NSE NIFTY and Its Correlation with Sectorial Indexes

Nagendra Marisetty1 and Haritha M2

Abstract

The NSE NIFTY Index indicates the behavior of a portfolio of top market capitalization
companies, the largest and most liquid Indian stocks. The index is well studied for
benchmarking, index funds, and index-based derivatives. NSE Nifty influence is very high on
other indices, especially NSE sectoral indices. Performance of the economy influences industry
sector returns differently and changes overtime periods. Thus, changing the pattern of
correlations between sectors is vital for investment purposes. The present study estimates the
correlations between NSE Nifty and Industry sectors in India.

Keywords: Index, NSE Nifty, Sectorial Indices, and Correlation

________________________________________________________________
1. Nagendra Marisetty, Faculty, RR Institute of Advanced Studies, Chikkabanwara, Bangalore,
India. [email protected].
2. Haritha. M, Faculty, RR Institute of Advanced Studies, Chikkabanwara, Bangalore, India.
* Article published in International Journal of Conceptions on Management and Social
Sciences, Vol. 2, Issue. 1, March’ 2014, ISSN: 2357 – 2787.

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I. Introduction
A. Index
An Index is used to provide information about the price changes of instruments in the
commodity, financial, or other markets. Financial indexes are developed to measure price
changes of stocks, bonds, T-bills, and other forms of investments. Stock market indexes are
meant to capture the overall behavior of equity markets. A stock market index is created by
selecting a group of stocks representing the whole market or a specified sector or segment of
the market. An Index is calculated with reference to a base period and a base index value.
Stock market indexes are useful for a variety of reasons. Some of them are:
• They provide a historical comparison of returns on money invested in the stock market
against other investments such as gold or debt.
• They can be used as a standard against which to compare the performance of an equity
fund.
• It is a lead indicator of the performance of the overall economy or a sector of the
economy
• Stock indexes reflect highly up to date information
• Modern financial applications such as Index Funds, Index Futures, Index Options play
an important role in financial investments and risk management

B. NSE
The National Stock Exchange (NSE) is India's leading stock exchange covering in
Indian Stock Market. The leading institutions set up NSE to provide a modern, fully automated
screen-based trading system with a national reach. The Exchange has brought about
unparalleled transparency, speed & efficiency, safety, and market integrity. It has set up
facilities that serve as a model for the securities industry regarding systems, practices, and
procedures.
NSE has played a catalytic role in reforming the Indian securities market in terms of
microstructure, market practices, and trading volumes. The market today uses state-of-art
information technology to provide efficient and transparent trading, clearing, and settlement
mechanism, and has witnessed several innovations in products & services viz. demutualization
of stock exchange governance, screen-based trading, compression of settlement cycles,
dematerialization, and electronic transfer of securities, securities lending, and borrowing, the
professionalization of trading members, fine-tuned risk management systems, emergence of

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clearing corporations to assume counterparty risks, market of debt and derivative instruments
and intensive use of information technology.

C. NIFTY
The S&P CNX Nifty is the prime index on the National Stock Exchange of India Ltd.
The index tracks the behavior of a portfolio of blue-chip companies, the largest and most liquid
Indian securities. It includes 50 of the approximately 1430 companies listed on the NSE,
captures approximately 65% of its float-adjusted market capitalization, and is a true reflection
of the Indian stock market. The S&P CNX Nifty covers 21 sectors of the Indian economy and
offers investment managers exposure to the Indian market in one efficient portfolio. The index
has been trading since April 1996 and is well suited for benchmarking index funds and index-
based derivatives. Major indices stocks weightage in NSE Nifty as fallows

Table - 1: Index Stocks weightage in NSE Nifty Index

S. No Indices Stocks Weightage (%)
1 Auto Index Stocks 8.17
2 Bank Index Stocks 20.67
3 Energy Index Stocks 16.19
4 FMCG Index Stocks 11.32
5 IT Index Stocks 12.38
6 Metal Index Stocks 5.88
7 Pharma Index Stocks 4.91
8 Other Stocks 28.65
(Source: National Stock Exchange)

D. Sectorial Indices
The CNX Auto Index is designed to reflect the Automobiles sector's behavior and
performance, which includes manufacturers of cars & motorcycles, heavy vehicles, auto
ancillaries, tyres, etc. The CNX Auto Index comprises 15 stocks that are listed on the National
Stock Exchange. The CNX Auto Index is computed using the free-float market capitalization
method with a base date of January 1, 2004, indexed to a base value of 1000, wherein the level
of the index reflects the total free-float market value of all the stocks in the index relative to
particular base market capitalization value. The CNX Auto Index represents about 6.78% of

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the free-float market capitalization of the stocks listed on NSE and 93.74% of the free-float
market capitalization of the stocks forming part of the Automobiles sector.

