vector Auto Regression
(VAR) context and the Geweke’s Feed Back measures. The result shows
contemporaneous relationship between returns in two markets as very strong
(statistically significant at 1% level of significance) during four financial 1998-
1999,1999-2000,2001-2002,2002-2003 and in other years, this relationship as
statistically insignificant. The hypothesis of no casual influence of exchange rates
and stock prices could be accepted in three years, viz., 1994-1995(10%), 1995-
1996(1% level) and 1998-1999(10% level). The casual impact in reverse direction
is found to be significant in the years 1994-1995(1% level), 1996-1997(5% level),
2001-2002(1% level), and 2002-2003(10% level). Thus the test reveal the sign of
mild-to-strong casual relationship (either contemporaneously or lagged) between
returns in foreign exchange and capital markets during some years. However the
Geweke’s feedback measures detect strong casual relationship in each financial
year.
8. Seshiah, Ganesh and Vuyyuri (2003) examined the effect of exchange rates and
inflation on stock returns. The entire period of study from 1980-81 to 1999-2000
has been sub-divided into two parts, before and after 1991 to find the effect of
liberalizations. Using annual changes in BSE Index, Gold and Silver returns and
Inflation rates, the study conducted stepwise linear regression equation. It is found
that stock returns and exchange rates during pre-liberalization era have no
significant relationship. However, during post-liberalization period, the degree of
dependence of stock returns on exchange rate movements is found significant at 5
% level. This may be due to huge inflow of foreign portfolio investment into
Indian capital markets after liberalizations. This means that exchange rate
movements and stock returns volatility are closely related to exchange flows
affecting stock returns.
9. Yamini Karmakar and Kawadia (2002) have explored the interrelationship
between capital market, forex market and bullion market in India. Considering the
indices of BSE-Sensex, BSE-National and Nifty as the representatives of capital
market, the Rupee Dollar exchange rate as indicator of movements in forex
market, the study has estimated the response functions. It is observed that there is
price integration between stock prices, bullion prices and exchange rates. The
growth of stock prices was much more than the growth in bullion prices and
exchange rates during the period under study. All these markets are found more
stable in the era of economic reforms.
10. Ajayi R A and Mongone M (1996) applied error correction model for the two
variable namely stock indices and exchange rate to simultaneously estimate the
short and long run dynamics of the variables. The test revealed significant short
and long run feedback relation between the two financial markets.
11. Abhay Pethe and Ajit Karnil (2000), Basabi Bhattacharya and Jaydeep Mukherjee
(2002), Golaka C Nath and GP Samanta (1999), Naeem Muhammad and Abdul
Rasheed (2002) by applying the techniques of unit root tests, co-integration and
long run uranger non casuality test tested the casual relationships between stock
market index and exchange rate for India. The result show no long or short run
association between stock prices and exchange rates for India.
2.3 Statement of the problem
Stock prices are influenced by various factors like economic, political, global, social and
other market sentiment. When it comes IT stocks, foreign exchange markets influence the
stock prices to a large extent more particularly the changing dollar rates have huge
influence on IT stock prices. Hence, in the present project an attempt will be made to
study the role of foreign exchange markets on the stock prices of select IT companies
with special reference to US Dollar/rupee.
2.4 Need of the study
1. To study the market reaction when dollar rate increase or decrease as compare to
rupees.
2. To predict the stock price of the company by seeing the fluctuations of dollar
rates.
2.5 Objectives
1. To study the impact of fluctuations of dollar rate on IT company stocks
2. To study the investor’s perception on investment in IT companies
2.6 Hypothesis
H0: There is no significant relation between foreign exchange price and IT industry
shares.
H1: There is significant relation between foreign exchange price and IT industry shares.
2.7 Operational definitions
1) Exchange rate:- the exchange rate is the rate between 2 currencies specifies how
much one currency worth in terms of other.
2) Quotations :- an exchange rate quotations is given by stating the number of units
of a price currency that can be bought in terms of 1 unit currency.
3) Quotes :-
a) Direct quote :- it is a quote using country’s home currency as the price
currency
b) Indirect quote :- it is a quote using a country’s home currency as the unit
currency.
2.8 Research Methodology
a) Types of Research :-
The study type of this project is Analytical, Quantitative and Historical.
Analytical because we have to analysis the data collected for the study of
the report.
Quantitative because relationship is examine by expressing variables
Historical because to study this report we need data from past which is
called history.
b) Sample Size :-
Sample size is 7 selected IT companies
c) Sampling Frame :-
Sampling frame would be highly liquid stocks and rupees which is compared
to dollar.
d) Sampling Technique :-
Deliberate samples are taken. Only particular units are selected from
sampling frame.
2.9 Data Collection :-
a) Data Type :- Secondary
b) Data :-
1. Historical daily share price & information about their daily exchange
exposure.
