Description
The doc explains about the linkages between stocks, bullion and real estate in India.
Interplay Between Stock,Bullion And Real Estateeconomic Theory
INTERPLAY BETWEEN STOCK, BULLION AND REAL ESTATE
PRESENTED BY: GROUP 5
MEMBERS
AVISHEK CHATTOPADHYAY – 111 ABHISHEKH PAREKH – 142 DALSHER SINGH DHILLON – 156 FIROZ R.V. – 145 PRASHANT SHUKLA - 155
1
Interplay Between Stock,Bullion And Real Estateeconomic Theory
Contents
1. Introduction ............................................................................................................ 3 Indian Stock Market ............................................................................................ 3 Real Estate .......................................................................................................... 3 Bullion Market .................................................................................................... 4 2. Economic Theory - Theory of Demand and Supply .............................................. 5 a. Demand Curve .................................................................................................... 5 b. Supply Curve ...................................................................................................... 5 c. Market Mechanism ............................................................................................. 6 d. Application Of The Market Mechanism - Interplay Between Stock Market and Real Estate. ................................................................................................................ 7 3. Economic Theory - Indifference Curve and Budget Line ..................................... 8 a. Indifference Curve .............................................................................................. 8 b. Budget Line ......................................................................................................... 8 c. Application of Budget Line and Indifference Curves - Interplay between Bullion and Other Investments .................................................................................. 9 4. References ............................................................................................................ 11 a. b. c.
2
Interplay Between Stock,Bullion And Real Estateeconomic Theory
1. Introduction a. Indian Stock Market
The world economy is currently reeling under the aftermaths of the subprime crisis and as former US Federal Reserve chairman Alan Greenspan said “history has not dealt kindly with the aftermath of protracted periods of low-risk premiums.” The fall of legends like Lehman brothers, AIG, Merrill Lynch has sent stock markets around the world crashing. It was only after the central banks around the world have pumped some liquidity into the system, that the system has attained some stability. However the long term projections for India are not so gloomy. It is a universally acknowledged fact now, that India is on a growth path with a significant element of consistency & fundamental strengths which are expected to fuel the drive into the future, at a faster pace. Economic indicators such as the GDP (Gross Domestic Product), Per Capita Income, Forex reserves, FII's (Foreign Institutional Investments) & Industry growth rate which includes the manufacturing & farm sector are all at their record highs. Add to that a throbbing Stock Market & a significant shift from a traditional agriculture & manufacturing based economy to a service oriented one, especially in Urban & Semi-urban segment; are factors which most economists would endorse. b. Real Estate While it is an accepted theory that Real Estate is among the most significant contributors to the GDP in any growing economy; the same is no different here. The past two years have witnessed a steady growth both in terms of investments in this sector as well as demand, which has further resulted in exciting capital appreciation across the country, especially in "A" & "B" categories cities & towns. More so in case of the housing sector, the rise in demand has been meteoric. Rationalizing of interest rates, higher per capita income & increased employment opportunities have thankfully ensured that demand is more from end-users rather than from speculators. Capital values in the past two years have grown in a bandwidth of 20% to 40% varying between respective geographic locations & price/ product segments. Mumbai, Delhi & their respective suburbs have predominantly witnessed the highest growth; 3
Interplay Between Stock,Bullion And Real Estateeconomic Theory
what with some projects being benchmarked against global standards. Rationalization by the respective state governments with regard to allowing divestment of defunct textile mills & other such manufacturing units which had so far occupied large tracts of land in prime locations; have been an important factor responsible for exciting new creations. Also, quite a few home-grown family run property development companies have truly gone professional while facing competition from real estate off-shoots of larger corporations from the organized sector. However with the economy entering in a recessionary phase and the liquidity crisis ushered by the sub prime crisis is bound to but breaks on real estate in short term. c. Bullion Market India is the world's largest consumer of gold. According to latest figures, in 2007 it absorbed over 1000 tonnes of gold, compared to just 320 tonnes in 1994; that is without taking into account the recycling of scrap from the immense stock of close to 10,000 tonnes built up in the last few hundred years, or gold imported for jewellery manufacture and re-export. Until 1990, the Gold Control Act prohibited its citizens from possessing gold bars. Thus their grew a market for smuggled bars. However the scenario changed in the period post 90s when investment in small bars both imported and locally made that had proliferated from local refineries had increased substantially. During the mid 90s, Gold began to be used as a method of camouflaging wealth when the local rupee price had experienced a steady rise. Such an augmentation in investment in gold was uninterrupted in 1998 when over 40 tonnes of gold from bonds that were originally issued by the Reserve Bank of India (RBI) were restored back to the public. Although in cities, gold is having to compete with investment in stock market, industries, and a wide range of durable consumer goods, the rural people till date prefer to invest in 22 carat jewelery. In order to tap this hoarding of gold privately, the Government announced a new initiative in its budget for the year 99-2000. It allowed the commercial banks to take deposits in terms of gold bars,coins or jewelery against the payment of interest. In present day context, the following statements hold true: ? ? ? ? Gold is being valued in India as a secondary source of investment after bank deposits. India is the largest investor in gold jewelery. Domestic consumption is sensitive to monsoon, harvest and marriage seasons. Indian jewelery off take is sensitive to price increases and more so to volatility.