E. Bank Index
CNX Bank Index is an index comprised of the most liquid and large capitalized Indian
Banking stocks. It provides investors and market intermediaries with a benchmark that captures
the capital market performance of Indian Banks. The index will have 12 stocks from the
banking sector which trade on the National Stock Exchange. CNX Bank Index is computed
using the free-float market capitalization method with a base date of January 1, 2000, indexed
to the base value of 1000, wherein the level of the index reflects the total free-float market
value of all the stocks in the index relative to a particular base market capitalization value. The
CNX Bank Index represents about 15.37% of the free-float market capitalization of the stocks
listed on NSE and 88.11% of the free-float market capitalization of the stocks forming part of
the Banking sector.

F. Energy Index
The energy sector is universally recognized as one of the most significant inputs for
economic growth. The growth of a nation, encompassing all sectors of the economy and all
sections of society, is contingent on meeting its energy requirements adequately. As a fast-
growing economy, India has become one of the largest energy-intensive countries in the world.
Energy is a crucial input for India's development process. The energy sector Index will include
companies belonging to Petroleum, Gas, and Power sub-sectors.
Effective October 11, 2010, CNX Energy Index is computed using the free-float market
capitalization-weighted method. The index's level reflects the total free-float market value of
all the stocks in the index relative to a particular base period. The CNX Energy Index has a
base date of January 1, 2001, and a base value of 1000. The CNX Energy Index represents
about 11.05% of the free-float market capitalization of the stocks listed on NSE and 82.65% of
the free-float market capitalization of the stocks forming part of the Energy sector

G. FMCG Index
FMCGs (Fast Moving Consumer Goods) are those goods and products: non-durable,
mass consumption products, and available off the shelf. The CNX FMCG Index comprises 15
companies that manufacture such products listed on the National Stock Exchange (NSE). The
index is computed using the free-float market capitalization method with the base period as of
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December 1995 indexed to a base value of 1000. The index's level reflects the total free-float
market value of all the stocks in the index relative to a particular base market capitalization
value. The CNX FMCG Index represents about 10.14% of the free-float market capitalization
of the stocks listed on NSE and 92.91% of the free-float market capitalization of the stocks
forming part of the FMCG.

H. IT Index
Information Technology (IT) industry has played a major role in the Indian economy
during the last few years. Several large, profitable Indian companies today belong to the IT
sector, and a great deal of investment interest is now focused on the IT sector. CNX IT provides
investors and market intermediaries with an appropriate benchmark that captures the
performance of the IT segment of the market. Companies in this index have more than 50% of
their turnover from IT-related activities like IT Infrastructure, IT Education and Software
Training, Telecommunication Services and Networking Infrastructure, Software Development,
Hardware Manufacturer's, Vending, Support, and Maintenance.
The CNX IT index is computed using the free-float market capitalization method with
a base date of January 1, 1996, indexed to a base value of 1000wherein the level of the index
reflects the total free-float market value of all the stocks in the index relative to a particular
base market capitalization value. The index's base value was revised from 1000 to 100 with
effect from May 28, 2004. The CNX IT Index represents about 9.48% of the free-float market
capitalization of the stocks listed on NSE and 94.05% of the free-float market capitalization of
the stocks forming part of the IT sector

I. Metal Index
The CNX Metal Index is designed to reflect the Metals sector's behavior and
performance, including mining. The CNX Metal Index comprises 15 stocks that are listed on
the National Stock Exchange. CNX Metal Index is computed using the free-float market
capitalization method with a base date of January 1, 2004, indexed to a base value of 1000,
wherein the level of the index reflects the total free-float market value of all the stocks in the
index relative to particular base market capitalization value. The CNX Metal Index represents
about 4.23% of the free-float market capitalization of the stocks listed on NSE and 75.60% of
the free-float market capitalization of the stocks forming part Metals.