2. Historical daily closing values of IT companies shares.
3. Direct quote of rupees & dollar.
2.10 Tools Used
1. Microsoft excel 2007
2. Analysis of financial statements
3. SPSS
2.11 Limitation
1. Only 7 companies
2. Market price only from NSE
3. Study of data of only 2 years
2.12 Chapter Scheme
Chapter 1 – Introduction
It includes the theoretical aspect of the study and introduction to the research
topic
Chapter 2 – Review of literature and Research Methodology
Which includes expert findings, Introduction part, Need for the study, Statement
of the problem, Scope of the study, Hypothesis, Objective, Research design,
Sample design, Source of data, Tools of analysis, Limitation of Study.
Chapter 3 – Industry Profile
This includes brief introduction about the Indian IT Industry
Chapter 4 – Analysis of Data
It includes Analysis and interpretation of data. Analysis is carried on by
preparation of Tables, Graphs, and Charts.
Chapter 5 – Findings , Conclusion & Suggestion
This chapter gives summary of findings of the study along with the conclusion
and suggestion for the study.
3.1 Industry profile
The Information technology industry in India has gained a brand identity as a
knowledge economy due to its IT and ITES sector. The IT–ITES industry has two major
components: IT Services and business process outsourcing (BPO). The growth in the
service sector in India has been led by the IT–ITES sector, contributing substantially to
increase in GDP, employment, and exports. The sector has increased its contribution to
India's GDP from 1.2% in FY1998 to 7.1% in FY2011. According to NASSCOM, the
IT–BPO sector in India aggregated revenues of US$88.1 billion in FY2011, where export
and domestic revenue stood at US$59 billion and US$29 billion respectively. The top
seven cities that account for about 90% of this sectors exports in
are Bangalore, Chennai, Hyderabad,Mumbai, Pune, Delhi, Kolkata, Coimbatore and Koc
hi Export dominate the IT–ITES industry, and constitute about 77% of the total industry
revenue. Though the IT–ITES sector is export driven, the domestic market is also
significant with a robust revenue growth. The industry’s share of total Indian exports
(merchandise plus services) increased from less than 4% in FY1998 to about 25% in
FY2012.
This sector has also led to employment generation. Direct employment in the IT services
and BPO/ITES segment was 2.3 million in 2009-10 and is estimated to reach nearly 2.5
million by the end of financial year 2010-11. Indirect employment of over 8.3 million job
opportunities is also expected to be generated due to the growth of this sector in 2010-11.
Generally dominant player in the global outsourcing sector. However, the sector
continues to face challenges of competitiveness in the globalized world, particularly from
countries like China and Philippines.
India's growing stature in the Information Age enabled it to form close ties with both
the United States of America and the European Union. However, the recent global
financial crises has deeply impacted the Indian IT companies as well as global
companies. As a result hiring has dropped sharply, and employees are looking at different
sectors like the financial service, telecommunications, and manufacturing industries,
which have been growing phenomenally over the last few years. India's IT Services
industry was born in Mumbai in 1967 with the establishment of Tata Group in
partnership with Burroughs. The first software export zone SEEPZ was set up here way
back in 1973, the old avatar of the modern day IT park. More than 80 percent of the
country's software exports happened out of SEEPZ, Mumbai in 80s.
3.2 History
The Indian Government acquired the EVS EM computers from the Soviet Union, which
were used in large companies and research laboratories. In 1968 Tata Consultancy
Services—established in SEEPZ, Mumbai by the Tata Group—were the country's largest
software producers during the 1960s. As an outcome of the various policies of Jawaharlal
Nehru (office: 15 August 1947 – 27 May 1964) the economically beleaguered country
was able to build a large scientific workforce, third in numbers only to that of the United
States of America and the Soviet Union. On 18 August 1951 the minister of
education Maulana Abul Kalam Azad, inaugurated the Indian Institute of
Technology at Kharagpur in West Bengal. Possibly modeled after the Massachusetts
Institute of Technology these institutions were conceived by a 22 member committee of
scholars and entrepreneurs under the chairmanship of N. R. Sarkar.