Thus the Bullion Market in India even after undergoing several corrections has retained its status of being a recognizable index highlighting the economic growth of the nation in recent times.
4
Interplay Between Stock,Bullion And Real Estateeconomic Theory
2. Economic Theory - Theory of Demand and Supply a. Demand Curve It can be defined as the relationship between the quantity of good that a consumers are willing to buy and the price of the good. This can be further illustrated by the following graph.
The graph shows that as prices increase demand for a particular item decreases.As prices of a particular item increase people are discouraged to buy them due to budget constraints hence demand falls
b. Supply Curve It can be defined as the relationship between the quantity of a good that producers are willing to sell and the price of the good. This can be further illustrated by the following graph.
5
Interplay Between Stock,Bullion And Real Estateeconomic Theory
The graph shows that as price of a good increases supply also increases as more and more manufacturers want to enter the market hence the supply increases.
c. Market Mechanism It can be defined as the tendency in a free market for price to change until the market clears. It can be illustrated in the following graph.
MARKET MECHANISM The graph illustrates that at the point of intersection of the demand curve and the supply curve the equilibrium exists at that point. Equilibrium price is that price that equates the quantity supplied to quantity demanded.
6
Interplay Between Stock,Bullion And Real Estateeconomic Theory
d. Application Of The Market Mechanism - Interplay Between Stock Market and Real Estate. Research has shown that the decline of real estate price has crippled the ability of investors to pump in money in real estate market. Hence the trend is that when stock prices fall real estate sector also goes down. The above theories can be illustrated in the following demand and supply graph.
Initially the equilibrium price is at P and the quantity supplied is Q , this is arrived at by the intersection of the two curves that is demand and supply curves . Now due rise in input costs of building material i.e. steel, cement etc the supply curve shifts to the left from SS to S’S’ this happens because builders would be discouraged to build more hence the supply would decrease. This results in increase of price from P to P’ and the quantity supplied decreases from Q to Q’ In the meanwhile stock markets have also crashed this decreased the liquidity of prospective investors as they have lost out on money in the market hence the general tendency is to save money. This shifts the demand curve to the left as well because now people are no more willing to buy houses as they no more have any liquidity.
7
Interplay Between Stock,Bullion And Real Estateeconomic Theory
Hence the curve shifts from DD to D’D’. The new equilibrium price now settles at the new intersection where price reduces from P’ to P”. 3. Economic Theory - Indifference Curve and Budget Line We have used the budget line and indifference curves to show the interplay between Bullion and other investments/expenses. a. Indifference Curve Indifference curve can be defined as the curve representing all combinations of market baskets that provide a consumer with same level of satisfaction.
In graph shown the curve represents all the set of possible combination of bullion and other expenses for which the consumer will derive equal utility or satisfaction. b. Budget Line Budget line is the line, which shows what a consumer can purchase given his budget.
8
Interplay Between Stock,Bullion And Real Estateeconomic Theory
The budget line represents the maximum a consumer will spend on two items given his budget constraints. He would achieve the maximum utility at the given budget at the point of tangency of the budget line and the indifference curve shown below:
c. Application of Budget Line and Indifference Curves - Interplay between Bullion and Other Investments Unlike the real estate market where the prices are at a constant level although lower than the initial highs, the bullion market has experienced a downfall. 9
Interplay Between Stock,Bullion And Real Estateeconomic Theory
This is to say that in spite of the global bullion market experiencing an increasing in the price of bullion, the demand for the metal has gone down in India. Let’s analyse the same from an economic viewpoint of the budget line and indifference curve theories explained above:
We assume that with the decrease of the stock market the purchasing power of the people have gone down. In this scenario let us consider that the people had an earlier budget line of Q (B). In this initial scenario since investment in the bullion market was highly profitable the Indifference curve IC’ shifted more towards bullion market than the alternate investments as this combination was more profitable. With the fall in stock prices and so the fall in income level of the people the budget line shifts left (to a lower income level) to Q (B’). At this stage unlike earlier where the consumer preferred greater amount of bullion compared to the amount of other investments, a fall in both the amounts takes place. So, there is a decrease in demand for bullion. Now, with the price of bullion in the global market increasing and due to the decreased income of the people, they prefer to buy more of other alternative investment rather than bullion. This leads to an even more decrease in the demand for bullion in the market. So, the net effect remains that the demand for bullion goes down with the fall in the stock prices and the budget line shifts to Q (B”). The indifference curve now shifts more towards the alternate investment rather than the bullion since that seems to be a profitable investment compared to bullion.
