Cross-border trade is the missing piece for India’s growth

The potential for cross-border trade between India and its neighbouring countries — Bangladesh, Bhutan, Nepal, Myanmar, Pakistan, Afghanistan and China — has not been fully realised. India’s formal cross-border trade with these countries was about US$2.48 billion in 2021 despite the US$115 billion trade potential. Only nine of India’s seventeen border states are actively engaged in cross-border trade. 

Source: East Asia Forum

This is due to political and security reasons, difficult geographical terrain for connectivity and growing informal trade which has stemmed from open borders in most of the northeastern region. 

Borders with neighbouring countries are often not properly fenced and guarded, resulting in insurgency and illegal movement of goods and people. Most of the northeastern region, as well as Jammu and Kashmir, face insurgency issues. Insurgents take advantage of porous borders to escape from the army as they are internationally well-connected and have hideouts in neighbouring countries. 

Another persistent issue is the undocumented cross-border migration from Bangladesh to India’s border regions, which results in human trafficking and other crimes. This has catalysed bilateral tensions between the two countries. The realities of the northeastern region pose a challenge to India’s open economic policy as conceptualised by the ‘Act East’ policy, which is currently oscillating between the need for basic economic development in the region and security constraints. 

Despite these challenges, northeastern states possess the potential to leverage their strong ethnic and cultural ties with neighbouring countries to facilitate the trade of locally produced goods via border haats (local markets along borders) and other channels. These channels can create numerous employment opportunities for young people. 

The proposed increase in border haats with Bangladesh, construction of new airports and the new PM-DevINE scheme (a regional development initiative) allow northeastern states to break the cycle of dependence on the central government. 

Both the central and state governments have introduced many developmental and infrastructural initiatives, such as Bharatmala — an intra-national transport network to strengthen land route connections with neighbouring countries. 

But despite these initiatives, northeastern states still face an infrastructural deficit. Poor road connectivity and a lack of bridges remain the biggest infrastructural challenge in the border districts of the state. Most villages do not even have access to tap water and electricity, and the Border Area Development Program does not have sufficient funds to fulfil the needs of border districts. Most borderlands lack basic amenities and employment opportunities, causing people to leave. 

The central government’s flagship initiatives, Make in India and the Self Reliant India Campaign, are efforts to make India a manufacturing hub. Given that vision, regional integration should be at the top of India’s foreign policy agenda, because it would help overcome constraints to the flow of goods, services, capital, people and ideas — all of which are critical to delivering high economic growth.

The central government needs to increase budget allocations for infrastructure and development initiatives in the border areas to provide necessary facilities for local populations. State governments could establish Export Promotion Zones for border trade through Integrated Check Posts by providing institutional and financial support to local entrepreneurs. They could also initiate an institutional framework at the state level to boost local trade, with designated ministries identifying local challenges and strengths.

The role of sub-regional groupings such as the Bay of Bengal Initiative for Multi-Sectoral Technical Economic Cooperation (BIMSTEC) and the Bangladesh, Bhutan, India, Nepal Initiative in facilitating border trade in India cannot be ignored. These groupings help reduce trade barriers, harmonise trade policies, develop infrastructure, enhance cooperation and promote regional integration which are essential for facilitating cross-border trade. 

BIMSTEC is in line with India’s ‘Act East’ policy, which seeks to foster greater regional cooperation in Southeast Asia. During the 2022 summit, Indian Prime Minister Narendra Modi urged BIMSTEC leaders to transform the group into a means of connectivity, prosperity and security — the three drivers of India’s regional diplomacy. 

India considers soft and hard infrastructure connectivity a key priority of its regional foreign policy. New Delhi’s recent initiatives such as the Bangladesh, Bhutan, India, Nepal Initiative Motor Vehicles Agreement, the expansion of cross-border railway linkages with Nepal and Bangladesh, the India–Myanmar–Thailand trilateral highway, efforts to start direct flights between Indian cities and Southeast Asian tourist destinations and the Security and Growth for All in the Region initiatives are all evidence of India’s commitment to this goal.