Relaxed immigration laws in the United States of America (1965) attracted a number of
skilled Indian professionals aiming for research. By 1960 as many as 10,000 Indians were
estimated to have settled in the US. By the 1980s a number of engineers from India were
seeking employment in other countries. In response, the Indian companies realigned
wages to retain their experienced staff. In the Encyclopedia of India, Kamdar (2006)
reports on the role of Indian immigrants (1980 - early 1990s) in promoting technology-
driven growth:
The United States’ technological lead was driven in no small part by the brain power of
brilliant immigrants, many of whom came from India. The inestimable contributions of
thousands of highly trained Indian migrants in every area of American scientific and
technological achievement culminated with the information technology revolution most
associated with California’s Silicon Valley in the 1980s and 1990s
The National Informatics Centre was established in March 1975. The inception of The
Computer Maintenance Company (CMC) followed in October 1976. During 1977-1980
the country's Information Technology companies Tata Infotech, Patni Computer
Systems and Wipro had become visible. The 'microchip revolution' of the 1980s had
convinced both Indira Gandhi and her successor Rajiv Gandhi that electronics and
telecommunications were vital to India's growth and development. MTNL underwent
technological improvements. During 1986-1987, the Indian government embarked upon
the creation of three wide-area computer networking schemes: INDONET (intended to
serve the IBM mainframes in India), NICNET (the network for India's National
Informatics Centre), and the academic research oriented Education and Research
Network (ERNET).
3.3 Post liberalization
Regulated VSAT links became visible in 1985. Desai (2006) describes the steps taken to
relax regulations on linking in 1991:
In 1991 the Department of Electronics broke this impasse, creating a corporation
called Software Technology Parks of India (STPI) that, being owned by the government,
could provide VSAT communications without breaching its monopoly. STPI set up
software technology parks in different cities, each of which provided satellite links to be
used by firms; the local link was a wireless radio link. In 1993 the government began to
allow individual companies their own dedicated links, which allowed work done in India
to be transmitted abroad directly. Indian firms soon convinced their American customers
that a satellite link was as reliable as a team of programmers working in the clients’
office.
Videsh Sanchar Nigam Limited (VSNL) introduced Gateway Electronic Mail Service in
1991, the 64 kbit/s leased line service in 1992, and commercial Internet access on a
visible scale in 1992. Election results were displayed via National Informatics Centre's
NICNET.
The Indian economy underwent economic reforms in 1991, leading to a new era
of globalization and international economic integration. Economic growth of over 6%
annually was seen during 1993-2002. The economic reforms were driven in part by
significant the internet usage in the country. The new administration under Atal Bihari
Vajpayee—which placed the development of Information Technology among its top five
priorities— formed the Indian National Task Force on Information Technology and
Software Development.
Wolcott & Goodman (2003) report on the role of the Indian National Task Force on
Information Technology and Software Development:
Within 90 days of its establishment, the Task Force produced an extensive background
report on the state of technology in India and an IT Action Plan with 108
recommendations. The Task Force could act quickly because it built upon the experience
and frustrations of state governments, central government agencies, universities, and the
software industry. Much of what it proposed was also consistent with the thinking and
recommendations of international bodies like world trade organizations (WTO),
international telecommunication union (ITU) and World Bank. In addition, the Task
Force incorporated the experiences of Singapore and other nations, which implemented
similar programs. It was less a task of invention than of sparking action on a consensus
that had already evolved within the networking community and government.
3.3.1 The New Telecommunications Policy, 1999 (NTP 1999) helped further liberalize
India's telecommunications sector. The Information Technology Act 2000 created legal
procedures for electronic transactions and e-commerce.
Throughout the 1990s, another wave of Indian professionals entered the United States.
The number of Indian Americans reached 1.7 million by 2000. This immigration
consisted largely of highly educated technologically proficient workers. Within the
United States, Indians fared well in science, engineering, and management. Graduates
from the Indian Institutes of Technology (IIT) became known for their technical skills.
The success of Information Technology in India not only had economic repercussions but
also had far-reaching political consequences. India's reputation both as a source and a
destination for skilled workforce helped it improve its relations with a number of world
economies. The relationship between economy and technology—valued in the western
world—facilitated the growth of an entrepreneurial class of immigrant Indians, which
further helped aid in promoting technology-driven growth.
3.4 Challenges and future scope of IT industry
The Indian information technology sector has been instrumental in driving the nation’s
economy onto the rapid growth curve. According to the Nasscom-Deloitte study, the
IT/ITES industry’s contribution to the country’s GDP has increased to a share of 5.2 per
cent in 2007, as against 1.2 per cent in 1998.
Further, the IT and BPO industries are poised to clock revenues worth US$ 64 billion by
the end of fiscal year 2008, registering a growth of 33 per cent with exports expected to
cross US$ 40 billion and the domestic market estimated to clock over US$ 23 billion,
according to a study. Simultaneously, the Indian IT services market is estimated to
remain the fastest growing in the Asia Pacific region with a CAGR of 18.6 per cent.
India’s IT growth in the world is primarily dominated by IT software and services such as
Custom Application Development and Maintenance (CADM), System Integration, IT
Consulting, Application Management, Infrastructure Management Services, Software
testing, Service-oriented architecture and Web services.
