A Project Report on

The Study of Forex Market and its effect on Stock Market

Submitted in partial fulfillment

Of the requirements for the award of degree of
MBA

by

Yash Verma
Enrollment No: 130221027
MBA IV Semester (2021-23)

Under the Supervision of Project

Guide Dr. A.R. Mishra

State Highway-22, Bahadurgarh-Jhajjar Road, Jhajjar,

Haryana-124507 Phone: 01276-699700, 01-15
1

Website: www.jagannathuniversityncr.ac.in
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 Certificate by Project Guide (Faculty)

On the basis of declaration submitted by Yash Verma student of MBA, I

hereby certify that the project titled “The Study of Forex Market and its
effect on Stock Market” which is submitted to the Faculty of Management,
Jagannath University, Jhajjar, Haryana, in partial fulfilment of the requirement
for the award of the degree of MBA, is an original contribution with existing
knowledge and faithful record of research carried out by him/her under my
guidance and supervision.
To the best of my knowledge this work has not been submitted in part or full
for any Degree or Diploma to this University or elsewhere.

Place & Date Signature & Name of the guide

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 STUDENT’S DECLARATION

I Yash Verma, hereby declare that the project titled The Study of Forex
Market and its effect on Stock Market, which is submitted by me to Faculty
of Management and Commerce, Jagannath University, Jhajjar, Haryana, in
partial fulfillment of the requirement for the award of Degree of MBA, is my
original work and has never been submitted elsewhere.

(Student Name and Signature)

Place and Date

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 ACKNOWLEDGEMENT

Every person who touches heights reaches that level with the grand support,
blessings of his/her loved ones, guides, teachers, elders. We can’t deny the fact that
they are the people behind our success. I am very thankful to the people who
provided me their help and support.

 I owe my special thanks to Mr. Sandeep (Student Coordinator,

Department of Management) for his grand support, guidance, and for
being a helping hand in every possible way in this project.
 I express my deepest gratitude to my Mentor Dr. A.R. Mishra,
Associate professor in the college for his valuable support,
guidance, interest and inspiration for my report completion.

I would also like to extend my thanks to my supporting faculty of

Jagannath Institute of Management Sciences.

Date: Yash Verma

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 Executive Summary

The project undertaken is based on the study of foreign exchange market and his impact on Stock
market in general as well as in the forex market.

FOREIGN EXCHANGE MARKET: The foreign exchange market (Forex, FX, or currency
market) is a global decentralized or over-the-counter (OTC) market for the trading of
currencies. This market determines foreign exchange rates for every currency. It includes all aspects
of buying, selling and exchanging currencies at current or determined prices.

 Foreign exchange market is a system facilitating mechanism through which one country’s
currency can be exchanged for the currencies of another country.
 The purpose of foreign exchange market is to permit transfers of purchasing power
denominated in one currency to another i.e., to trade one currency for another.
 The major participants involved in the foreign exchange market are forex brokers, commercial
banks, and other legitimized dealers and monetary authorities. It is important to note that
although participants may possess their own trading centers, the market in itself is spread
worldwide. There is close and continuous contact between the trading centers, and there is more
than one market where the participants can deal.
 Exports by a nation lead to the buy its domestic commodities and services by the foreigners
send presents or make transfers
 The assets of a host nation are bought by the foreigners.

IIP - The Index of Industrial Production (IIP) is an index which shows the growth rates in different
industry groups of the economy in a stipulated period of time. The IIP index is computed and
published by the Central Statistical Organization (CSO) on a monthly basis. IIP is a composite
indicator that measures the growth rate of industry groups classified under,

1. Broad sectors, namely, Mining, Manufacturing and Electricity

2. Use-based sectors, namely Basic Goods, Capital6 Goods and Intermediate Goods.
Currently IIP figures are calculated considering 2004-05 as base year.

Inflation rate - Inflation is the decline of purchasing power of a given currency over time. A
quantitative estimate of the rate at which the decline in purchasing power occurs can be reflected in
the increase of an average price level of a basket of selected goods and services in an economy over
some period of time. The rise in the general level of prices, often expressed a a percentage means
that a unit of currency effectively buys less than it did in prior periods.

Inflation can be contrasted with deflation, which occurs when the purchasing power of money
increases and prices decline. As a currency loses value, prices rise and it buys fewer goods and
services. This loss of purchasing power impacts the general cost of living for the common public
which ultimately leads to a deceleration in economic growth. The consensus view among
economists is that sustained inflation occurs when a nation's money supply growth outpaces
economic growth.

Gold - Gold is considered a safe investment. It is supposed to act as a safety net when markets are in
decline since the price of gold doesn't typically move with market prices. Because of this, it can be
considered a risky investment as well, as history has shown that the price of gold does not always go
up, particularly when markets are soaring. Investors typically turn to gold when there is fear in the
market and they expect prices of stocks to go down.

Furthermore, gold is not an income-generating asset. Unlike stocks and bonds, the return on gold
is based entirely on price appreciation. Moreover, an investment in gold carries unique costs. As
it is a physical asset, it requires storage and insurance costs. Taking into consideration these
factors, gold works best as part of a diversified portfolio, particularly when it is acting as a hedge
against a falling stock market. Let's take a look at how gold has held up over the long-term.

Stock Market (SENSEX) - Sensex, otherwise known as the S&P BSE Sensex index, is
the benchmark index of India's BSE, formerly known as the Bombay Stock Exchange.) The Sensex
is comprised of 30 of the largest and most actively-traded stocks on the BSE, providing a gauge of
India's economy. The index's composition is reviewed in June and December each year. Created in
1986, the Sensex is the oldest stock index in India. Analysts and investors use it to observe the
7 decline of particular industries.
cycles of India's economy and the development and
The term Sensex was coined by stock market analyst Deepak Mohoni and is a portmanteau of the
words Sensitive and Index. The constituents of the index are selected by the S&P BSE index
Committee
based on five criteria: it should be listed in India on BSE, it should be a large-to mega-cap company,
the stock should be relatively liquid, the company should generate revenue from core activities, and
it should keep the sector balanced broadly in line with the Indian equity market. The BSE Sensex's
plunged 12.7%—its worst-ever fall—on April 18,1992 after revelations of a scam in which a
prominent broker siphoned money from the public banking sector to pump money into stock.