It is difficult to deliver high GDP growth without simultaneous growth in trade, particularly where manufacturing relies on integrated cross-border value chains. 75 years after independence, India — with its experience in soft power diplomacy to manage international relations — can lead the cross-border territorial integration with neighbouring countries to promote peace and prosperity across the border states. 

Excerpted from Kumarasamy, D and Nayyar, M (2023), "Cross-border trade is the missing piece for India's growth", East Asia Forum, Crowford School of Public Policy, Australian National University. Original article accessible here.

Durairaj Kumarasamy is Associate Professor and Head of the Department of Economics at the Faculty of Behavioral and Social Science, Manav Rachna International Institute of Research and Studies. durairaj.fbss@mriu.edu.in

Manisha Nayyar is Assistant Professor in the Department of Economics at the Faculty of Behavioral and Social Science, Manav Rachna International Institute of Research and Studies. manisha.fbss@mriu.edu.in

The Dominance of Oil Price Fluctuations on India’s Exchange Rate and Foreign Reserves

 

ABSTRACT

Crude oil prices are a major factor in every nation's economic development. More than 70% of India's crude oil needs are met by imports. This article's objective is to analyze how changes in the price of oil affect the expansion of the Indian economy, in particular the exchange rate and foreign reserves.

 

KEYWORDS

Crude Oil price, Growth of Indian economy, Inflation, Imports of crude oil, balance of trade deficit, Exchange Rates, Foreign Reserves

INTRODUCTION

Economic growth cannot be separated from the role that energy plays. Oil continues to be one of the most important energy sources, along with coal, natural gas, electricity, solar, wind, and nuclear energy, in a nation's economy, supporting things like transportation, businesses, and households. India is similar to other countries in this sense, however oil is the major energy source there, making up 31% of primary energy consumption. India is the seventh-largest nation in the world, with a population of more than 1.2 billion. It contributes 17.2% of the global population and has the second-largest population.

As per the Monthly Ready Reckoner January, 2023 (Ministry of Petroleum & Natural Gas), India produces 29.7 MMT( million metric tons) in 2022 and consumed 204.7 MMT of petroleum products as compared to 194.3 MMT in the year 2021.India imports 80% of its crude oil, whereas just 20% is produced domestically by PSUs like ONGC, OIL, and other private entities. Several PSU businesses including IOCL, BPCL, and HPCL as well as private entities like Reliance and Essar refine and process crude oil in India. India is one of the world's top importers of crude oil. India mostly imports crude oil from the Middle East.

Source: www.google.com

A group of 13 significant oil-producing nations known as OPEC generates nearly 40% of the world's crude oil collectively. Around 60% of the petroleum traded internationally is exported by the OPEC. India is the third-largest crude oil importer in the world, after China and the United States. 85 percent of our total imports of petroleum and 94 percent of our purchases of gas come from OPEC nations. Moreover, India is currently importing crude oil from Asia Pacific, Africa, and South America. India imported 120 billion dollars' worth of crude oil in 2022, roughly twice as much as it imported the year before.

Due to India's substantial reliance on oil imports, which is demonstrated in Figure 1, multiple oil price shocks that have an impact on both the domestic economy, directly and indirectly, are most likely to occur.

Figure 1: Share of India's Oil Import

Source: Handbook of Statistics of Indian Economy: Reserve Bank of India

Note: Share of Oil Imports= Total Oil Imports (in dollars)/ Total Oil+Non-Oil Imports(in dollars)

WHY DO OIL PRICES FLUCTUATE?