3.5 Challenges and Positives:
Can we stay Competitive? In the recent past we have seen that the Globalization 3.0 has
resulted in Outsourcing and Off-shoring spreading to various other countries like China,
Vietnam, Philippines and the Eastern European countries. In the wake of such
competition can we still remain competitive? The answer is pretty much yes. We know
that our assets are the talented pool of people who are not only competent technically but
also linguistically better at English compared to the other competitors. Also the
government support, labor pool, infrastructure, educational system, cost, political and
economic environment, cultural compatibility, global and legal maturity,
and data and intellectual property security and privacy give Indian IT companies and
edge. But contradicting this is the Nasscom survey, which states that majority of the
graduates coming out of the colleges today are unemployable. We need to introduce
training programs in colleges to train the talent pool of students not only technically but
also on soft skills. The training should also be imparted to the faculty to generate a better
equipped talent force. These measures have already being taken by the IT companies,
which also helps in reducing the training costs incurred by the IT companies after
recruitment.
3.5.1 Dependency on the US: In the wake of the Sub-Prime crisis and subsequent
economic recession in the US, the companies there started cutting down costs and one of
them being IT expenditures. Because the majority of the IT companies in India have an
export driven business model and majority of it is to the US, the companies have been
facing a lot of heat. Some of the clients of these IT companies have gone bankrupt; some
others have incurred heavy losses (Citigroup, Bear Sterns, and HSBC etc.) The IT
companies should therefore explore options in Europe, the western Asia and Asia-Pacific
and reduce direct dependency on the US.
Though it seems paradoxical but recession in the US is only going to make the Industries
over there outsource more, primarily to reduce their costs by efficient application of IT,
cheaper labor and cost effectiveness.
Indian IT firms outsourced and Off-shored! : It is observed that competitive markets have
emerged in Latin America, Eastern Europe and South East Asia. Moreover there are
emerging economies present in these areas like Brazil, Russia etc. The IT companies
have already forayed in these countries for two primary reasons: First, it provides them to
take advantages of cost-effectiveness in these areas due to new talent pool, Lower wages
and greater advantage by making their exports cheaper and competitive. Second, places
like Mexico have emerged as a major outsourcing and offshore development centre for
the IT companies due to the proximity to their major business clientele in the USA. This
not only provides cost-effectiveness, but also helping the client in round the clock service
providing environment.
3.5.2 Rupee Appreciation and FII: In the wake of US crisis it was observed that the
rupee appreciated due to the weakened US economy, Federal bank interest cuts and
subsequent FII inflows in the country. Due to this IT companies in India incurred lower
profit margins. On the flipside it surely gave them a wake-up call to effectively utilize the
resources and bench strength. FII inflows and FDI in the IT sector surely helps in rolling
out further expansion plans but excess FII also make the exports incompetent. So the
govt. should take steps to manage excess FII inflows into the country and hedge the
export driven sectors against the rupee appreciation.
3.5.3 IT SEZ’s: To further make the IT fraternity competitive, the govt. should take steps
to develop IT Sez’s. This will reduce the excess tax burden on these IT companies.
Moreover STPI (Software Technology Parks of India) have already enabled the IT
companies and new startups to carry out the documentation and licensing and tax
payment hassles through a single window system. Moreover the govt. should also relax
norms for DTA (domestic Tariff Areas) to promote IT spending in the country itself at a
lesser cost leading to development of the country.
3.5.4 Diversification In Verticals: In the wake of US crisis, one of the Indian IT
company suffered major drop in profits because majority of its clientele in the BFSI
(Banking Financial Sector and Insurance). This was the sector which took the brunt of the
recession. And the company’ BFSI clients cut down on their IT spending leading to lower
profits. Thus the companies should balance their presence in various verticals which will
surely make them immune to unforeseen events.
3.5.5 Telecom and 3G: The roll out of 3G of mobile phones in India should be seen as a
positive development for the IT companies. In the long run it is going to provide basic
communication facilities in the rural areas of the country. Unlike the US where 3G brings
luxury, In India it is going to provide basic communication and broadband access to the
rural youth. This will result in dissemination of information and creating further talent
pool for the country. We have already seen the IT industry moving to Tier-II and Tier-III
cities to tap local talent and maintain cost-effectiveness. Moreover Growth in Telecom
industry also demands greater IT application in terms of VAS (Value Added Services),
Telecom Billing Solutions, IVRS etc.
3.5.6 Domestic Markets: Dalian in China has been growing as the major IT hub there. If
actually compared China’s IT spending is five times that of India, most of it being
domestically. This could be also seen in the organization of retail sector in China
showcasing the presence of Retail majors like Wal-Mart there. Hence IT companies
should also focus more on the domestic markets with major projects lining up inside the
country as well for instance the Railways ERP project, the BSNL systems
integration, networking projects, IT work from ministry of finance and private telecom
companies, banks and others are offering multi-year contracts that are over US$ 100
million. Moreover multinationals have been lining up in India further strengthening the
IT growth in India.