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 Table of Contents

Particular Page No.

Completion certificate

Student’s Declaration

Acknowledgement

Table of content

Executive summary

Chapter 1: Overview

Chapter 2: Literature Review

Chapter 3 : Research Methodology

Chapter 4: Conceptual Background

Chapter 5: Data Analysis and Findings

Chapter 6: Discussion and Conclusion

Chapter 7: Recommendations

References

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 Chapter-1

Introduction

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1.1 Introduction

The foreign exchange market in India has been around for about 40 years now. The market
started operating in 1978 after the government’s decree. After its establishment, the forex market has
seen significant growth over the years. The market is regulated by the central government and all
aspects of the trade are defined by national laws. There are many things about this market that make
it distinct from other markets in the world. To start with, its structure is slightly unique and defined
by different market dynamics.
The basics of trading Forex online, a brief explanation of the markets and the major benefits of
trading forex online. There are also two scenarios describing the implications of trading in a bear as
well as bull market to better acquaint you with some of the risks and opportunities in the largest and
most liquid market in the world.

Ancient

Currency trading and exchange first occurred in ancient times. Money-changers (people helping
others to change money and also taking a commission or charging a fee) were living in the Holy
Land in the times of the Talmudic writings (Biblical times). These people (sometimes called
"kollybistẻs") used city stalls, and at feast times the Temple's Court of the Gentiles instead. Money-
changers were also the silversmiths and/or goldsmiths of more recent ancient times.
During the 4th century AD, the Byzantine government kept a monopoly on the exchange of
currency. Papyri PCZ I 59021 (c.259/8 BC), shows the occurrences of exchange of coinage in
Ancient Egypt. Currency and exchange were important elements of trade in the ancient world,
enabling people to buy and sell items like food, pottery, and raw materials. If a Greek coin held
more gold than an Egyptian coin due to its size or content, then a merchant could barter fewer
Greek gold coins for more Egyptian ones, or for more material goods. This is why, at some point
in their history, most world currencies in circulation today had a value fixed to a specific quantity
of a recognized standard like silver and gold.

Medieval and later

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During the 15th century, the Medici family were required to open banks at foreign locations in
order to exchange currencies to act on behalf of textile merchants. To facilitate trade, the bank
created
the nostro (from Italian, this translates to "ours") account book which contained two columned
entries showing amounts of foreign and local currencies; information pertaining to the keeping of
an account with a foreign bank. During the 17th (or 18th) century, Amsterdam maintained an
active Forex market. In 1704, foreign exchange took place between agents acting in the interests of
the Kingdom of England and the County of Holland.

Early modern

Alex. Brown & Sons traded foreign currencies around 1850 and was a leading currency trader in
the USA. In 1880, J.M. do Espírito Santo de Silva (Banco Espírito Santo) applied for and was
given permission to engage in a foreign exchange trading business.
The year 1880 is considered by at least one source to be the beginning of modern foreign
exchange: the gold standard began in that year.
Prior to the First World War, there was a much more limited control of international trade.
Motivated by the onset of war, countries abandoned the gold standard monetary system.

Modern to post-modern

From 1899 to 1913, holdings of countries' foreign exchange increased at an annual rate of 10.8%,
while holdings of gold increased at an annual rate of 6.3% between 1903 and 1913.

At the end of 1913, nearly half of the world's foreign exchange was conducted using the pound
sterling. The number of foreign banks operating within the boundaries of London increased from 3
in 1860, to 71 in 1913. In 1902, there were just two London foreign exchange brokers. At the start
of the 20th century, trades in currencies was most active in Paris, New York City and Berlin; Britain
remained largely uninvolved until 1914. Between 1919 and 1922, the number of foreign exchange
brokers in London increased to 17; and in 1924, there were 40 firms operating for the purposes of
exchange.
During the 1920s, the Kleinwort family were known as the leaders of the foreign exchange market,
12
while Japheth, Montagu & Co. and Seligman still warrant recognition as significant FX traders.
The trade in London began to resemble its modern manifestation. By 1928, Forex trade was
integral to the financial functioning of the city. Continental exchange controls, plus other factors in
Europe and Latin America, hampered any attempt at wholesale prosperity from trade for those of
1930s London.

After World War II

In 1944, the Bretton Woods Accord was signed, allowing currencies to fluctuate within a range of
±1% from the currency's par exchange rate. In Japan, the Foreign Exchange Bank Law was
introduced in 1954. As a result, the Bank of Tokyo became the center of foreign exchange by
September 1954.
Between 1954 and 1959, Japanese law was changed to allow foreign exchange dealings in many
more Western currencies.

U.S. President, Richard Nixon is credited with ending the Bretton Woods Accord and fixed
rates of exchange, eventually resulting in a free-floating currency system. After the Accord
ended in
1971, the Smithsonian Agreement allowed rates to fluctuate by up to ±2%. In 1961–62, the volume
of foreign operations by the U.S. Federal Reserve was relatively low. Those involved in controlling
exchange rates found the boundaries of the Agreement were not realistic and so ceased this in March
1973, when sometime afterward none of the major currencies were maintained with a capacity for
conversion to gold, organizations relied instead on reserves of currency. From 1970 to 1973, the
volume of trading in the market increased three-fold. At some time (according to Gandolfo during
February– March 1973) some of the markets were "split", and a two-tier currency market was
subsequently introduced, with dual currency rates. This was abolished in March 1974.
Reuters introduced computer monitors during June 1973, replacing the telephones and telex
used previously for trading quotes.

Markets close

Due to the ultimate ineffectiveness of the Bretton Woods Accord and the European Joint Float, the
forex markets were forced to close sometime during 1972 and March 1973. The largest purchase of
US dollars in the history of 1976, was when the West German government achieved an almost 3-
13
billion-dollar acquisition (a figure is given as 2.75 billion in total by The Statesman: Volume 18
1974). This event indicated the impossibility of balancing of exchange rates by the measures of
control used at the time, and the monetary system and the foreign exchange markets in West
Germany and other countries within Europe closed for two weeks (during February and, or, March
1973. Giersch, Piqué, & Schmieding state closed after purchase of "7.5 million Demarks" Brawley
states "... Exchange markets had to be closed.
When they re-opened ... March 1 " that is a large purchase occurred after the close).

