Are we ‘benching’ it right?

One of the most important ways to gauge the mood of the Indian economy is through Bombay Stock Exchange’s Sensitive Index (Sensex). While it shows if things are hunky-dory in the economy than it is also supposed to reflect the depressing state of the market.

The 30 share index is considered to be the economic barometer of the Indian capital market. Apparently, these 30 components are the largest and most actively traded stocks. These stocks are representatives of different sectors of the economy. Although they represent less than 1 percent of the total number of companies listed on the Bombay Stock Exchange yet they account for around 50 percent of the BSE's total market capitalisation.

Indian economy is defined by the small entrepreneurs and not by the big brothers. The heavyweights are well-armoured to fight a declining economy and it is the small and mid caps that truly bear the burns of rising costs of funds, power, labour etc. This is the basic reason why the market is at 22000 even after the Gross Domestic Product has fallen from 9 percent to 5 percent. The big corporates, who are considered to be the pulse of the country can easily take these things on their chin and walk straight to fight recession or may be even depression. Ironically, a steady Dalal Street is then glorified as a sign of the Foreign Institutional Investors’ re-enforced trust in India despite a crumbling economy.

Reports have shown that in the financial year 2012-13 while the ‘super 30’ earned a return of 7.45 percent, mid-cap and small companies lost to the tune of 10 and 19 percent respectively. While the Sensex fell only by 2.5 percent, mid-cap and small-cap indices have battered by 23 and 28 percent respectively.

Another limitation of the index is that out of the top 30 companies, six companies can alone alter the market because of the higher weights accredited to them.

                               Source: bseindia.com

The dominating representation of these companies has resulted in the Sensex becoming sensitive to only price movements of these companies. But are these six companies the only mirrors of the economy? Not really.

Surprisingly, two of these six companies are from the same parent company, HDFC.

Moreover, like stocks certain sectors also dominate the calculation of the Sensex.

Source: bseindia.com

Issue is not only the skewed representation of sectors but also the extreme sensitivity of the dominating sectors to changes in prices which make the index undesirably volatile.

Above all Sensex can be easily manipulated by fund managers. The index doesn’t seem to measure the economy correctly. The movement seems to misrepresent the economy as well as the stock market. A broader base and adequate representation of the small companies can make Sensex a better benchmark index.

About the author

Ritika Pradhan is a graduate in commerce and hold a diploma in Business Journalism and Corporate Communication from the University of Delhi. She has worked as the Public Relation Manager of EduKart.com and is currently pursuing English Journalism at the Indian Institute of Mass Communication. You can read more of her blogs on http://bruisedview.blogspot.in/