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J. Pharma Index
The pharmaceuticals sector is one of the key sectors where Indian companies have
created a global brand for themselves besides software. Indian companies have taken advantage
of the opportunities in the regulated generics market in western countries and made deep
inroads, especially in providing low-cost equivalents of expensive drugs. Pharma outsourcing
into India and low-cost Healthcare services are expected to be the key areas of growth shortly.
Besides, biotechnology's inherent potential has also attracted many new companies, which is
also a key growth area for Indian companies.
Effective October 11, 2010, CNX Pharma Index is computed using the free-float market
capitalization-weighted method. The index's level reflects the total free-float market value of
all the stocks in the index relative to a particular base period. The CNX Pharma Index has a
base date of January 1, 2001, and a base value of 1000. The CNX Pharma Index represents
about 4.39% of the free-float market capitalization of the stocks listed on NSE and 77.26% of
the free-float market capitalization of the stocks forming part of the Pharmaceutical sector

K. Correlation
In the world of finance, a statistical measure of how two securities or indexes move
concerning each other. Correlations are used in advanced portfolio management. Correlation
is computed into what is known as the correlation coefficient, which ranges between -1 and +1.
A perfect positive correlation (a correlation coefficient of +1) implies that as one index moves,
either up or down, the other index will move in lockstep, in the same direction. Alternatively,
perfect negative correlation means that if one index moves in either direction, the index that is
perfectly negatively correlated will move in the opposite direction. If the correlation is 0, the
indexes' movements are said to not correlate; they are completely random.
A measure that determines the degree to which two variable's movements are associated.

𝐶𝑜𝑣 (𝑋,𝑌)
The correlation coefficient is calculated as: 𝜌𝑥𝑦 = 𝜎𝑥 𝜎𝑦

II. Literature Review

Philipp Fasnacht & Henri Loeberge (2007) Studied International stock market
correlations: A sectoral approach and they found that sectorial correlations between markets
are more stable over time than correlation at the market level as sectorial correlations within

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countries. However, sectors such as Industry, Financials, and Consumer services present a
rather high proportion of inconsistent correlation coefficients.
Rakesh Gupta & Parikshit. K. Basu (2008) analyzed the importance of industry
selection in portfolio selection has been tested in this study using a sample of 10 industry
sectors for equity markets in India. They argued that if industry selection is important, so the
correlations within the industry pairs are important for portfolio optimization purpose to
enhance portfolio returns. If correlations within the industry are important, then an accurate
estimate of correlations becomes evident. Theoretically, Asymmetric DCC GARCH estimates
should provide us with a better estimate of correlations, and the results indicate correlations do
change over time.
Tarun Chordia, Amit Goyal & Qing Tong's (2011) paper searches for the source of
the asymmetric correlations between individual stocks. They found that the trading activity
governs the asymmetric correlation phenomenon in individual stocks with high retail
concentrations (i.e., small stocks/low institutional-holding stocks). More specifically, the
positive coefficient in the regression of correlation on negative returns is entirely captured by
the interaction of return and the trading activity. An increase in trading volume when returns
are negative leads to an increase in correlations. The results suggest that co-ordinated selling
activity across stocks drives the asymmetry in correlations in small stocks.
The above literature provides an insight into the correlation used to study the
relationship between different variables. No comprehensive study was carried out in Indian
Stock Markets to study the Market Index correlation with sectorial indexes. Thus, this study
attempts to analyze the Nifty and its correlation with Sectorial Indices.

III. Research Methodology

A. Objectives
This study's main objective is to find out if there is a correlation between NSE Nifty
returns and Sectorial Index returns. The secondary objective of this study is to find out if there
is a correlation among Sectorial indices.

B. Scope
The present study is limited to NSE Nifty and seven NSE Sectorial Indexes in 2006-
2010. Seven NSE Indexes are Auto, Bank, Energy, FMCG, IT, Metal, and Pharma.

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C. Sample
The target Indexes for this study are NSE NIFTY and NSE's seven primary industry
indexes. The study has been conducted for 8 sample sizes; for samples convenient sample has
been used. Data analysis correlation test has been used to find a correlation between NSE Nifty
monthly returns and Sectorial Indexes monthly returns during 2006 - 2010.

D. Limitations
1. The samples taken for the study may not represent the true population.
2. The market condition is always uncertain; the result reflects the market of that period.

IV. Data Analysis

Table – 2: One Year Monthly Average Return Correlations

Auto Bank Energy FMCG IT Metal Pharma NIFTY

Auto 1
Bank 0.721 1
Energy 0.696 0.481 1
FMCG 0.658 0.585 0.764 1
IT 0.651 0.364 0.537 0.271 1
Metal 0.728 0.683 0.485 0.317 0.765 1
Pharma 0.672 0.421 0.594 0.357 0.501 0.557 1
NIFTY 0.863 0.766 0.722 0.625 0.695 0.824 0.666 1
(Source: Author’s Calculations)

Table 2 shows that the Auto index has the highest correlation with NSE Nifty at 0.863
fallows by Metal Index correlation with nifty is 0.824 and FMCG has least correlation with
NSE Nifty index at 0.625. It has been found that all the seven Indexes correlations with NSE
Nifty are more than 0.60, which means that all the indexes’ returns are moving along with NSE
Nifty indices. Correlations among the sectoral indices show that from table – 2, IT and Metal
correlation is highest at 0.765 and least at 0.271 between IT and FMCG indices. Auto Indices
correlations with other indices are above 0.6, and FMCG correlations with other indices are
very low.