After 1973
In developed nations, the state control of the foreign exchange trading ended in 1973 when complete
floating and relatively free market conditions of modern times began. Other sources claim that the
first time a currency pair was traded by U.S. retail customers was during 1982, with additional
currency pairs becoming available by the next year.
On 1 January 1981, as part of changes beginning during 1978, the People’s Bank of china
allowed certain domestic "enterprises" to participate in foreign exchange trading. Sometime
during 1981, the South Korean government ended Forex controls and allowed free trade to occur
for the first time.
During 1988, the country's government accepted the IMF quota for international trade.
Intervention by European banks (especially the Bundesbank) influenced the Forex market
on 27
February 1985. The greatest proportion of all trades worldwide during 1987 were within the
United Kingdom (slightly over one quarter). The United States had the second highest involvement
in trading. During 1991, Iran changed international agreements with some countries from oil-barter
to foreign exchange

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1.2 Overview of the industry

Foreign exchange, Forex or just FOREX are all terms used to describe the trading of the world's
many currencies. The Forex market is the largest market in the world, with trades amounting to more
than $1.5 trillion every day. This is more than one hundred times the daily trading on the NYSE
(New York stock exchange). Most forex trading is speculative, with only a few percent of market
activity representing governments' and companies' fundamental currency conversion needs.
Unlike trading on the stock market, the forex market is not carried out by a central exchange, but on
the “interbank” market, which is thought of as an OTC (over the counter) market. Trading takes
place directly between the two counterparts necessary to make a trade, whether over the telephone or
on electronic networks all over the world. The main centers for trading are Sydney, Tokyo, London,
Frankfurt and New York. This worldwide distribution of trading centers means that the forex market
is a 24-hour market.

TRADING FOREX
A currency trade is the simultaneous buying of one currency and selling of another one. The
currency combination used in the trade is called a cross (for example, the Euro/US Dollar, or the
GB Pound/Japanese Yen.). The most commonly traded currencies are the so-called “majors” –
EURUSD, USDJPY, USDCHF and GBPUSD.
The most important forex market is the spot market as it has the largest volume. The market is
called the spot market because trades are settled “immediately” or on the spot. In practice this
means within two banking days.

TRADING ON MARGIN
Trading on margin means that you can buy and sell assets that represent more value than the capital
in your account. Forex trading is usually done with relatively little margin since currency exchange
rate fluctuations tend to be less than one or two percent on any given day. To take an example, a
margin of 2.0% means you can trade up to $500,000 even though you only have $10,000 in your
15
account. In terms of leverage this corresponds to 50:1, because 50 times $10,000 is $500,000, or put
another way, $10,000 is 2.0% of $500.000. Using this much leverage gives you the possibility to
 make profits very quickly, but there is also a greater risk of incurring large losses and even being
completely wiped out.
Therefore, it is inadvisable to maximize your leveraging as the risks can be very high.

1.3 The structure of the forex market in India

Like other forex markets in the world, the forex in India consists of several stakeholders. The
main stakeholders in this market are:
 Traders
 Banks /Authorized dealers
 The Reserve of India

The three actors mentioned above play different roles in the trade. Traders are generally all
individuals in the public who are also corporate customers of the banks. These customers use the
banks as authorized dealers to access the forex market. There are traders of different kinds but all of
them are able to access the market only through dealers. This is much like elsewhere in the world
where brokers are the intermediaries between the forex and ordinary traders.
The banks, on the other hand, are the legally authorized institutions to handle currency. In India,
banks exist in different tiers and there are clear laws that determine which institution is categorized
as a financial institution. From these legal institutions, all those who want to trade can create
accounts, access the market and choose products that they would like to trade in. The trading
landscape has changed a lot over the years especially since the 1990's when the Indian regulatory
authorities liberalized this market.
Lastly, the Reserve bank of India is the central financial institution which is responsible for the
monetary policy in India. This institution has been instrumental in shaping the trading landscape in
India. Before 1993, the Indian Rupee had a fixed value which was determined by the RBI. This
meant that the currency only attracted a certain exchange rate even though the market dynamics were
changing. In 1993, though, the RBI repealed the prevailing law at the time to allow for an exchange
rate determined by the market itself. Since then, the Rupee's value has changed a lot in relation to
different currencies.

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1.4 The status of the forex market in India
The forex market in India is quite vibrant. Even though it is not the market with the most daily
volume, it is among the top ten markets in the world. As of 2017, the forex assets in India place it as
the 8th best market in the world by forex reserves. The top asset in this market is the United States as
represented by US institutional bonds and government bonds. The Indian forex reserves are also held
in terms of gold. Indeed, India is the first nation in the world in terms of gold consumption.

Statistically, the Indian forex market has changed a lot. To start with, the daily turnover for the
market is well over several billion dollars down from a couple of millions when it started. The Indian
forex market has several forex players that facilitate the exchange of currency. The markets in these
exchanges have several listed brokers and authorized institutions. There are several non-bank
financial institutions that are legally authorized to facilitate trade in the Indian market. These
institutions are regulated by
FEDAI and they use the USP for better rates of exchange. The market is open 24 hours every day
and it is linked to the rest of the world markets.

