The Stock Market in India

Topics: Stock market, Stock exchange, Stock Pages: 33 (8471 words) Published: May 21, 2015

The Stock Market in India: Its
Growth and Prospects.
Subid Chakraborty
St. Xavier’s College, Kolkata
Rachit Agarwal
St. Xavier’s College, Kolkata
Hemangi Desai
St. Xavier’s College, Kolkata
Nilesh Agarwal
St. Xavier’s College, Kolkata

We are grateful to the faculty of the Department of Economics, St. Xavier’s College, for their valuable comments on an earlier version of the paper. However, the usual disclaimer applies.



This study investigates history, growth, prospects and volatility in Indian stock markets. Specifically, it looks for the possible implications of integration between the financial and the real sector with specific focus on volatility of stock market fluctuations and output. In this paper we analyze the growth of the Indian stock markets and its effect on the economy as a whole. We also examine the Indian stock market on account of the process of financial liberalization in India. The reform program in India and in many developing countries has been producing major changes in the functioning of financial markets. Accordingly, there has been increasing participation of portfolio investors in stocks. We extend the Tobin’s model to a closed economy working under excess capacity. The model integrates stock market with the real sector along the Keynesian effective demand principle. The model is further augmented to include open-economy implications of the stock market.

Our analysis reveals that the Stock Market development unambiguously leads to output expansion through rise in investment in a closed economy. Once economy is open, it involves adjustment in trade balance and money supply. This underscores the importance of international political framework through appropriate sequencing of reforms, introduction of flexible exchange rate regime and the need of package inter-related measures of liberalization to be in place.

JEL Classification: E60, E61.

Keywords: Reforms, Volatility, Effective Demand.


1. Introduction

Financial crises in the last decade have revealed that financial asset price volatility has the potential to undermine financial stability. Available empirical evidence indicates that financial stability is endangered more by sudden shifts in volatility rather than by a sustained increase in the level of volatility. Understanding volatility is therefore central to risk management in an economy.

In the aftermath of the many crises that the last decade has been witness to, a return to the oldworld order of regulated/restricted flows has been proposed by many economists and policymakers. The clamor for restrictions on capital inflows has largely been on account of the notion that unregulated cross – border movement of portfolio capital causes “excessive” booms and busts and thus volatility/instability in the financial markets. Financial market volatility can have a wide repercussion on the economy as a whole. There is clear evidence of the important link between financial marketuncertainty1and public confidence. Policy makers therefore rely on market estimates of volatility as a barometer of the vulnerability of financial markets. The existence of excessive volatility or “noise” also undermines the usefulness of stock prices as a “signal” about the true intrinsic value of a firm, a concept that is core to the paradigm of informational efficiency of markets. Further, volatility estimation and forecasting have become a compulsory risk–management exercise for economies and many financial institutions around the world ever since the first Basle Accord was established in 1996.

A stock exchange is defined as under section 2(3) of the Securities Contracts (Regulation) Act, 1956, as “any body of individuals whether incorporated or not, constituted for...

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for Manmohan Singh” (OUP 1995).
Mankiw, N. G. Macroeconomics(Worth Publishers), 5th edition
Ministry of Finance (1991), Report of the Committee on the Financial System (Narasimham
Rakshit, Mihir. “Studies in the Macroeconomics of Developing Countries” (1989), “Some
Puzzles of India’s Macroeconomy” (2005) (mimeo).
Ray ,Debraj :Development Economics
Stoll H R and R Whaley (1990), “The Dynamics of Stock Index and Stock Index Futures
Tobin, James (1975). “A General Equilibrium Approach to Monetary Theory”, Journal of
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