 

1. The Organization of Petroleum Exporting Countries, or OPEC, is the primary factor affecting changes in oil prices. Algeria, Angola, Congo, Equatorial Guinea, Gabon, Iran, Iraq, Kuwait, Libya, Nigeria, Saudi Arabia, the United Arab Emirates, and Venezuela make up the group known as OPEC, which will consist of 13 nations as of 2021. The consortium decides on production levels to satisfy global demand and has the power to change oil and gas prices by raising or lowering output. Prior to 2014, OPEC promised to maintain oil prices above $100 per barrel for the foreseeable future, but in the middle of the year, the price of oil started to decline. It dropped from a peak of more than $100 a barrel to less than $50 per barrel. In that case, OPEC was largely to blame for the low price of oil since it refused to reduce oil output, which caused prices to fall.
2. Supply and Demand: Oil prices fluctuate according to the principles of supply and demand, just like they do with any other good, stock, or bond. Prices decrease when supply outpaces demand; the opposite is also true when demand outstrips supply. Reduced oil demand in Europe and China, along with a consistent supply of oil from OPEC, have been blamed for the sharp decline in oil prices in 2014. Oil prices dropped significantly as a result of the excess supply. Oil prices are influenced by supply and demand, but oil futures actually determine the price. A legally binding contract known as an oil futures contract gives the buyer the right to purchase a barrel of oil at a certain price in the future. The buyer and seller of the oil are required to complete the transaction on the date specified in the contract.
3. Natural Disasters: Another element that may affect oil prices is natural disasters. For instance, the price of oil increased by $13 a barrel when Hurricane Katrina hit the southern United States in 2005, hurting over 20% of the country's oil supply. The Mississippi River's flooding in May 2011 also caused changes in oil prices.
4. Political Instability: Since the Middle East produces the majority of the world's oil supply, political unrest in the region has an impact on oil prices globally. For instance, in July 2008, a barrel of oil cost $128 because of unrest and consumer apprehension over the conflicts in Afghanistan and Iraq.
5. Production Cost and Storage: Oil prices might fluctuate due to production expenses as well. While it costs less to extract oil in the Middle East, it costs more to do so in Canada's oil sands.If the only oil left is in the tar sands, the price might theoretically increase if the supply of cheap oil runs out. The price of oil is also directly impacted by U.S. output. Due to the extreme overstock in the market, a drop in output lowers total supply and raises prices.
6. Interest Rates: One of the fundamental hypotheses contends that as interest rates rise, manufacturers' and consumers' expenditures increase, resulting in less time and money spent driving overall. Less demand for oil results from fewer vehicles on the road, which can lower oil costs. This is what we would refer to as an inverse correlation. According to the same principle, when interest rates fall, people and businesses can borrow and spend money more easily, which increases the demand for oil. More consumers bid up the price of oil the more it is used.

                    

  Figure 2: Oil Price Fluctuations over 2012-2022

Source: Handbook of Statistics of Indian Economy: Reserve Bank of India (Prices in Dollars)

 

 IMPACT OF RISING CRUDE OIL PRICES ON THE INDIAN ECONOMY

●      India has a current account deficit because it imports more than 86% of its oil needs. India's import bill would grow due to the increase in crude oil prices, which will cause the CAD to worsen (difference between import and export).

●      The consumer price index (CPI) is also significantly impacted by rising crude oil prices. As a result, inflation rises in tandem with rising crude oil prices.

●      It is the discrepancy between what the government receives in direct and indirect taxes and what it spends. The price of gasoline won't go up if the government decides not to pass on the increases in crude oil prices to the customer. But, somebody needs to absorb the blow. It will be the Indian government in this instance. That will result in a budget deficit, which is never beneficial to the economy.

●      The RBI will need to raise interest rates in order to contain inflation as a result of rising crude oil prices. It will result in less expenditure, which will slow down the nation's growth.

●       Oil import costs would increase for net oil importers like India as the price of oil rises on the global market. A rise in the price of oil globally will affect the trade deficit. Because of the rise in inflation brought on by rising oil prices, actual GDP growth has been much slower.

●      This connects domestic inflation to global pricing. A typical developing nation like India that is seeing an increase in the price of oil on the global market would see an increase in the general price level as a result of both direct consumption of oil at the higher price and an increase in the cost of producing final goods that utilize oil as an input.