The Indian stock exchanges hold a place of prominence not only in Asia but also at the global stage.
The Bombay Stock Exchange (BSE) is one of the oldest exchanges across the world, while the
National Stock Exchange (NSE) is among the best in terms of sophistication and advancement of
technology. The Indian stock market scene really picked up after the opening up of the economy in
the early nineties.
The whole of nineties were used to experiment and fine tune an efficient and effective system. The
‘badla’ system was stopped to control unnecessary volatility while the derivatives segment started as
late as 2000. The corporate governance rules were gradually put in place which initiated the process
of bringing the listed companies at a uniform level. On the global scale, the economic environment
started taking paradigm shift with the ‘dot com bubble burst’, 9/11, and soaring oil prices. The
slowdown in the US economy and interest rate tightening made the equation more complex.
However, after 2000 riding on a robust growth and a maturing economy and relaxed regulations,
outside investors- institutional and others got more scope to operate. This opening up of the system
led to increased integration with heightened cross-border flow of capital, with India emerging as an
investment ‘hot spot’ resulting in our stock exchanges17
being impacted by global cues like never
before.
 Chapter-2
Literature Review

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To do any research, we have to review/study previous literature. For this we studied Journals,
Magazines & Books of FOREX and also the search engine www.google.com. To get good results in
any research, it is very essential that this review of literature should be carefully done. The review of
literature survey for this project includes the following:

 Elliot Wave – This is considered by most experienced traders to be the purest form of
technical analysis, since Elliott Wave analysis measures investor psychology. The Wave
shows how the psychology of traders, en masse, moves from pessimism to optimism on a
stock. This shift occurs in a specific and measurable. Detecting where a stock is in the
pattern can help a trader estimate the future movements of the market.

 K.B. Advisory Ltd. – This program offers you daily technical analysis and trading
recommendations that are based on sophisticated trading strategies developed by Keith
Black. It boasts a successful three-year track record.

 TRL (Technical Research Limited) – TRL is a Specialist Foreign Exchange Forecasting

Service that can help you with forecasting and trading analysis in the global foreign
exchange markets. Technical Research Limited is rated the No. 1 FX Advisory Service by
customers in 39 different countries around the world.

 Prone Analytics - This program is very powerful, and offers real-time analysis for market
professionals who are looking for inexpensive real-time data and exchange feeds with
standard and simple graphical trading support.

 IFR (International Financing Review) – IFR Forex Watch has real-time technical analysis of
the FX spot and options markets. It connects you with analysts in London, New York,
Boston, San Francisco, Singapore and Sydney. IFR specializes in sifting through the vast
array of information that clutters up current market participants, and boiling it down to its
bare essentials.

19
 GMR (Global Market Research) – Global Market Research provides price forecasting and
performance-based Trade Strategies for the FX market. You can check out their daily
 newsletter, their FX Technical and intraday updates and analysis through the Web. Or you
can have them E- mailed to you.

 CHQREK.com – This is a resource created by a market professional that has been trading
and writing about markets for nearly 20 years. You can capitalize on of his experience
and his analysis, especially technical analysis, and get a real trader's take on current
market action.
4CASTWEB – 4CAST sends out key market information and analysis to market
participants worldwide, including central banks. It also has an on-line service that gives
you fundamental, political, strategic and technical analysis 24 hours a day
ForexTRM – ForexTRM is a forex charting service that pairs 18 world and regional
currencies and tracks them every day. This means ForexTRM lets you to trade any one of
the 18 currencies against any of the other 17. It uses trademarked Sigma Bands and Hurst
Cycle Analysis to correctly identify overbought/sold FOREX markets, where trading risk is at
its lowest point in time, and which currency pairs are ready to trade.

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 Chapter 3
Research Methodology

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 3.1 Title of the Project
The Study of Forex Market and its effect on Stock Market

3.2 Objectives
1. To study the effect of Index of Industrial Production on the Stock market.
2. To study the effect of Inflation on Stock market.
3. To study the effect of Gold returns on Stock market.
4. To study the effect of Forex Market on the stock market during the pandemic.

3.3 Research design

a) Introduction
This report focuses on the study of the foreign exchange market and to ascertain their effect on the
Stock market. For this study, Past performance of Sensex, USD/INR, IIP, Gold Return have
been taken into consideration and the study has been focused around these areas and their
performance over the years. It also showcases how the changes in these factors have brought
stability/volatility in the Stock market.

b) Research Design

This study used as descriptive research. Descriptive research involves gathering data that
describe events and then organizes, tabulates, depicts and describes the data collection. It
also uses graphs and charts to the reader in understanding the data distribution easily.

 Data collection tools: Google, RBI websites, government of India websites, NSE and
22
BSE, money control etc. Secondary data (Online Reports, research papers, journals,
company websites.)
  Population of the Study

Sample size: The sample size is restricted to 3 factors (IIP, Forex returns and Gold
Returns) to carry out the research and various online reports (based on past research).
This was done in mind of the time constraints and the fact that felt that this number
would be enough to serve the information required to show the trends.

Sample design/technique: The sample was collected keeping in mind that these 3 factors
would serve as a viable sample size to analyze the data.
Sample unit: Independent Variables - IIP, Forex returns and Gold Returns and Dependent
Variable – Sensex.

 Data Collection -Secondary Data (Sources–Websites, Journals, Magazines etc.)

Secondary data: This study has focused its data collection method to be secondary as the data collected
is from RBI sites, Moneycontrol, BSE and NSE, google, research papers. The data collected from the
following sources is evaluated using different techniques to analyze the impact and effect of different
variable of foreign exchange on Stock market.

3.4Limitations of the study

Every study has a limitation; this research also carried some limitations. While collecting the
information, some of the hurdles I faced were:

 Limited time Frame.

 Lack of primary sources available to collect the data.
 Lack of experience in the Foreign exchange Field.
 The inadequacy in the data collected from internet.

23
Chapter-4
Analysis

24
 24 hours trading
One of the major advantages of trading forex is the opportunity to trade 24 hours a day
from Sunday evening (20:00 GMT) to Friday evening (22:00 GMT). This gives you a
unique opportunity to react instantly to breaking news that is affecting the markets.

 Superior liquidity
The forex market is so liquid that there are always buyers and sellers to trade with. The
Liquidity of this market, especially that of the major currencies, helps ensure price stability
and
low spreads. The liquidity comes mainly from large and smaller banks that provide
liquidity to investors, companies, institutions and other currency market players.

 No commissions
The fact that forex is often traded without commissions makes it very attractive as an
investment opportunity for investors who want to deal on a frequent basis.
Trading the “majors” is also cheaper than trading other cross because of the high level of
liquidity. For more information on the trading conditions at Saxo Bank, go to the Account
Summary on your Client Station and open the section entitled "Trading Conditions" found in
the top right-hand corner of the Account Summary.