10
Interplay Between Stock,Bullion And Real Estateeconomic Theory
4. References 1.http://www.bseindia.com/ 2.http://www.contrarianprofits.com/articles/tag/bullion-products 3.http://nrifinanceguide.com/2008/03/21/current-indian-stock-market-scenariovs-us-recession/ 4.http://info.goldavenue.com/Info_site/in_mark/in_ma_in_mm.htm 5.http://info.goldavenue.com/Info_site/in_mark/in_ma_in_mm.htm 6. www.indiastat.com 7. www.invest.gold.org 8. www.bseindia.com 9. www.ansals.com 10. www.eqitymaster.com 11. www.eqitymaster.com
11
doc_217327235.docx
The doc explains about the linkages between stocks, bullion and real estate in India.
Interplay Between Stock,Bullion And Real Estateeconomic Theory
INTERPLAY BETWEEN STOCK, BULLION AND REAL ESTATE
PRESENTED BY: GROUP 5
MEMBERS
AVISHEK CHATTOPADHYAY – 111 ABHISHEKH PAREKH – 142 DALSHER SINGH DHILLON – 156 FIROZ R.V. – 145 PRASHANT SHUKLA - 155
1
Interplay Between Stock,Bullion And Real Estateeconomic Theory
Contents
1. Introduction ............................................................................................................ 3 Indian Stock Market ............................................................................................ 3 Real Estate .......................................................................................................... 3 Bullion Market .................................................................................................... 4 2. Economic Theory - Theory of Demand and Supply .............................................. 5 a. Demand Curve .................................................................................................... 5 b. Supply Curve ...................................................................................................... 5 c. Market Mechanism ............................................................................................. 6 d. Application Of The Market Mechanism - Interplay Between Stock Market and Real Estate. ................................................................................................................ 7 3. Economic Theory - Indifference Curve and Budget Line ..................................... 8 a. Indifference Curve .............................................................................................. 8 b. Budget Line ......................................................................................................... 8 c. Application of Budget Line and Indifference Curves - Interplay between Bullion and Other Investments .................................................................................. 9 4. References ............................................................................................................ 11 a. b. c.
2
Interplay Between Stock,Bullion And Real Estateeconomic Theory
1. Introduction a. Indian Stock Market
The world economy is currently reeling under the aftermaths of the subprime crisis and as former US Federal Reserve chairman Alan Greenspan said “history has not dealt kindly with the aftermath of protracted periods of low-risk premiums.” The fall of legends like Lehman brothers, AIG, Merrill Lynch has sent stock markets around the world crashing. It was only after the central banks around the world have pumped some liquidity into the system, that the system has attained some stability. However the long term projections for India are not so gloomy. It is a universally acknowledged fact now, that India is on a growth path with a significant element of consistency & fundamental strengths which are expected to fuel the drive into the future, at a faster pace. Economic indicators such as the GDP (Gross Domestic Product), Per Capita Income, Forex reserves, FII's (Foreign Institutional Investments) & Industry growth rate which includes the manufacturing & farm sector are all at their record highs. Add to that a throbbing Stock Market & a significant shift from a traditional agriculture & manufacturing based economy to a service oriented one, especially in Urban & Semi-urban segment; are factors which most economists would endorse. b. Real Estate While it is an accepted theory that Real Estate is among the most significant contributors to the GDP in any growing economy; the same is no different here. The past two years have witnessed a steady growth both in terms of investments in this sector as well as demand, which has further resulted in exciting capital appreciation across the country, especially in "A" & "B" categories cities & towns. More so in case of the housing sector, the rise in demand has been meteoric. Rationalizing of interest rates, higher per capita income & increased employment opportunities have thankfully ensured that demand is more from end-users rather than from speculators. Capital values in the past two years have grown in a bandwidth of 20% to 40% varying between respective geographic locations & price/ product segments. Mumbai, Delhi & their respective suburbs have predominantly witnessed the highest growth; 3
Interplay Between Stock,Bullion And Real Estateeconomic Theory