●      If there is not a complete pass-through, an increase in the price of oil internationally will result in a higher oil subsidy, which will increase the government's revenue spending. Additionally, oil prices in India are subsidized, but they also generate significant tax revenues for the federal government and the states. Due to an increase in ad valorem tax collections on oil and petroleum products, which must be netted out to determine the net contribution to the government's oil subsidy, an increase in the price of oil internationally would result in higher revenue receipts.

Source: www.google.com

 

IMPACT OF OIL PRICE FLUCTUATIONS ON EXCHANGE RATES

The terms of trade channel, the wealth effect channel, and the portfolio reallocation channel are three direct transmission pathways of oil prices to exchange rates that have been taken into consideration in the literature (Buetzer et al, 2016). Amano and van Norden introduced the terms of trade channel (1998a, b). The fundamental concept, according to Bénassy-Quéré et al. (2007), is to relate the price of oil to the price level that influences the real exchange rate. The output price of a country A's non-tradable sector will rise in comparison to a country B's non-tradable sector if the former uses more energy than the latter. This suggests that greater inflation causes the currency of country A to really appreciate (Chen and Chen, 2007; Buetzer et al., 2016). 

If the assumption that the price of tradable products is fixed is abandoned, effects on the nominal exchange rate follow. In this situation, purchasing power parity serves as a link between the fluctuations of the nominal exchange rate and inflation (PPP). We anticipate that the tradable currencies of nations with significant oil dependence will fall as a result of greater inflation if the price of oil rises. As the price of the tradable (and non-tradable) commodities mentioned above changes, it will have an effect on how the real exchange rate reacts, depending on how the nominal exchange rate changes. Overall, depending on how prices are adjusted, the causality encoded in the terms of trade channel may persist over various time horizons.

 

 

Figure 3: Oil Price and Exchange Rate Causality

Source: https://www.eia.gov/workingpapers/pdf/oil_exchangerates_61317.pdf

The fundamental concept of the portfolio and wealth channel was first proposed by Krugman and Golub in 1983 and has since been reexamined by Bodenstein et al (2011). The underlying concept is that when the price of oil increases, wealth is transferred to oil-exporting nations (BénassyQuéré et al., 2007). The resulting short-run impact is reflected in the wealth channel, while the medium- and long-term effects are evaluated in the portfolio channel. When oil prices increase, wealth is transferred to oil-exporting nations (in US dollars), which is represented in an increase in exports and a positive current account balance (in local currencies). Because of this, we anticipate that with a rise in oil prices, the currencies of oil-exporting countries will strengthen and the currencies of oil-importers will depreciate effectively (Beckmann and Czudaj, 2013b). If oil-exporting nations reinvest their earnings in US dollar assets, the wealth effect may also create a short-term increase in the value of the US dollar.

 According to the portfolio effect, two factors will have an impact on the US dollar's short- and medium-term movements in relation to the currencies of oil exporters. The first is the US's reliance on oil imports in comparison to the percentage of US exports to nations that produce oil. The second is the relative preference of oil exporters for US dollar assets.

 

Figure 4: Wealth and Portfolio channel

Source: https://www.eia.gov/workingpapers/pdf/oil_exchangerates_61317.pdf

Oil prices have a significant impact on the Indian exchange rate, according to Hidhayathulla et al. (2014) in their study "Relationship between International Crude Oil Price and the Inflation Rate (CPI) in India from 2011 to 2014," but according to Kaushiket (2014) in his study "Oil Prices and Real Exchange Rate," there is no discernible impact of oil price change on the real exchange rate between the Indian rupee and the US dollar. Most often, as the price of crude oil rises, the cost of production inputs follows suit. As a result, prices for goods and services rise as well, which ultimately drives up the country's inflation rate. However, this process doesn't end there; it will also have an impact on consumer purchasing power, global trade, and the value of currencies. In essence, a few factors also have an impact on the price of crude oil. The number of producers, natural disasters, fresh inventories, and customer demand are some of them. In addition, the Indian government has taken several actions to lessen the effects of rising oil costs.

We anticipate that Indian exports would rise as the value of the rupee falls against the major foreign currencies, making items made in India more affordable abroad. Conversely, depreciation raises the cost of imports, which could lead to a decrease in the amount of imports as domestic products and services begin to replace imports due to the rise in the relative cost of imports. In this case, a depreciation of the rupee will raise net exports and hence increase GDP.