 Leverage
With a minimum account of USD 10,000, for example, you can trade up to USD 500,000.
The USD 10,000 is posted on margin as a guarantee for the future performance of your
position

 Profit potential in falling markets

Since the market is constantly moving, there are always trading opportunities, whether a
25 to another currency. When you trade
currency is strengthening or weakening in relation
currencies, they literally work against each other. If the EUR/USD declines, for example, it
 is because the U.S. dollar gets stronger against the Euro and vice versa. So, if you think the
EURUSD will decline (that is, that the Euro will weaken versus the dollar), you would sell
EUR now and then later you buy Euro back at a lower price and take your profits. The
opposite trading scenario would occur if the EUR/USD appreciates.

TWO WAYS TO TRADE

There are two basic approaches to analyzing currency markets, fundamental analysis and technical
analysis. The fundamental analyst concentrates on the underlying causes of price movements, while
the technical analyst studies the price movements themselves.

TECHNICAL ANALYSIS
Technical analysis focuses on the study of price movements. Historical currency data is used to
forecast the direction of future prices. The premise of technical analysis is that all current market
information is already reflected in the price of that currency; therefore, studying price action is all
that is required to make informed trading decisions. The primary tools of the technical analyst are
charts. Charts are used to identify trends and patterns in order to find profit opportunities. The most
basic concept of technical analysis is that markets have a tendency to trend. Being able to identify
trends in their earliest stage of development is the key to technical analysis.

FUNDAMENTAL ANALYSIS
Fundamental analysis focuses on the economic, social and political forces that drive supply and
demand. Fundamental analysts look at various macroeconomic indicators such as economic growth
rates, interest rates, inflation, and unemployment. However, there is no single set of beliefs that
guide fundamental analysis. There are several theories as to how currencies should be valued.

26
 PSYCHOLOGY OF TRADING

> Four Principles for Becoming a Better Trader

(A). Trade with a DISCIPLINED Plan: The problem with many traders is that they take shopping
more seriously than trading. The average shopper would not spend $400 without serious research
and examination of the product he is about to purchase, yet the average trader would make a trade
that could easily cost him $400 based on little more than a “feeling” or “hunch.” Be sure that you
have a plan in place BEFORE you start to trade. The plan must include stop and limit levels for the
trade, as your analysis should encompass the expected downside as well as the expected upside.

(B). Cut your losses early and Let your Profits Run:
This simple concept is one of the most difficult to implement and is the cause of most traders
demise. Most traders violate their predetermined plan and take their profits before reaching their
profit target because they feel uncomfortable sitting on a profitable position. These same people
will easily sit on losing positions, allowing the market to move against them for hundreds of
points in hopes that the market will come back. In addition, traders who have had their stops hit a
few times only to see the market go back in their favor once they are out, are quick to remove
stops from their trading on the belief that this will always be the case. Stops are there to be hit,
and to stop you from losing more than a predetermined amount!
The mistaken belief is that every trade should be profitable. If you can get 3 out of 6 trades to be
profitable then you are doing well. How then do you make money with only half of your trades
being winners? You simply allow your profits on the winners to run and make sure that your
losses are minimal.

(C). Do not marry your trades:

The reason trading with a plan is the #1 tip is because most objective analysis is done before the
trade is executed. Once a trader is in a position, he/she tends to analyze the market differently in the
“hopes” that the market will move in a favorable direction rather than objectively looking at the
changing factors that may have turned against your original analysis. This is especially true of
losses. Traders with a losing position tend to marry their position, which causes them to disregard
27
the fact that all signs point towards continued losses.
(D). Do not bet the farm:
Do not over trade. One of the most common mistakes that traders make is leveraging their account
too high by trading much larger sizes than their account should prudently trade. Leverage is a
double-edged sword. Just because one lot (100,000 units) of currency only requires $1000 as a
minimum margin deposit, it does not mean that a trader with $5000 in his account should be able to
trade 5 lots. One lot is
$100,000 and should be treated as a $100,000 investment and not the $1000 put up as margin. Most
traders analyze the charts correctly and place sensible trades, yet they tend to over leverage
themselves. As a consequence of this, they are often forced to exit a position at the wrong time. A
good rule of thumb is to trade with 1-10 leverage or never use more than 10% of your account at
any given time.
Trading currencies is not easy (if it was, everyone would be a millionaire!)

28
 Fundamentals Every Trader Should Know

Currency prices reflect the balance of supply and demand for currencies. Two primary factors
affecting supply and demand are interest rates and the overall strength of the economy. Economic
indicators such as GDP, foreign investment and the trade balance reflect the general health of an
economy and are therefore responsible for the underlying shifts in supply and demand for that
currency. There is a tremendous amount of data released at regular intervals, some of which is more
important than others. Data related to interest rates and international trade is looked at the closest.

(1). Interest Rates

If the market has uncertainty regarding interest rates, then any bit of news regarding interest rates can
directly affect the currency markets. Traditionally, if a country raises its interest rates, the currency
of that country will strengthen in relation to other countries as investors shift assets to that country to
gain a higher return. Hikes in interest rates, however, are generally bad news for stock markets.
Some investors will transfer money out of a country's stock market when interest rates are hiked,
causing the country's currency to weaken. Which effect dominates can be tricky, but generally there
is a consensus beforehand as to what the interest rate move will do. Indicators that have the biggest
impact on interest rates are PPI, CPI, and GDP. Generally, the timing of interest rate moves are
known in advance.

(1). International Trade

The trade balance shows the net difference over a period of time between a nation’s exports and
imports. When a country imports more than it exports the trade balance will show a deficit, which is
generally considered unfavorable.
For example, if U.S dollars are sold for other domestic national currencies (to pay for imports), the
flow of dollars outside the country will depreciate the value of the currency. Similarly, if trade
figures show an increase in exports, dollars will flow into the United States and appreciate the value
of the currency. From the standpoint of a national economy, a deficit in and of itself is not
29
necessarily a bad thing. However, if the deficit is greater than market expectations then it will
trigger a negative price movement
 Trading Mechanism in Stock Market

Trading at both the exchanges takes place through an open electronic limit order book in which
order matching is done by the trading computer.4 There are no market makers and the entire
process is order- driven, which means that market orders placed by investors are automatically
matched with the
best limit orders. As a result, buyers and sellers remain anonymous.

