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Web of Finance
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| Apr 07, 2004 2:12 pm |
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Rupee v/s Sensex |
Haresh Soneji
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Off late and rather so during the previous few days, players in the market are throwing tantrums about the impact of the depreciation of the dollar against the rupee. And why not? Barring the previous few trading sessions where the equity market rose sharply, the rise in the value of the rupee against the dollar was at a much faster rate than the surge in the equity market. Consider this: in the ten consecutive trading sessions during March 18-31, markets appreciated by nearly 1% but the dollar depreciated against the rupee by nearly 3.9%. this caused worries among players that when the equity market will fall, the dollar rise against the rupee will be at the same pace. But, the markets have already laid to rest those fears.
Several players in the market still seem to be sceptic about this fact, but we don’t think so. We studied the movement of the rupee against the dollar with the movement of the equity market to find their correlation in the long run. The Bombay Stock Exchange’s (BSE) premier index – sensex was taken as a benchmark to calculate movement in the equity market. The result was not surprising and proved that the fears of many market players are all hyped. Here’s the result: the depreciation of the dollar against the rupee and the movement in the market has virtually no correlation.
The correlation coefficient between the two variables calculated for the previous one year was as low as 0.06. Squaring the correlation coefficient makes it easier to understand. The square of the coefficient is equal to the percent of the variation in one variable that is related to the variation in the other. Here the square is a negligible 0.35%, indicating no correlation. Further, the number of times both the rupee and the sensex moved in the same direction was 54%. Even this suggests that the movements between the two are not correlated as there is almost an equal chance of either way movement between the two. So, investors need not worry whether there will be any direct impact on the stock markets, if the dollar continues to depreciate against the rupee.
Correlation is a statistical technique, which can show whether, and how strongly pairs of variables are related. In order to calculate the correlation coefficient, daily closing levels of the rupee and the sensex for the previous one-year were taken into consideration. Daily percentage changes were tabulated and yearly data was then correlated to arrive at the correlation coefficient.
The main result of a correlation is called the correlation coefficient. It ranges from -1 to +1. The closer the correlation coefficient is to +1 or -1, the more closely the two variables are related. If the correlation coefficient is close to zero, it means there is no relationship between the variables. If the correlation coefficient is positive, it means that as one variable gets larger the other gets larger. If the correlation coefficient is negative it means that as one gets larger, the other gets smaller (often called an "inverse" correlation).
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