Complete Project Forex Mkt

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

http://en.wikipedia.org/wiki/Bond_(finance)

http://en.wikipedia.org/wiki/Secondary_market

http://en.wikipedia.org/wiki/Security_(finance)

http://en.wikipedia.org/wiki/Debt

http://en.wikipedia.org/wiki/Primary_market

http://en.wikipedia.org/wiki/Financial_market

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

http://en.wikipedia.org/wiki/Yield_curve

http://en.wikipedia.org/wiki/Bond_valuation

http://en.wikipedia.org/wiki/Interest_rate

http://en.wikipedia.org/wiki/Credit_risk

http://en.wikipedia.org/wiki/Government_bond

http://en.wikipedia.org/wiki/Stock_exchange

http://en.wikipedia.org/wiki/Over-the-counter_(finance)

http://en.wikipedia.org/wiki/Broker-dealer

http://en.wikipedia.org/wiki/Securities_Industry_and_Financial_Markets_Association

http://en.wikipedia.org/wiki/Bank_for_International_Settlements

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.

http://kalyan-city.blogspot.in/2010/11/what-is-stock-exchange-its-definitions.html

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

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.

http://neerajmishra.wordpress.com/2008/07/21/information-technology-it-in-india-the-challenges-future-scope/

http://neerajmishra.wordpress.com/2008/07/21/information-technology-it-in-india-the-challenges-future-scope/

“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/

http://www.targetseo.com/blog/2009/12/future-of-indian-it-industry-2012-2013/

http://www.targetseo.com/blog/2009/12/future-of-indian-it-industry-2012-2013/

http://www.business-standard.com/india/news/despite-economic-uncertainty-europe-offers-scope-for-indian-it-firms/474190/

http://www.business-standard.com/india/news/despite-economic-uncertainty-europe-offers-scope-for-indian-it-firms/474190/

3.8 Revenues and Market share of major IT companies in India

Figure – 3.1

http://3.bp.blogspot.com/-GQAQctWQGZM/TmOdlrDs62I/AAAAAAAAAQI/5RVhGvZqQGc/s1600/ITCompanie+Market+Share+2011.PNG

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

http://investorzclub.blogspot.in/2011/09/it-software-companies-market-share-in.html

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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Exchange rate of rupees per US dollar

Figure - 3

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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


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

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Table - 3


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


Exchange Rate in Rs

Share Price Of Wipro

Exchange Rate in Rs

Pearson Correlation 1 -.204


N 8 8

Share Price Of Wipro

Pearson Correlation -.204 1


N 8 8**. Correlation is significant at the 0.01 level (2-tailed).

Interpretations



3)Quarterly performance of Infosys

Figure - 7

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Figure - 8

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Table - 5


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


Exchange Rate in Rs

Share Price of Infosys

Exchange Rate in Rs



N 8 8

Share Price of Infosys



N 8 8


Interpretations


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


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Table - 7


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


Exchange Rate in Rs

Share Price Of Tech Mahindra

Exchange Rate in Rs



N 8 8

Share Price Of Tech Mahindra




Interpretations


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


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Figure - 15

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Table - 9


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



N 8 8

Share Price of HCL



N 8 8


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


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Figure - 17

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Figure - 18

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Table - 11


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



N 8 8

Share Price Of Patni




Interpretations



7)Quarterly results of Hexaware

Figure - 19


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Figure - 20

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Figure - 21

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Table - 13


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


Exchange Rate in Rs

Share Price Of Hexaware

Exchange Rate in Rs



N 8 8

Share Price Of Hexaware




Interpretations



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.

Complete Project Forex Mkt

Documents

clearing house facility

bretton woods system

national informatics centre

exits high degree

net profit increased

software technology parks

foreign exchange rate

exchange rate table