The average price of a barrel of Indian crude oil in March 2020 was $33.36 per barrel, down from $66.74 in March 2019. Due to a drop in demand during the pandemic era, crude oil prices have dropped by over two-thirds since the start of the year 2020. The rupee's value has declined against the dollar, nevertheless, offsetting this decline.

 

   Figure 5: Trend in Indian Exchange Rate in respect to Dollars

Source: Handbook of Statistics of Indian Economy: Reserve Bank of India (Prices in Dollars)

IMPACT OF OIL PRICE FLUCTUATIONS ON FOREIGN RESERVES

Talking about foreign reserves, all asset owners, including citizens of oil exporting nations, will be impacted by a decline in asset prices and dividends in countries that import oil because of an increase in the price of crude. On the other hand, asset prices in oil-exporting nations will rise, affecting all asset owners once more, including citizens of oil-importing nations. Therefore, the effect of changes in oil prices on the current account and changes in net foreign assets (NFA) may be mitigated by capital gains and income flows. Usually, the prices of bonds, stocks, and currency rates react considerably more quickly than the costs and quantities of things.

The country's foreign exchange reserves, which are under the custody of the Reserve Bank of India (RBI), have decreased for a fifth week in a row as of April 8. Over these weeks, there was a sizable $28.5 billion decline overall. This has caused considerable anxiety, particularly given the possibility that a protracted Russia-Ukraine crisis may reinforce the trend and result in a significant depletion of reserves, worsening the nation's balance of payments. Between 2019 and September 2021, the growth of India's foreign exchange reserves, which are primarily made up of holdings of foreign currency assets, was constant. The assets making up the remaining 35–40% of India's foreign exchange reserves are held in other global currencies, such as the euro, pound, and yen, albeit they are expressed in dollar terms. The component of foreign currency assets reached $580 billion around the same time as the Forex reserves reached their peak of $642.5 billion for the week ending September 3. In contrast, the reserves' size on August 8 was just over $604 billion, with currency assets totalling about $537 billion. This means that the reserves' decline was primarily the result of a valuation loss brought on by the US dollar's appreciation against other advanced-economy currencies and the RBI's recent sales of dollars to support the rupee. The RBI may stick with its current approach to the currency market up till the cycle of net FPI outflows from the Indian market turns. According to Banerjee, additional significant depletion of the reserves might not occur if oil prices remain stable. However, she noted that a faster depletion of India's reserves should not be ruled out if oil rises to $140 per barrel and capital outflows pick up speed.

For the time being, FPIs won't invest in Indian assets since they are made unattractive by high oil prices, rising US bond yields, and the global strength of the US dollar. Because the rupee offers excellent relative real rates compared to the US dollar, carry traders are still invested in it. Investors can sustain their faith in the currency thanks to the RBI's aggressive actions. The central bank had earlier stated that the market would not determine the value of the rupee. If oil prices remain at $100, the RBI can help to keep the rupee stable. However, if oil prices rise much from here, there could be significant pressure on the rupee to depreciate, according to Banerjee.

 

CONCLUSION

The shocks have consequential impact on the Indian economy. The RBI should therefore acknowledge the significance of macroeconomic variables in the examination of monetary policy. Oil price changes that are unfavourable have a positive long-term impact on output, while also momentarily lowering prices and short-term strengthening of the currency. To control inflation and the exchange rate, the central bank adopts an expansionary monetary policy, which can result in greater output growth. For the Indian context, it is necessary to further investigate how the economy reacts asymmetrically to positive and negative shocks to oil prices.

A medium- to long-term drop in output, demand for money, and the price of oil globally is brought on by rupee depreciation. It briefly increases inflation because of its tiny impact. RBI implements a contractionary monetary policy in an effort to save the domestic currency. The globe shouldn't disregard the global ramifications of rupee fluctuations, which can lead to huge changes in global oil prices.