Capgemini, Europe’s largest consulting and computer services firm is gradually
moving its internal support services to India.
After sourcing IT applications from some IT firms last year Wal-Mart will now
expand its existing operations given India’s impressive IT capability to cover
more firms and augment its work in the United States.
Intel-the globally renowned chip maker is looking to invest more than US$ 1
billion in India over the next three years in partnership with Indian and foreign
hardware firms to prepare light weight personal computers.
Cisco posted over 100 per cent year-on-year growth in its SME business in India.
Oracle is expecting over 100 per cent growth in India for its CRM business on the
back of increased technology awareness and need for cost-effective customer
servicing.
Yahoo! Inc and Tata Sons subsidiary firm Computational Research Laboratories
(CRL)have entered into a joint agreement to make available-EKA, a
supercomputer (the fourth fastest) in the world for cloud computing research in
India.
Dell India witnessed 80 per cent sales over last year with revenues to the tune of
US$ 700 million.
World’s leading chip designer firm ARM is expanding its India design centre to
make it the largest outside Britain.
IT biggies like Microsoft, IBM, Cisco, Oracle and a host of other IT entities are
working overtime to tap the smaller and medium businesses.
Ref:-http://neerajmishra.wordpress.com/2008/07/21/information-technology-it-in-india-
the-challenges-future-scope/
3.6 Expanding business to Europe
Indian information technology (IT) services companies are slowly gaining market share
in Europe, with European buyers opening up to off shoring services.
According to a recent Gartner report, the top five Indian IT services companies, including
Cognizant, have increased their market share in Western Europe from 2.3 per cent in
2010 to 2.8 in 2011.
Within Europe, while Tata Consultancy Services (TCS) continued to hold on to its
position of the leading IT services provider, Wipro managed to hold on to its position
despite competition from Cognizant and Infosys Technologies.
For 2011-12, Wipro’s IT services revenue from Europe stood at $1.6 billion, accounted
for 28.3 per cent of the company’s IT revenue of $5.9 billion. It was ahead of India’s
second largest IT services firm Infosys that derived $1.5 million in revenue from Europe.
Research company IDC said in a recent report, “One of the reasons for Wipro to do better
in Europe was its differentiated capabilities in infrastructure management, an area in
which it stands out strongly from most of its peers.”
The Nasdaq-listed Cognizant, which has overtaken Wipro in terms of revenue, is also
lagging in Europe. Cognizant, which reported a revenue of $6.12 billion for the 2011
calendar year, saw its revenue from Europe declining in the last quarter of 2011. Europe
contributed 19.9 per cent of Cognizant’s overall revenue at $1.17 billion.
“Indian IT services companies stared focusing on Europe quite recently. However, TCS,
which had got the early mover advantage, is the number one Indian player in the region.
It started focusing on Europe much before any other IT companies, including Wipro and
Infosys,” said Pradeep Udhas, partner, KPMG India.
TCS managed to hold on its position by bagging its first ever £1.37-billion ($2.2 billion)
UK deal from Friends Life in 2011. While Infosys also managed to bag two large deals in
Europe, the fourth quarter dip in Europe pulled the company’s performance in the region.
Amneet Singh, country head -India, Everest Group, believes that even though Europe is
struggling with its macro conditions, companies would look at reducing their costs and
"one of the ways that they can achieve this is through off shoring to regions that would
give them the option of labour arbitrage."
Indian IT services companies are looking to increase their wallet share in Europe by
setting up regional offices in various Europe countries and appointing country heads for
various countries among others.
“Our strategies for Europe are paying well. We are seeing good traction in the region and
our localized focus for Europe is bringing benefits for us,” said Infosys chief executive S
D Shibulal.
In the recent past, HCL Technologies was also witnessing good traction in Europe,
bagging significant wins from companies such as UPM, Statoil and AstraZeneca. Europe
accounts for 25 per cent of HCL Tech’s overall revenue.
“Due to the current market conditions in Europe, companies are looking to bringing down
cost of operation, which provides a lot of opportunity for the Indian players,” said Singh
of Everest Group. He, however, said that the Indian players would have to face stiff
competition from global companies like IBM, Accenture, Capgemini and Logica, which
have established a strong base in Europe.
The IT outsourcing market in Europe is estimated to be about $260 billion, according to
various reports.
Ref:-http://www.business-standard.com/india/news/despite-economic-uncertainty-
europe-offers-scope-for-indian-it-firms/474190/
3.7 Future of Indian IT Industry 2012 2013
The domestic IT services market in India is estimated to grow from $5.7 billion in 2008
to $12.8 billion in 2013, which represents a Compound Annual Growth Rate (CAGR) of
18.6 percent, says a study.