The advantage of an order-driven market is that it brings more transparency by displaying all buy
and sell orders in the trading system. However, in the absence of market makers, there is no
guarantee that orders will be executed.

All orders in the trading system need to be placed through brokers, many of which provide an online
trading facility to retail customers. Institutional investors can also take advantage of the direct market
access (DMA) option in which they use trading terminals provided by brokers for placing orders
directly into the stock market trading system.

Settlement and Trading Hours

Equity spot markets follow a T+2 rolling settlement.5 6 This means that any trade taking place on
Monday gets settled by Wednesday. All trading on stock exchanges takes place between 9:55 a.m.
and 3:30 p.m., Indian Standard Time (+ 5.5 hours GMT), Monday through Friday. Delivery of
shares must be made in dematerialized form, and each exchange has its own clearing house, which
assumes all settlement risk by serving as a central counterparty

30
 Market Indexes
The two prominent Indian market indexes are Sensex and Nifty. Sensex is the oldest market index
for equities; it includes shares of 30 firms listed on the BSE, which represent about 47% of the
index's free- float market capitalization.7 It was created in 1986 and provides time series data from
April 1979, onward.

Another index is the Standard and Poor's CNX Nifty; it includes 50 shares listed on the NSE,
which represent about 46.9% of its free-float market capitalization.7 It was created in 1996 and
provides time series data from July 1990, onward.

S&P BSE SENSEX, first compiled in 1986, was calculated on a 'Market Capitalization-Weighted'
methodology of 30 component stocks representing large, well-established and financially sound
companies across key sectors. The base year of S&P BSE SENSEX was taken as 1978-79. S&P
BSE SENSEX today is widely reported in both domestic and international markets through print as
well as electronic media. It is scientifically designed and is based on globally accepted construction
and review methodology. Since September 1, 2003, S&P BSE SENSEX is being calculated on a
free-float market capitalization methodology. The 'free-float market capitalization-weighted'
methodology is a widely followed index construction methodology on which majority of global
equity indices are based; all major index providers like MSCI, FTSE, STOXX, and Dow Jones use
the free-float methodology.

The growth of the equity market in India has been phenomenal in the present decade. Right from
early nineties, the stock market witnessed heightened activity in terms of various bull and bear runs.
In the late nineties, the Indian market witnessed a huge frenzy in the 'TMT' sectors. More recently,
real estate caught the fancy of the investors. S&P BSE SENSEX has captured all these happenings
in the most judicious manner. One can identify the booms and busts of the Indian equity market
through S&P BSE SENSEX. As the oldest index in the country, it provides the time series data over
a fairly long period of time (from 1979 onwards). Small wonder, the S&P BSE SENSEX has
become one of the most prominent brands in the country.

31
 Market Regulation

The overall responsibility of development, regulation, and supervision of the stock market rests
with the Securities and Exchange Board of India (SEBI), which was formed in 1992 as an
independent authority. Since then, SEBI has consistently tried to lay down market rules in line
with the best market practices. It enjoys vast powers of imposing penalties on market participants,
in case of a breach.

Who Can Invest in India?

India started permitting outside investments only in the 1990s. Foreign investments are classified
into two categories: foreign direct investment (FDI) and foreign portfolio investment (FPI). All
investments in which an investor takes part in the day-to-day management and operations of the
company are treated as FDI, whereas investments in shares without any control over management
and operations are treated as FPI.

For making portfolio investments in India, one should be registered either as a foreign institutional
investor (FII) or as one of the sub-accounts of one of the registered FIIs. Both registrations are
granted by the market regulator, SEBI.

Foreign institutional investors mainly consist of mutual funds, pension funds, endowments,
sovereign wealth funds, insurance companies, banks, and asset management companies. At present,
India does not allow foreign individuals to invest directly in its stock market. However, high-net-
worth individuals (those with a net worth of at least $50 million) can be registered as sub-accounts
of an FII.

Foreign institutional investors and their sub-accounts can invest directly into any of the stocks listed
on any of the stock exchanges. Most portfolio investments consist of investment in securities in the
primary and secondary markets, including shares, debentures, and warrants of companies listed or to
be listed on a recognized stock exchange in India. FIIs32can also invest in unlisted securities outside
stock exchanges, subject to the approval of the price by the Reserve Bank of India. Finally, they can
invest in units of mutual funds and derivatives traded on any stock exchange.

An FII registered as a debt-only FII can invest 100% of its investment into debt instruments. Other
FIIs must invest a minimum of 70% of their investments in equity. The balance of 30% can be
invested in debt. FIIs must use special non-resident rupee bank accounts in order to move money in
and out of India. The balances held in such an account can be fully repatriated.

STOCK MARKET - AT INDIAN PERSPECTIVE

The concept of stock markets came to India in 1875, when Bombay Stock Exchange (BSE) was
established as 'The Native Share and Stockbrokers Association ' a voluntary non - profit making
association. We all know it, the Bhaji (Sabji) market in your neighborhood is a place where
vegetables are bought and sold. Like Bhaji (Sabji) market, a stock market as a place where stocks
shares.
are bought and sold. The stock market determines the day's price for a stock through a process of
bid and offer. You have right to bid and buy a stock share and offer to sell the stock shares at a
valuable price. Buyers compete with each other for the best bid and got their highest price quoted
to purchase a particular Stock Market Shares. Similarly, sellers compete with each other for the
lowest price
quoted to sell the stock. When a match is made between the best bid and the best offer a trade is
executed. In automated exchanges high-speed computers do this entire job. Stocks of various
companies are listed on stock exchanges. Presently there are 23 stock markets In India. The
Bombay Stock Exchange (BSE), the National Stock Exchange (NSE) and the Calcutta Stock
Exchange (CSE) are the three large stock exchanges. There are many small regional exchanges
located in state capitals and other major cities.