In order to raise the production potential frontier, the policy of setting an exchange rate at a very competitive level may not be advantageous and may even be quite risky for India. Instead, India should concentrate on structural reforms to address supply-side bottlenecks, particularly in the resource and energy sectors. Examples of such policies include measures to promote exports such optimal resource allocation and permitting private sector participation in the energy sector. For the development of alternative energy technologies that will lessen India's reliance on oil imports, more money must be invested in research and development.

 

REFERENCES

1. Amano, R. A., and Van Norden, S. (1998a). Oil prices and the rise and fall of the US real exchange rate. Journal of International Money and Finance, 17(2), 299-316.
2. Amano, R. A., and Van Norden, S. (1998b). Exchange rates and oil prices. Review of International Economics, 6(4), 683-694.
3. Beckmann, J., and Czudaj, R. (2013a). Oil prices and effective dollar exchange rates. International Review of Economics & Finance, 27(1), 621-636.
4. Beckmann, Czudaj, Arora, “The Relationship between Oil Prices and Exchange Rates: Theory and Evidence”
5. Bénassy-Quéré, A., Mignon, V., and Penot, A. (2007). China and the relationship between the oil price and the dollar. Energy Policy, 35(11), 5795-5805.
6. Chen, S.S., and Chen, H.C. (2007). Oil prices and real exchange rates. Energy Economics, 29(3), 390-404
7. Ghosh, Taniya “Oil Price, Exchange Rate and the Indian Macroeconomy”
8. Golub, S. (1983). Oil prices and exchange rates. The Economic Journal, 93(371), 576-593.
9. Kali Charan,. Pallabi Mukherjee “A Study on Impact of Crude Oil Price Fluctuation on Indian Economy”
10. Krugman, P. (1983). Oil and the dollar. In B. Jagdeeps, & P. Bulfordh (Eds.), Economic interdependence and flexible exchange rates. Cambridge, MA: MIT Press.
11. Narendra,Hiranmoy Roy, Anshuman Gupta “Crude oil import of India from its major oil trade partner countries: An empirical evidence using panel data analysis”
12. Snapshot of India’s Oil & Gas data Monthly Ready Reckoner January, 2023 Petroleum Planning & Analysis Cell (Ministry of Petroleum & Natural Gas)

Ms. Mahek Khanna, MA Economics (batch 21-23), Department of Economics, Faculty of Behavioural and Social Sciences (FBSS), Manav Rachna International Institute of research and Studies (MRIIRS), Faridabad, Haryana. mahekkhannaa@gmail.com

A STUDY ON MARKET ANOMALIES BASED ON NIFTY INDEX

 ABSTRACT

Market anomalies are something which are inconsistent with the efficient market hypothesis (EMH). Anomalies are the ones  which generate abnormal returns/profits to the investor which are above the expected rate of return generated by the efficient markets. Anomalies are considered when there is a trend in the market. If an anomaly is known by everyone in the market then the advantage of this anomaly is taken by every investor in the market and the abnormal profit then scatters away and only normal profits are generated by the investors which are then consistent with the efficient market hypothesis. An anomaly is first found through data mining or data snooping through aggressive research by going through its data of historical prices and volume movements and then causes for such an anomaly are then researched. In this research paper of mine I am going to take the nifty 50 index as my base subject then try to find different market anomalies like turn of the month effect(January effect), weekend effect and turn of the year effect. Nifty 50 index is a portfolio of securities of 50 diversified companies comprising 13 sectors. Nifty midcap 50 captures the movement of the midcap segment of the market and Nifty smallcap 50 captures the movement of the smallcap segment of the market.They are managed by the National Stock Indices which is a subsidiary of NSE Strategic Corporation limited. It was established on 21st April 1997. They are a free float market capitalization weighted index in which market capitalization is found by market price multiplied by number of outstanding shares in the market excluding the number of shares held by the promoters of the company.

KEYWORDS : 

Efficient Market Hypothesis (EMH), Market Anomalies, Turn of the Year Effect (January), Turn of the Month Effect and Weekend Effect.