According to a study conducted by IT research firm Springboard Research, the vertical
would be heavily dominated by infrastructure services, which are expected to reach $7.2
billion in 2013, while applications services, with a CAGR of 19.6 percent would be the
fastest growing segment. In terms of industry verticals, Banking, Financial Services and
Insurance (BFSI) leads the Indian IT services market with 21.5 percent market share,
followed by the public sector (including education) and telecom industry. However,
energy and utilities, followed by healthcare remain the fastest growing vertical.
“The Indian domestic IT Services market is at par with international levels in terms of
average gross margin and provides immense opportunity to the vendors,” said Sudip
Saha, Springboard Research Senior Research Analyst (Services).
However, to meet high consumer expectations, vendors need to use strategies around
services delivery by implementing efficient processes, reusable tools and templates and
replaceable models, he added. “With industries such as public sector, healthcare, energy
and utilities, and transportation and logistics stepping up their IT spending, the appeal for
the Indian domestic market has increased tremendously and is drawing the attention of
domestic and MNC IT Service Providers,” Springboard Research Vice-President
(Services Research) Phil Hassey said. He added that the key challenge remains the
disability to convert the potential demand into successful client engagement.
Ref:-http://www.targetseo.com/blog/2009/12/future-of-indian-it-industry-2012-2013/
3.8 Revenues and Market share of major IT companies in India
Figure – 3.1
Companies revenue in 2011
CompanyFY 11 Revenue in Crores
Market share
TCS 37,325 24.9
Infosys 27,501 18.3
Wipro 23,606 15.7
Cognizant^ 20,655 13.8
HCL Tech 15,730 10.5
Mahindra Satyam 5,145 3.4
Tech Mahindra 5,140 3.4
Mphasis Ltd* 5,037 3.4
iGatePatni^^ 4,403 2.9
Oracle Fin 2,360 1.6
Rolta 1,805 1.2
Polaris 1,586 1.1
Mindtree 1,509 1.0
NIIT Tech 1,232 0.8
Hexaware* 1,054 0.7
Table – 3.1
Ref:-http://investorzclub.blogspot.in/2011/09/it-software-companies-market-share-in.html
1)Quarterly performance of TCS
Figure - 1
2009 june 2009 sept 2009 dec 2010 mar 2010june 2010 sept 2010 dec 2011 mar0
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Performance of shares
Figure - 2
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Exchange rate of rupees per US dollar
Figure - 3
Apr-09
May-09
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Chart Titleru
pee/
US$
Quarterly price of shares and exchange rate
Table - 1
Date Share price Rupees/US $
June 2009 699.75 46.99
Sept 2009 526.6 49.06
Dec 2009 687.8 46.25
March 2010 763.15 45.78
June 2010 738.8 46.98
Sept 2010 857.2 46.31
Dec 2010 1075.95 45.01
March 2011 1124.7 45.18
Correlations
Table – 2 Correlations
Exchange Rate in Rs
Share Price o f TCS
Exchange Rate in Rs
Pearson Correlation 1 -.862**
Sig. (2-tailed) .006
N 8 8
Share Price of TCS
Pearson Correlation -.862** 1
Sig. (2-tailed) .006
N 8 8
**. Correlation is significant at the 0.01 level (2-tailed).
Interpretations
There exits high degree of negative correlation between the exchange rate and share price of company i.e. – 0.862.
This infers that there is no impact on the price of shares by the fluctuations of exchange rate and the price of shares has increased to double from 544.3 Rs to 1124.7 Rs. And in that period there quarterly performance is also good as there net profit increased.
2)Quarterly performance of Wipro
Figure - 4
2009 june
2009 sept
Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-110
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1400
1600
Series 1
Series 1
rupe
es in
cror
es
Performance of shares
Figure - 5
Apr-09
May-09
Jun-09Jul-0
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Aug-09Sep
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Exchange rate of rupees per US dollar
Figure - 6
Apr-09
May-09
Jun-09Jul-0
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Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
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Chart Titleru
pee/
US$
Quarterly price of shares and exchange rate
Table - 3
Date Share price Rupees/US $
June 2009 397.7 46.99
Sept 2009 559 49.06
Dec 2009 635.8 46.25
March 2010 699.3 45.78
June 2010 658.1 46.98
Sept 2010 403.3 46.31
Dec 2010 414.55 45.01
March 2011 443.45 45.18
Correlations
Table – 4 Correlations
Exchange Rate in Rs
Share Price Of Wipro
Exchange Rate in Rs
Pearson Correlation 1 -.204
Sig. (2-tailed) .062
N 8 8
Share Price Of Wipro
Pearson Correlation -.204 1
Sig. (2-tailed) .062
N 8 8**. Correlation is significant at the 0.01 level (2-tailed).
Interpretations
There exits high degree of negative correlation between the exchange rate and share price of company i.e. – 0.204.