33
 Data Analysis and Findings

Multiple regression is an extension of linear regression models that allow predictions of systems
with multiple independent variables. It does this by simply adding more terms to the linear
regression equation, with each term representing the impact of a different physical parameter.

This is still a linear model, meaning that the terms included in the model are incapable of showing
any relationships between each other or representing any sort of non-linear trend. These downsides
can be overcome by adding modified terms to the equation. A new parameter could be driven by
another equation that tracks the relationship between or variables or that applies a non-linear trend to
the variable. In this way the independent linear trends in the multiple regression model can be forced
to capture relationships between the two and/or non-linear impacts.

Data was collected for the period starting from January, 2019 – March, 2021

The following formula is a multiple linear regression model.

Y = Β0 + Β1X1 + Β2X2 +….. ΒpXp

Where:

X, X1, Xp – the value of the independent variable,

Y – the value of the dependent variable.
Β0 – is a constant (shows the value of Y when the value of X=0)
Β1, Β2, Βp – the regression coefficient (shows how much Y changes for each unit change in X).

P-value ≤ α: The association is statistically significant

If the p-value is less than or equal to the significance level, you can conclude that there
is a statistically significant association between 34
the response variable and the term.

P-value > α: The association is not statistically significant

 If the p-value is greater than the significance level, you cannot conclude that there is a
statistically significant association between the response variable and the term. You may
want to refit the model without the term
Inflation Currency Return SENSEX
Period IIP Gold Return
rates (USD/INR) Returns
Jan,2021 1.97% 0.40% 0.00% 0.00% 0.00%
Feb,2021 2.57% -5.10% 5.54% 0.79% -1.07%
Mar,2021 2.86% 12.90% -2.50% -2.29% 7.82%
Apr,2021 2.99% -12.20% -3.05% -0.24% 0.93%
May,2021 3.05% 7% -0.19% 0.52% 1.75%
June,2021 3.18% -4.50% 2.17% -0.50% -0.80%
July,2021 3.15% 1.90% 5.01% -0.97% -4.86%
Aug,2021 3.28% -4.20% 4.81% 3.46% -0.40%
Sept,2021 3.99% -2.60% 9.29% 0.24% 3.57%
Oct,2021 4.62% 0.90% -3.67% -0.42% 3.78%
Nov,2021 5.54% 3.90% 1.37% 0.68% 1.66%
Dec,2021 7.35% 4.40% -1.54% -0.43% 1.13%
Jan,2022 7.59% 2.20% 3.13% 0.13% -1.29%
Feb,2022 6.58% -2.30% 4.94% 0.45% -5.96%
Mar,2022 5.84% -12.70% 0.64% 4.12% -23.05%
Apr,2022 7.22% -53.90% 6.43% 2.27% 14.42%
May,2022 6.26% 67% 6.06% -0.72% -3.84%
June,2022 6.23% 19.60% 1.70% 0.12% 7.68%
July,2022 6.73% 9.30% 1.83% -1.12% 7.71%
Aug,2022 6.69% -0.60% 10.59% -0.45% 2.72%
Sept,2022 7.27% 5.90% -2.66% -1.41% -1.45%
Oct,2022 7.61% 4.10% -3.04% 0.01% 4.06%
Nov,2022 6.93% -2.40% 0.54% 0.91% 11.45%
Dec,2022 4.59% 7.80% -4.98% -0.75% 8.16%
Jan,2023 4.06% 0.00% 3.79% -0.71% -3.07%
Feb'2023 0.00% 0.00% -1.75% -0.40% 6.08%
Mar,2023 0.00% 0.00% -7.22% 0.40% 1.54%
35
SUMMARY OUTPUT

Regression Statistics
Multiple R 0.481150382
R Square 0.23150569
Adjusted R Square 0.091779451
Standard Error 0.066037359
Observations 27

ANOVA
df SS MS F Significance F
Regression 4 0.02890168 0.007225 1.65685 0.19581901
Residual 22 0.09594052 0.004361
Total 26 0.1248422

Coefficients Standard Error t Stat P-value

Intercept 0.0078828 0.03017178 0.261263 0.79632
Inflation rates 0.2839256 0.59496887 0.477211 0.63792
IIP -0.141637 0.08074102 -1.75421 0.09332
Gold Return -0.076356 0.31511449 -0.24231 0.81078
Currency Return (USD/INR) -2.589661 1.09720265 -2.36024 0.02755

Lower 95% Upper 95% Lower 95.0% Upper 95.0%

-0.05468967 0.070455 -0.0546897 0.07045521
-0.94996435 1.517815 -0.9499644 1.51781547
-0.30908313 0.02581 -0.3090831 0.02581011
-0.72986365 0.577151 -0.7298637 0.57715127
-4.86511957 -0.3142 -4.8651196 -0.3142015

36
OBSERVATION - In these results, the relationships between Currency returns (USD/INR)
are statistically significant because the p-value (0.02755) for this term are less than the
significance level of 0.05. The relationship between IIP (0.09332), Inflation Rate (0.63792)
and Gold returns (0.81078) is not statistically significant at the significance level of 0.05.
Out of the 4 factors i.e., IIP, Gold returns, Currency returns and Inflation rate, only currency
returns affect the stock market. Other 3 factors didn’t affect much the stock market Indices.

37
Chapter-5
Conclusion

38
Conclusion derived from this study is that the foreign exchange market returns have a strong effect
on stock market returns in general. In addressing each of the hypotheses, USD/INR exchange rate
has a strong effect on stock market returns and the relationship is negative. However, Inflation rate,
Index of Industrial Production and Gold prices exchange rate return reflects a positive relationship
with stock returns, and has a weak explanatory power on stock returns. USD/INR as a positively
correlated variable with stock returns, it set outs a strong explanatory power on stock returns. Even
though all three independent variables have a weak correlation to stock returns, it’s found that three
exchange rate return variables have a collective explanatory power on stock returns.