 

INTRODUCTION

EFFICIENT MARKET HYPOTHESIS (EMH)

 

Efficient market hypothesis (EMH) is a term coined by Harry Roberts (1967) which was developed independently by Fama (1963,1965) and Samuelson (1965). Many other researchers claim its origin in their research work but its due credit is given to Eugene Fama. EMH states that current market price of the shares reflects all the information available in the market, I.e., market participants have all the information related to that company shares. Market participants can only earn normal profits in the market only and passive investment strategy is favorable to the investors. Passive investment strategy is that the investors are following a certain benchmark (like index, shares, etc). In passive investment strategy investors earn equal to their benchmark returns. Whereas in active investment strategy investors use their own investment techniques or strategies for investment and there is also high transaction costs associated with investors buying or selling the assets in this strategy. In active investment strategy investors try to earn above the benchmark. In EMH passive investment strategy is followed and investors earn only equal to their benchmark or normal profit rather than abnormal profits which the active investment strategy tries to earn. EMH describes three types of market:- weak form efficient , semi-strong form efficient and strong form efficient.

 MARKET ANOMALIES

 Market anomalies arise when there are inefficiencies in the market as they should be because markets are formed by investors who are  irrational  and not only  by the rational investors as theories state. The market is driven by people’s sentiments, biases  and not just with the pure rational thought process. Due to anomalies individuals are able to earn abnormal profits than normal profits as stated in EMH. Prices of the stock are different than as predicted by the EMH prices .Anomalies can be of various types like turn of the year effect(January effect) , turn of the month effect, weekend effect, stock split effect etc. Causes of these anomalies  can be because new information doesn’t quickly  adjust , tax treatments are different, adjustments of cash flows and behavioral constraints of the investors. Anomalies are found after a long aggressive data  snooping  by viewing all the past data related to trading volumes and prices and if there is a pattern found, reasons for its occurrence are to be investigated as to why this is happening. By following such patterns investments are made so that abnormal profits can be made and an  active investment strategy approach is taken in this. Volatility of the stock market also influences the inefficiencies in the stock market, more volatile the stock market more inefficiencies it have.

Source: www.google.com

TURN OF THE YEAR EFFECT (JANUARY)

 Turn of the year effect states that there is a pattern of increased volume and higher price movement during the last week of December and first two weeks of January. The January effect is the same as of the turn of the year effect but it is stated that small cap company stocks outperforms the market during the first two or three weeks of January. It can be due to window dressing by companies.

TURN OF THE MONTH EFFECT

 Turn of the month effect states that during the last four days of the month and starting three days of the next month there is an increase in trading volume and higher stock prices.

WEEKEND EFFECT

 Weekend effect states that on Mondays stock prices tend to decrease and on Fridays stock prices tend to rise or increase. It can be attributed to bad news released by companies after the closing of the Market on Friday.

OBJECTIVE OF THE STUDY 

In this study I wanted to find out the following :

•        To find market anomalies in the Indian stock market index Nifty 50, Nifty mid-cap 50 and Nifty small-cap 50.

•        To Compare market anomalies between the three indices : Nifty 50, Nifty mid-cap 50 and Nifty small-cap 50.

Source: www.google.com

 METHODOLOGY

 Daily data of  stock closing prices  has been collected from National Stock Exchange (NSE) for 12 years from 2010-2021 of all the three indices Nifty 50, Nifty midcap 50 and Nifty smallcap 50. Data is collected from secondary sources. Multiple linear regression with dummy variable is applied. 2978 observations are used for turn of the year effect (January) and weekend effect. For the turn of the month effect 2976 observations are used.

ANALYSIS

Stock returns are calculated by :

Rt = ln(Pt/Pt-1) = ln(Pt) - ln(Pt-1)

 Where Rt represents log return of closing stock price,

Pt represents the closing stock price of the present day and Pt-1 represents the  closing stock price of the previous day. Log stock returns are chosen over linear returns because it is very easy to calculate and they give a first order difference of logarithmic prices.

