Why Sensex is not the barometer of the Indian economy

The Sensex does not seem to represent the Indian economy correctly. The index needs to be made more broad-based in terms of number of companies and sectors. Also emerging companies should be adequately represented in Sensex, so as to reflect the Indian economy fully

How do you gauge the mood of stock market in India? How do you decide whether things are hunky-dory or depressing in the stock market?  How do you take a call to make an entry into the market or exit out of it? Though the answers to all these questions are not very easy, one very obvious parameter which gives a good understanding with respect to these questions is to look at the ‘Sensex’ and its movements. The Sensex has always been termed as the barometer of the economy and no wonder daily analysis of the stock market for business news channels starts with a mention of movement in the Sensex and ends with the same as well. Sensex commands the same position in the stock market which ‘Xerox’ has in the photo copy business and ‘Bisleri’ has for mineral water. This is say that if we treat Sensex as a brand then it has a very strong brand recall. But does ‘Sensex’ indeed reflect the mood of the stock market and is it indeed barometer of the Indian economy? Do we indeed need to follow ‘Sensex’ the way we do it?

Let us look at some interesting facts to understand certain limitations which Sensex has as an index. These limitations can be classified as follows:

Sensex movement is extremely sensitive to 6 companies:  Sensex is made of 30 companies representing different sectors of the economy. But the fact is that six companies alone can easily alter the movement of the index and give us false impression of market movement in general. Let us look at the data Sensex data in this connection:

It is very obvious that because of the dominant representation of the top six companies in the Sensex, the much-tracked index becomes extremely sensitive to price movement of these companies. Do these six companies mirror Indian economy? Not really.

Surprisingly two out of these six companies are from one corporate house only i.e. HDFC. If 14% of an index is one corporate house of the economy, then it goes on to show how the Sensex can easily get influenced by a decision making activity of this corporate house, though it may not be intentional. It is understood that the Sensex is built on free market capital capitalization method which gives representation to stocks broadly based on their market capitalization but had the Sensex been more broad-based, this shortcoming would have been removed.


Sensex has skewed sectoral representation: Like dominance of certain stocks having the ability to influence the Sensex movement, sectoral representation in the Sensex also looks skewed. Let us look at the data below for sectoral representation of the stocks in the Sensex.

Finance, Oil & Gas and IT have around 50% weightage in the Sensex. Issue is not with only skewed sectoral distribution, but also the fact these sectors are extremely sensitive in terms of price movement and provide undesirable volatility to the index. History shows us that the financial sector has been extremely sensitive to monetary policy, oil and gas to international crude prices and IT to foreign exchange movement. The Sensex volatility exposes investors to portfolio risk in case they try to replicate the Sensex in their portfolio.

Sensex does not capture the mood of change in economy correctly:  If you look at the way stocks have been included and excluded from the Sensex since June 2006, you get an idea that inclusions and exclusions are not always based on logic. How can one explain the fact that Sun Pharma, which was included in Sensex on 12 January 2009, was excluded on 3May 2010 and was again included on 8August 2011? Inclusions and exclusions should not be so frequent in any index, especially considering that an index like the Sensex is often projected as an index which measures barometer of the Indian economy.

Additionally, several stocks have been making a come back in the Sensex frequently. Out of 15 stocks which have been excluded from the Sensex post June 2006, six have made a comeback in Sensex which is clearly evident from the table below.

If stocks make such frequent come back in the index, won’t it be fair to say that the index is not capturing the mood of the economy correctly. Ideally new stocks which reflect the emerging economy should also be included in the Sensex by making it more broad-based.

Usage of Sensex can be manipulated by fund managers:  Many fund managers use the Sensex as the benchmark index for measuring and showing performance of schemes of their funds. These schemes do not replicate stocks in the index, barring cases of index funds which have stocks almost in the same pattern as the index.  It is very easy for fund managers to manipulate the performance of their schemes operating against the Sensex because of limitations such as skewed distribution of the sectors and stocks in the Sensex. It is a different story that many of fund managers still find it difficult to beat the benchmark index.

The Sensex does not seem to represent the Indian economy correctly. The movement in the Sensex often misrepresents the behavior of the Indian economy in general and stock market in particular. The index needs to be made more broad-based in terms of number of companies and sectors. Also emerging companies should be adequately represented in Sensex.






5 years ago

If the writer feels that Sensex needs to be more "broad-based", why doesn't he suggest changes to it (specifically in which stocks should be included, which to be excluded, how the weightages should be changed, etc)

Writing such articles is easy; pointing out shortcomings in others views is easy. What makes a difference is - if you are able to suggest specific actionable changes & give adequate justification for your ideas. You should convince others or get convinced.

My suggestion for changes in Sensex (with justification): Telecom as a sector is under-represented. One way of choosing industry weightages for Sensex could be that industry's contribution to the country's GDP (& not the market capitalization). Other more intelligent readers can comment on the same.