However, the researcher was constrained in data collection, due to unavailability of some exchange
rate data for the specified time period to unhide the relationships, and data set could include unusual
events occurred during the selected period. It is suggested that finding the individual and collective
relationships between all the exchange rate returns in foreign exchange market and the stock market
returns, as future research directions. Focusing on a single sector returns in the stock exchange is
seen as another possibility for further research in this area.

All markets in the economy affect each other in different ways. A radical change in any aspect of
the economy will thus have an effect on the markets. The market that affects the economy the most
though is the stocks market. This is mainly because of the capital nature of the economy. The
stocks market is the perfect illustration of how a capitalist economy works. The performance of the
companies listed in this market is what primarily heralds the start of either a recession or expansion
of the economy. A recession would adversely affect the value of the currency in the long-term and
this would be reflected in the forex market. An expansion would also be reflected in the forex
market in the form of a strengthening local currency.

Trading by Numbers – Eighteen Tips

You can never have too many tips or tricks up your sleeve when you are trading. Most of the tips
I’m including here are received wisdom, trading truisms that you should remember. They apply
to all markets, but are particularly useful in a volatile and technical market like the FOREX

1. Pay attention to the market. Exit and enter trades based on market information. Don’t wait for
39 market has changed direction on you.
a price you think the currency should hit when the
2. There are times when, due to a lack of liquidity or excessive volatility, you should not trade
at all. On a similar note, never trade when you are sick. You can’t count on yourself to be
alert to the shifts of the markets, and make good decisions.

3. Trading systems that work in an up market may not work in a down market, and a system that
works for trending markets, or for range bound markets may not work in other markets. Have
a system for each type of market.
4. Up market and down-market patterns are ALWAYS there, but you have to look for the
dominant trends. Always select trades that move with the trends
5. During the blowout stage of the market, either up or down, the risk managers are usually
issuing margin call position liquidation orders. They don't generally check the screen to see
what’s overbought or oversold; they just keep issuing liquidation orders. Make sure you stay
out of their way.
6. Trust your instincts. If something feels wrong about a trade, don’t make it. It’s better to be
superstitious than to loose money.
7. Rumor is king. Buy when you hear the rumor, sell when you hear the news.
8. The first and last ticks are always the most expensive. Get in the market late, and out early.
And never trade in the direction of a gap, either opening or closing.
9. When everyone else is in, it's time for you to get out. If a stock or currency is overbought, it’s
time to exit your position.
10. Don’t worry about missing out on an opportunity to trade. There will always be another good
one just around the corner. If the trade you are considering doesn’t meet all your entry
signals but it seems too good to pass up, remember, you’re never going to run out of trades
you can make.
11. Don’t get too confident. No one can predict the market with 100% accuracy. You need to
always expect the unexpected. If you become uneasy, or the market becomes choppy, exit
your trades.
12. Don't turn three losing trades in a row into six. When you’re off, turn off the screen, do
something else. Often the best way to break a streak of consecutive loses is to not trade
for a day.
13. But, don't stop trading when you’re on a winning streak.
14. Measure your success by the profit made in a day, not on a trade. It’s even better to measure
it over two or three days. A successful trader’s goal is to make money, not to win on every
trade. 40
(2). Scalpers reduce the number of variables affecting market risk by being in a position only for a
few seconds. Day traders reduce market risk by being in trades for minutes. If you convert a
scalp or day trade into a position trade, you probably didn’t analyze the risks of the trade
properly.
(3). There is no secret to understanding the market. You can spend much of your valuable time and
money looking for these kinds of secrets. It’s better to take the time to create a solid trading
system, and realize that the secret to success is hard work.
(4). Never ask for someone else's opinion, they probably didn’t do as much homework as you did
anyways.
(5). When the market is going up, say it out loud. When the market is going down, say that out loud
too. You’ll be amazed at how hard it is to say what is going on right in front of you when you
want it the market to be doing something else.

41
Chapter-6 Suggestions

42
The Stock Market affects the Forex market greatly. FX market is a reflection of the stock market.
The 2 always show a positive correlation most of the time. The correlation between stocks and
Forex can change from time to time depending on the global financial condition. When a country’s
stock market is performing poorly, you can avoid that country’s currency because we expect a
decline in the currency value following a fall in the stock market.

Market sentiment

 The investor attention to the market can affect the forex market in a big way. It is a
commonly known fact that there exists a crowd psychology in most markets. The stocks
market performance is based on how much confidence the investors have on the assets
being traded. If for any reason investors start losing confidence in particular stocks, the
investments will start to fall. This will lead to a larger perception that the economy might
not be faring well. When investors pull out, they take their money with them and this has
direct effects on the currency exchange markets. An economy that is losing units of foreign
currency will end up seeing a devaluation of its currency. This, in turn, has a direct effect
on forex trading (also known
as prekybos finansų rinkose in Europe) since the value of the asset of trade has been
changed. The market sentiment is, therefore, a key factor in the stock market which has a
direct effect on the forex market.

Global trade

 Other than investor attention, the connected global market also has a huge role to play in how
the stock market influences the forex market. Most multinational companies that are publicly
owned are especially instrumental in changing market dynamics. Multinational companies
have a global reach and are thus directly involved in the forex market in one way or another.
Huge companies that operate globally like Coca-Cola have a direct impact on currency
exchange. When recessions happen, they are almost always as a result of a falling economy.
 The economy can decline due to various reasons but the most likely is due to a decline in
stocks value. Major news about the economy also first affect the stocks market and the
43
companies in it before any other markets. The big corporates can also initiate the process of a
poor performance in the stocks market when they make bad investment decisions. If for any
reason a big company stops profiting, the reduction of spending by that company will
definitely reflect in the economy. This will then ultimately affect the value of the currency in
the forex market.

Since the stock market has a huge bearing on the economy, it is often the first source
of information for investors, consumers and other stakeholders of the economy who want to

understand the direction the currencies might take. Such indicators show how the
economy is performing and ultimately determine how the forex market is fairing as well.
Basic goods that are usually at the top of consumers priority lists are vital for determining
the price and general inflation in the economy. The general inflation rates affect the
interest rates. Interest rates, in turn, affect the level of investments. The investments are
ultimately the main factor that determines the value of a currency at the forex market.

44
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