SENSEX is the short term for the words "Sensitive Index" and is associated with the Bombay (Mumbai) Stock Exchange (BSE). The SENSEX was first formed on 1 January 1986 and used the market capitalization of the 30 most traded stocks of BSE. The base was 1979 and taken as 100. It is the most important stock index of the country, most extensively traded and followed by the economy. Therefore, many a times, it is considered as representative of rise or fall in sensex is considered as rise or fall of Indian economy. 

 

The Sensex has always been termed as the representative of the economy and the 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.

 

 However, it is not right to align the entire Indian economy with sensex as it deals with corporate and organized sector only and entire agriculture and unorganized sector is left behind. 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. 

 

Even in BSE itself, it doesn’t reflect a general trend as 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. 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.

 

Like dominance of certain stocks having the ability to influence the Sensex movement, sectoral representation in the Sensex also looks skewed. 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.

 

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.

 

Though many believe that movement of sensex affects the Indian economy but in fact sensex represents only the few sectors of the economy. For instance, rise in the shares of banking companies may bring in funds for the banking sector. 

 

The rise of the Sensex does not have any link to reports of farmers’ suicides or to agitations by farmers over land acquisition with little compensation. Nor does it have any relation to the numbers of people below the poverty line or whether food grains are rotting in godowns rather than being fed to the hungry and malnourished. While the rise in the Sensex is all to the good and surely brings cheer to the corporate sector and millions of investors it does not necessarily reflect a rise in the overall well being of the masses.

 

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.

 

Thus, the effect of sensex on overall economy is rare; however, it does represent the few sectors of the economy. However, from the entire argument, it should not be concluded that sensex is a futile index and it must be shut down. Sensex is indeed an important index but it represents the financial health of the companies represented in the index.

 

No index in the country includes every item for example Wholesale Price Index doesn’t includes all goods but it doesn’t means it should be abolished.  The significance of Sensex must be recognized but it should not be considered representative of Indian economy.

 

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