Guramandeep Singh

In Reply to Shekhar 5 years ago

Dear Shekhar,

If pointing out shortcomings was that easy, I wonder why they haven't been pointed out earlier. I believe that this article was very apt at the issue it wanted to raise. The issue being an opinion as to why the Sensex does not adequately represent the Indian Economy.

It is a similar issue to talking about how bad our political environment is, but then again I have not seen everybody start a political party. As much as I like your pro-activeness at suggesting a solution, I do not agree with your comment about not having a discussion about a problem unless you have a solution to it. I believe that unless we acknowledge and accept an issue, we will not be in the right frame of mind to suggest a solution.


I loved this article and the the issue you have brought forth. I hope more of us take notice and urge the regulators to do something about this.

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Equity mutual funds suffer a massive outflow of Rs3,559 crore

Despite a rising market and more reforms, mutual fund inflows declined and redemptions went up to a massive Rs6,741 crore in September. The regulator and fund companies seem clueless to stem the tide 

The Securities and Exchange Board of India (SEBI) brought into effect its mutual fund reforms from 1 October 2012. The regulator gave fund houses the leeway to hike the expense ratio by nearly 45 basis points (bps). This hike in expenses goes against long-term investors and the new reforms don’t seem to have gone down well with the investors. Mutual fund sales declined by Rs203 crore, from Rs3,385 crore in August to Rs3,182 crore in September. Sales have declined by as much as 32% compared to that of September 2011 where new inflows had touched Rs4,657 crore. Along with the declining sales this has been the highest net monthly outflow since September 2010 and second consecutive outflow. In September 2010 there was an exodus of nearly Rs7,281 crore, but despite the massive net outflow in September 2010, the latest inflows were as high as Rs5,969 crore. In the month of August outflows were as high as Rs2,286 crore.
Moneylife has been constantly highlighting declining sales of mutual funds which has a lot do with the attitude of both fund companies and the regulator. SEBI’s new reforms are aimed to ‘revive’ the fund industry by increasing the fees charged to incentivise fund houses to penetrate smaller towns and cities. As per AMFI data, nearly 70% of the assets come from the top four cities. However, investors from these cities would have to pay higher expenses to enable fund houses to bring in funds from other cities. Unfortunately, existing and new investors of these towns and cities who are actively investing would be penalised by the increase in costs. This definitely will not go down well with existing investors.
New fund flows may decline further as SEBI has also mandated that fund houses need to keep only a single plan per scheme. Mutual fund houses had different plans for the same scheme depending on the investor category (retail or institutional). Fund houses would now have to keep a single plan and discontinue other plans of the same scheme. The discontinued plans will not receive any new inflows, thus existing SIPs (Systematic investment plans) in these plans would be discontinued as well. SEBI has given fund houses time till end of October to inform investors and complete the process of keeping a single plan. The discontinuation of existing SIPs would affect new fund flows.
There have been no new funds offers (NFOs) in the past two months. In the past year there have been only eights NFOs that were launched bringing in just Rs420 crore. From January 2012 to September 2012, there have been just two months of positive inflows, however the inflows were not sufficient enough as the total outflows for calendar year (January 2012 to September 2012) is as much as Rs10,393 crore. Except in March which saw a spurt due to a rush in tax saving investments, sales have failed to pick up and redemptions have just increased month on month since May 2012. (See chart)




5 years ago

If one visits an AMC office the front counter is full of investors and everybody is holding a redemptionslip. There are no distributors / advisors. Since SEBI feels that all investors are sharp and investment savvy this is very likely to happen. All the rules and regulations which being brought into force shows that the regulator is gropping in the dark mindlessly. Just to overcome the cascading effect of no entry load situation every day new rules and regulations are being bought in making the entire process extremely complex and complicated for investors, AMC and distributors. As a matter of fact reducing entry load would have been a better way than abolishing the same. In the long run the investor would lose. They do not take the time and conveyance cost into account. Also still 90% of investors are not tech savvy hence could be left in the wild and have to fend for themselves.


5 years ago

Is it too early to pass a judgment or is it that you are more or less convinced nothing is going to come out of those remedial measures which people so fondly call 'reforms'.

Do we not give time to those tier 2 cities to mobilise ( it could well be a new phenomena . . . for the world to emulate) or

Can we not wait for the retired school teachers and the retired bank employees to start contributing in big numbers. For all you know, the investors would be waiting eagerly to invest or

Should we not wait till the new direct plan becomes a BIG hit with the unit holders and they throng in Large numbers

And if nothing works can we not patiently wait to see what more can be thrown in as a probable solution for re-energizing MFs in India.

There are other sales & distribution ideas which are waiting to be explored viz.
1) selling through retired Railway employees and retired postal staff.
2) Milk & Vegetable vendors, Fishermen & women and Butchers ... the list could be endless. We just have to be patient. And these category of sellers may be given only no-brainer schemes as may be deemed fit.

We can wait for the next wrong one. . .

Why bother about falling mutual fund folios and assets when they can be so easily blamed on the market conditions.

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