Dummy variable multiple linear regression model is used for finding the market anomalies. Dummy variables  take only two values 1 and 0. 1 represents presence of an attribute and 0 represents absence of the attribute. For the dummy variable model, if there are 'n' numbers of variables then n-1 number of dummy variables should be used. One variable should be omitted as it is represented by the intercept of the model. Total observations for each market anomaly from 2010-2021 is 2978.

For finding the Turn of the year effect (January effect) we have used :

Nifty return = b0 + b1d1(January) + b2d2(April) + u

 As financial year for many countries have different starting period ,i.e., for USA it is January to December and for India it is April to March so we have collected data concerning each financial year :

Nifty return = b0 + b1d1(January) + b2d2(April) + u

 b0 = represents returns in other months other than January and April

b1 = coefficient which represents return on January

d1(January) = dummy variable used for indicating the presence of January or not

b2 = coefficient which represents return on April

d2(April) = dummy variable used for indicating the presence of April or not

 For finding the turn of the month effect we have used a return interval of seven days which comprises first days of the current starting of the month and last four days of ending of previous month.

                                                Nifty return = b0 + b1d1(TOM) + u

 Where b0 = interest represents returns on other days of the month

b1 = coefficient represents returns on Turn of the Month (TOM)

d1(TOM) = dummy variable indicating the presence of TOM or not

 For finding the weekend effect we have used :

Nifty returns = b0 + b1d1(Monday) + b2d2(Friday) + u

Where b0 = intercept which represents returns on rest of the days other than Monday       

                     And Friday

 b1 = coefficient which represents return on Monday

d1(Monday) = dummy variable used for indicating the presence of Monday or not

b2 = coefficient which represents return on Friday

d2(Friday) = dummy variable used for indicating the presence of Friday or not 

HYPOTHESIS 

For Turn of the year effect return on all the months is same ,i.e.,

 

H0 : b0=b1=b2 

H1 : at least  one is indifferent

For Turn of the month effect return on all days of the month are same ,i.e.,

 H0 : b0=b1

 H1 : at least one is indifferent

For Weekend effect return on Monday and Friday and other days of the week are same ,.i.e.,

 H0 : b0=b1=b2

 H1 : at least one is indifferent

 If the dummy variable for any one day or month is significant , we know that effect is significant of the anomaly which the dummy variable is representing then we are rejecting the null hypothesis and accepting the alternate hypothesis. If there is no significant pattern of anomaly found then we are accepting the null hypothesis and rejecting the alternate hypothesis.

 

CONCLUSION

 All the three indices Nifty 50, Nifty Midcap 50 and Nifty Smallcap 50  are showing positive turn of the month effect  and Nifty 50 is also showing positive returns on other weekdays like Tuesday, Wednesday and Thursday. All three indices are showing negative returns on Monday but it is found to be statistically insignificant and Nifty 50 and Nifty Smallcap 50 is also showing negative return on Friday, So weekend effect is not present in all the three indices but Nifty 50 is showing another anomaly with positive returns on other weekdays which is statistically significant. All the three indices are showing negative return on January effect ( turn of the year effect ) and positive return on April ( financial year starting of Indian Market) but it is also statistically insignificant and also for January effect, So turn of the year effect (January) is also not present in Indian stock markets Nifty 50, Nifty Midcap 50 and Nifty Smallcap 50. Comparatively all the indices are showing the same market anomaly except Nifty 50 which is also showing another market anomaly other than the two indices.Nifty Midcap 50 is showing highest return than Nifty Smallcap 50 and Nifty 50 in turn of the month effect and Nifty Smallcap 50 is showing greater return than Nifty 50 on turn of the month effect. So in the end the Indian market Nifty 50, Nifty mid-cap 50 and Nifty small-cap 50 are still not efficient.

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Mr. Tarun Kumar Kadyan, BA Hons. Economics (batch 20-23), Department of Economics, Faculty of Behavioural and Social Sciences (FBSS), Manav Rachna International Institute of research and Studies (MRIIRS), Faridabad, Haryana. tarunkadyan17@gmail.com