This infers that there is no impact on the price of shares by the fluctuations of exchange rate and the price of shares has increased to double from 251.6 Rs to 443.45 Rs. And in that period there quarterly performance is also good as there net profit increased.
3)Quarterly performance of Infosys
Figure - 7
2009 june Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-110
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Chart Titleru
pees
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s
Performance of shares
Figure - 8
Apr-09
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9Dec-
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Exchange rate of rupees per US dollar
Figure - 9
Apr-09
May-09
Jun-09Jul-0
9
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
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Chart Titleru
pee/
US$
Quarterly price of shares and exchange rate
Table - 5
Date Share price Rupees/US $
June 2009 1602 46.99
Sept 2009 2142.65 49.06
Dec 2009 2394.75 46.25
March 2010 2640.4 45.78
June 2010 2625.25 46.98
Sept 2010 2775.75 46.31
Dec 2010 3054.55 45.01
March 2011 3088 45.18
Correlation
Table – 6 Correlations
Exchange Rate in Rs
Share Price of Infosys
Exchange Rate in Rs
Pearson Correlation 1 -.678
Sig. (2-tailed) .064
N 8 8
Share Price of Infosys
Pearson Correlation -.678 1
Sig. (2-tailed) .064
N 8 8
**. Correlation is significant at the 0.01 level (2-tailed).
Interpretations
There exits high degree of negative correlation between the exchange rate and share price of company i.e. – 0.678.
This infers that there is no impact on the price of shares by the fluctuations of exchange rate and the price of shares has increased to double from 1375.5 Rs to 3088 Rs. And in that period there quarterly performance is also good as there net profit increased.
4)Quarterly results of Tech Mahindra
Figure - 10
2009 june Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-110
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pees
in cr
ores
Performance of shares
Figure - 11
Apr-09
May-09
Jun-09Jul-0
9
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Nov-09
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Exchange rate of rupees per US dollar
Figure - 12
Apr-09
May-09
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9
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Chart Titleru
pee/
US$
Quarterly price of shares and exchange rate
Table - 7
Date Share price Rupees/US $
June 2009 473.55 46.99
Sept 2009 971.7 49.06
Dec 2009 938.6 46.25
March 2010 896.05 45.78
June 2010 637.67 46.98
Sept 2010 646.65 46.31
Dec 2010 674.25 45.01
March 2011 673.55 45.18
Correlation
Table – 8 Correlations
Exchange Rate in Rs
Share Price Of Tech Mahindra
Exchange Rate in Rs
Pearson Correlation 1 -.287
Sig. (2-tailed) .491
N 8 8
Share Price Of Tech Mahindra
Pearson Correlation -.287 1
Sig. (2-tailed) .491
N 8 8**. Correlation is significant at the 0.01 level (2-tailed).
Interpretations
There exits high degree of negative correlation between the exchange rate and share price of company i.e. – 0.287.
This infers that there is no impact on the price of shares by the fluctuations of exchange rate and the price of shares has increased to double from 273 Rs to 673.55 Rs. And in that period there quarterly performance is also good as there net profit increased.
5)Quarterly results of HCL
Figure - 13
2009 june Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-110
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Chart Titleru
pees
in cr
ores
Performance of shares
Figure - 14
Apr-09
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Jun-09Jul-0
9
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Sep-09
Oct-09
Nov-09
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Feb-10
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shar
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Exchange rate of rupees per US dollar
Figure - 15
Apr-09
May-09
Jun-09Jul-0
9
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
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Mar-11
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Chart Titleru
pee/
US$
Quarterly price of shares and exchange rate
Table - 9
Date Share price Rupees/US $
June 2009 171.7 46.99
Sept 2009 297.35 49.06
Dec 2009 340 46.25
March 2010 364.45 45.78
June 2010 366.25 46.98
Sept 2010 386.55 46.31
Dec 2010 410.95 45.01
March 2011 467.75 45.18
Correlation
Table - 10 Correlations
Exchange Rate in Rs
Share Price of HCL
Exchange Rate in Rs
Pearson Correlation 1 -.601
Sig. (2-tailed) .115
N 8 8
Share Price of HCL
Pearson Correlation -.601 1
Sig. (2-tailed) .115
N 8 8
**. Correlation is significant at the 0.01 level (2-tailed).
Interpretations
There exists high degree of negative correlation between the exchange rate and share price of company i.e. – 0.601.
This infers that there is no impact on the price of shares by the fluctuations of exchange rate and the price of shares has increased to double from 100.85 Rs to 467.75 Rs. And in that period there quarterly performance is also good as their net profit increased.
