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Sensex hits 7 months high, History & Functions of Bombay Stock Exchange

Sensex hits 7 months high, History & Functions of Bombay Stock Exchange

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  • GS 3 || Economy || Banking & Financial Sector || Basics

Why in news?

  • The benchmark Sensex at the Bombay Stock Exchange rose 412 points or 1.08 per cent to close at a seven-month high of 38,545 in March 2019.

Sensex

  • Sensex, otherwise known as the S&P BSE Sensex index, is the benchmark index of the Bombay Stock Exchange (BSE) in India.
  • Sensex comprises 30 of the largest and most actively-traded stocks on the BSE, providing an accurate gauge of India’s economy. The index’s composition is reviewed in June and December each year.
  • Initially compiled in 1986, the Sensex is the oldest stock index in India.
  • The Sensex measures the stock prices of 30 listed companies of the Bombay Stock Exchange.
    • if the Sensex rises up, then it shows that the stock price of most companies of Bombay Stock Exchange (BSE) has increased; and
    • if the Sensex decreases; it shows that the stock price of most companies of BSE has dropped down.
  • The main reason for the ups and downs in the Sensex is the fluctuations in the prices of these 30 companies.
  • The base year of the Sensex is 1978-79 and the base index value was set at 100.

Bombay Stock Exchange (BSE)

  • The Bombay Stock Exchange (BSE) is the first and largest securities market in India and was established in 1875 as the Native Share and Stock Brokers’ Association.
  • Based in Mumbai, India, the BSE lists close to 6,000 companies and is one of the largest exchanges in the world.

How far is Sensex from all-time high?

  • While the benchmark Sensex has hit an all-time high of 38,989, it closed at an all-time high of 38,896 on Aug 28, 2018.
  • In March 2019, the benchmark Sensex hit an intra-day high of 38,593, before closing at 38,545.

Reasons for rise

  • Strong FPI flows into domestic equities: A large part of the gains have been accounted by strong FPI flows into domestic equities that amounted to over Rs 30,000 crore this month.
  • Domestic investment: The FPI support has come alongside the continued inflow into equities from domestic investors through the mutual fund route.
  • Modi’s re-election prospects: Experts say that expectations of NDA government coming back to power after general elections has provided some comfort to the markets that look for political stability.
  • Stable currency: The domestic currency on Tuesday bolstered against the US dollar by as much as 28 paise on weakening global crude oil prices. This seems to have boosted investor sentiment as a strong rupee may mean more FPI inflows.
  • Stability of global crude oil prices: Oil prices fell on Tuesday as China cut its 2019 economic growth target, dimming the outlook for fuel demand, although Opec-led efforts to cut output still offered some support.

Additional info

Foreign portfolio investments (FPIs)

  • FPIs consist of securities and other foreign financial assets that are passively held by the foreign investor.
  • This does not provide the foreign investor with direct ownership of the financial assets and can be relatively liquid depending on the volatility of the market that the investment takes place in.
  • Foreign portfolio investments can be made by individuals, companies, or even governments in international countries.
  • This type of investment is a way for investors to diversify their portfolio with an international advantage.
  • Foreign portfolio investment shows up in a country’s capital account.
  • It is also part of the balance of payments which measures the amount of money flowing in and out of a country over a given time period.

FPI vs. FDI

  • Foreign portfolio investment is similar, but differs from foreign direct investment.
  • In foreign portfolio investment the investor purchases stocks, securities and other financial assets but does not actively manage the investments or the companies that are issuing the assets.
  • So, in FPI the investor does not have direct control over the securities or businesses. This means that FPI tends to be more liquid and less risky than FDI.
  • The relatively high liquidity of FPI’s makes them much easier to sell than FDI’s. Foreign portfolio investments also tend to have a shorter time frame for returns than foreign direct investments.

Mains question

  • The benchmark Sensex at the Bombay Stock Exchange hit a seven-month high. Examine the factors leading to its rise.