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 Table – 3: Three Years Monthly Average Return Correlations

Auto Bank Energy FMCG IT Metal Pharma NIFTY

Auto 1
Bank 0.761 1
Energy 0.833 0.774 1
FMCG 0.626 0.652 0.676 1
IT 0.817 0.683 0.747 0.636 1
Metal 0.879 0.768 0.838 0.577 0.855 1
Pharma 0.687 0.613 0.697 0.623 0.755 0.776 1
NIFTY 0.885 0.871 0.924 0.699 0.835 0.915 0.771 1
(Source: Author’s Calculations)

Table 3 exhibits that, Energy index has the highest correlation with NSE Nifty at 0.924
fallows by Metal Index correlation with nifty is 0.915, and FMCG has the least correlation with
NSE Nifty index at 0.699. It has been found that all the seven Indexes correlations with NSE
Nifty are more than 0.60, which means that all the indexes’ returns are moving along with NSE
Nifty indices. Correlations among the sectoral indices show that from table – 3, between Auto
and Metal correlation is highest at 0.879 and least at 0.577 between Metal and FMCG indices.
Energy, Metal, and Auto Indices correlations with other indices are above 0.7 except with
FMCG Indices, and as usual, FMCG correlations with other indices are low.

Table – 4: Five Years Monthly Average Returns

Auto Bank Energy FMCG IT Metal Pharma NIFTY

Auto 1
Bank 0.716 1
Energy 0.734 0.768 1
FMCG 0.655 0.565 0.628 1
IT 0.792 0.609 0.609 0.568 1
Metal 0.785 0.726 0.838 0.577 0.736 1
Pharma 0.724 0.604 0.656 0.693 0.726 0.709 1
NIFTY 0.843 0.854 0.925 0.683 0.766 0.908 0.753 1
(Source: Author’s Calculations)

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 Table 4 reveals that the energy index with the highest correlation with NSE Nifty at
0.925 fallows by Metal Index correlation with nifty is 0.908, and FMCG has the least
correlation with the NSE Nifty index 0.683. It has been found that all the seven Indexes
correlations with NSE Nifty are more than 0.60, which means that all the indexes’ returns are
moving along with NSE Nifty indices. Correlations among the sectoral indices show that from
table – 4, between Energy and Metal correlation is highest at 0.838 and least at 0.565 between
Bank and FMCG Indices. Energy, Metal, and Auto Indices correlations with other indices are
above 0.7 except with FMCG Indices, and as usual, FMCG correlations with other indices are
low.
It has been found from the above discussion that NSE Nifty Indices correlations are
very good with all sectoral indices in all the periods. Especially Nifty correlations with Energy,
Metal, and Auto indices are high, whereas correlations with FMCG and Pharma indices are
normal. From table 1, it has been observed that Bank stocks weightage is more than Energy,
Metal, and Auto stocks. Still, the Bank indices correlation is lesser than the Energy and Metal
Indices correlations. It is also observed that IT and FMCG stocks weightage in Nifty are more
than Auto and Metal stocks weightage, but IT and FMCG indices correlations with Nifty are
lesser than those indices. Among sectoral indexes, FMCG and Pharma correlations are low
with other indexes in all the periods, and Energy, Metal, and Auto indexes correlations are high
with other indexes.

V. Conclusion
NSE NIFTY monthly average returns for different periods have been correlated with
most of the sectorial indexes' monthly average returns; it also means that many indexes'
performance is along with NSE Nifty. Some of the Index stock weights are more in NSE Nifty,
but the influence is less than other index stocks; it means weightage only does not influence
the correlations between indexes. From the preceding analysis, it can be concluded that Nifty
influences sectoral indices performance, and FMCG and Pharma indexes are less influenced
by other sectoral indexes.

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 VI. References

1. Philipp Fasnacht & Henri Loeberge (2007), International Stock Market correlations: A
Sectorial Approach, Finance International Meeting AFFI-EUROFIDAI, Paris, December’
2007 Paper.

2. Rakesh Gupta & Parikshit. K. Basu (2008), Portfolio Optimization in the Indian Stock
Market – Industry Sector Analysis, Delhi Business Review X Vol. 9, No. 1 (January - June
2008)

3. Tarun Chordia, Amit Goyal & Qing Tong (2011), Asymmetric Correlations, Emory
University Seminar 2011.

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