6)Quarterly results of Patni
Figure - 16
2009 june Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-110
50
100
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200
250
Chart Titleru
pees
in cr
ores
Performance of shares
Figure - 17
Apr-09
May-09
Jun-09Jul-0
9
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
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Sep-10
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Dec-10
Jan-11
Feb-11
Mar-11
0
100
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600
Chart Title
shar
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Exchange rate of rupees per US dollar
Figure - 18
Apr-09
May-09
Jun-09Jul-0
9
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10Jul-1
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Aug-10
Sep-10
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Nov-10
Dec-10
Jan-11
Feb-11
Mar-11
41
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Chart Titleru
pee/
US$
Quarterly price of shares and exchange rate
Table - 11
Date Share price Rupees/US $
June 2009 218.15 46.99
Sept 2009 415.85 49.06
Dec 2009 448 46.25
March 2010 471.15 45.78
June 2010 542.25 46.98
Sept 2010 459.6 46.31
Dec 2010 467.35 45.01
March 2011 450.85 45.18
Correlations
Table - 12 Correlations
Exchange Rate in Rs
Share Price Of Patni
Exchange Rate in Rs
Pearson Correlation 1 -.244
Sig. (2-tailed) .560
N 8 8
Share Price Of Patni
Pearson Correlation -.244 1
Sig. (2-tailed) .560
N 8 8**. Correlation is significant at the 0.01 level (2-tailed).
Interpretations
There exits high degree of negative correlation between the exchange rate and share price of company i.e. – 0.244.
This infers that there is no impact on the price of shares by the fluctuations of exchange rate and the price of shares has increased to double from 127.85 Rs to 450.85 Rs. And in that period there quarterly performance is also good as there net profit increased.
7)Quarterly results of Hexaware
Figure - 19
2009 june Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-110
5
10
15
20
25
30
35
40
45
50
Chart Titleru
pees
in cr
ores
Performance of share
Figure - 20
Apr-09
May-09
Jun-09Jul-0
9
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
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Jun-10Jul-1
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Feb-11
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0
20
40
60
80
100
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140
Chart Title
shar
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Exchange rate of rupees per US dollar
Figure - 21
Apr-09
May-09
Jun-09Jul-0
9
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
May-10
Jun-10Jul-1
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Aug-10
Sep-10
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Nov-10
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Jan-11
Feb-11
Mar-11
41
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Chart Titleru
pee/
US$
Quarterly price of shares and exchange rate
Table - 13
Date Share price Rupees/US $
June 2009 44.55 46.99
Sept 2009 83.3 49.06
Dec 2009 91.5 46.25
March 2010 67.3 45.78
June 2010 72.95 46.98
Sept 2010 68.2 46.31
Dec 2010 88.4 45.01
March 2011 54.95 45.18
Correlations
Table – 14 Correlations
Exchange Rate in Rs
Share Price Of Hexaware
Exchange Rate in Rs
Pearson Correlation 1 -.088
Sig. (2-tailed) .835
N 8 8
Share Price Of Hexaware
Pearson Correlation -.088 1
Sig. (2-tailed) .835
N 8 8**. Correlation is significant at the 0.01 level (2-tailed).
Interpretations
There exits high degree of negative correlation between the exchange rate and share price of company i.e. – 0.088.
This infers that there is no impact on the price of shares by the fluctuations of exchange rate and the price of shares has increased to double from 27.15 Rs to 54.95 Rs. And in that period there quarterly performance is also good as there net profit increased.
FINDINGS
Forex rates have sharp decline of rupees five, which means rupee has appreciated
to dollar by rupees five.
Not all the Information Technology companies have strong relationship with
foreign exchange rates.
Not only foreign exchange rate but other factors are also responsible for the stock
price.
Almost all the companies share price have increased to 50% or more.
Not all the companies have stability in their profits.
There are companies which have negative correlation to foreign exchange rate.
Though their doesn’t exists strong linear relationship so it is difficult to predict
stock price using only regression.
All the companies are not showing same trends in their quarterly profit which
means the common factor which affects the industry wouldn’t have affected there
profile.
There is no company which has traded with the price traded in 2009, almost all
the companies share prices have gone high more than 50%.
Though regression statements were formed to predict stock prices for there future
based on the forex rate for the day, it was not producing proper prices which
could have been used to take position based on these results.
There is not much of volatility in the stock prices of all the companies in the
industry.
Companies showing positive correlation also making good profits.
CONCLUSION
The companies showed a varying degree of correlation where by it means each and every
company has its own level of significance to foreign exchange rates. And companies even
exhibited correlation where they are referring that they had a favorable environment
even when rupees are appreciating compared to US dollar. Though there doesn’t exist a
perfectly positive or negative correlation it was not possible to build a regression
statement that would any one in predicting stock prices by capitalizing this equation
which also means that there are many other factors which are affecting the movement of
stock prices of IT companies other than foreign exchange rate.
Therefore for an investors/speculators should concentrate on both i.e. the shares where he
wants to invest and the foreign exchange rate.
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