what with some projects being benchmarked against global standards. Rationalization by the respective state governments with regard to allowing divestment of defunct textile mills & other such manufacturing units which had so far occupied large tracts of land in prime locations; have been an important factor responsible for exciting new creations. Also, quite a few home-grown family run property development companies have truly gone professional while facing competition from real estate off-shoots of larger corporations from the organized sector. However with the economy entering in a recessionary phase and the liquidity crisis ushered by the sub prime crisis is bound to but breaks on real estate in short term. c. Bullion Market India is the world's largest consumer of gold. According to latest figures, in 2007 it absorbed over 1000 tonnes of gold, compared to just 320 tonnes in 1994; that is without taking into account the recycling of scrap from the immense stock of close to 10,000 tonnes built up in the last few hundred years, or gold imported for jewellery manufacture and re-export. Until 1990, the Gold Control Act prohibited its citizens from possessing gold bars. Thus their grew a market for smuggled bars. However the scenario changed in the period post 90s when investment in small bars both imported and locally made that had proliferated from local refineries had increased substantially. During the mid 90s, Gold began to be used as a method of camouflaging wealth when the local rupee price had experienced a steady rise. Such an augmentation in investment in gold was uninterrupted in 1998 when over 40 tonnes of gold from bonds that were originally issued by the Reserve Bank of India (RBI) were restored back to the public. Although in cities, gold is having to compete with investment in stock market, industries, and a wide range of durable consumer goods, the rural people till date prefer to invest in 22 carat jewelery. In order to tap this hoarding of gold privately, the Government announced a new initiative in its budget for the year 99-2000. It allowed the commercial banks to take deposits in terms of gold bars,coins or jewelery against the payment of interest. In present day context, the following statements hold true: ? ? ? ? Gold is being valued in India as a secondary source of investment after bank deposits. India is the largest investor in gold jewelery. Domestic consumption is sensitive to monsoon, harvest and marriage seasons. Indian jewelery off take is sensitive to price increases and more so to volatility.
Thus the Bullion Market in India even after undergoing several corrections has retained its status of being a recognizable index highlighting the economic growth of the nation in recent times.
4
Interplay Between Stock,Bullion And Real Estateeconomic Theory
2. Economic Theory - Theory of Demand and Supply a. Demand Curve It can be defined as the relationship between the quantity of good that a consumers are willing to buy and the price of the good. This can be further illustrated by the following graph.
The graph shows that as prices increase demand for a particular item decreases.As prices of a particular item increase people are discouraged to buy them due to budget constraints hence demand falls
b. Supply Curve It can be defined as the relationship between the quantity of a good that producers are willing to sell and the price of the good. This can be further illustrated by the following graph.
5
Interplay Between Stock,Bullion And Real Estateeconomic Theory
The graph shows that as price of a good increases supply also increases as more and more manufacturers want to enter the market hence the supply increases.
c. Market Mechanism It can be defined as the tendency in a free market for price to change until the market clears. It can be illustrated in the following graph.
MARKET MECHANISM The graph illustrates that at the point of intersection of the demand curve and the supply curve the equilibrium exists at that point. Equilibrium price is that price that equates the quantity supplied to quantity demanded.
6
Interplay Between Stock,Bullion And Real Estateeconomic Theory
d. Application Of The Market Mechanism - Interplay Between Stock Market and Real Estate. Research has shown that the decline of real estate price has crippled the ability of investors to pump in money in real estate market. Hence the trend is that when stock prices fall real estate sector also goes down. The above theories can be illustrated in the following demand and supply graph.
Initially the equilibrium price is at P and the quantity supplied is Q , this is arrived at by the intersection of the two curves that is demand and supply curves . Now due rise in input costs of building material i.e. steel, cement etc the supply curve shifts to the left from SS to S’S’ this happens because builders would be discouraged to build more hence the supply would decrease. This results in increase of price from P to P’ and the quantity supplied decreases from Q to Q’ In the meanwhile stock markets have also crashed this decreased the liquidity of prospective investors as they have lost out on money in the market hence the general tendency is to save money. This shifts the demand curve to the left as well because now people are no more willing to buy houses as they no more have any liquidity.
7
Interplay Between Stock,Bullion And Real Estateeconomic Theory
Hence the curve shifts from DD to D’D’. The new equilibrium price now settles at the new intersection where price reduces from P’ to P”. 3. Economic Theory - Indifference Curve and Budget Line We have used the budget line and indifference curves to show the interplay between Bullion and other investments/expenses. a. Indifference Curve Indifference curve can be defined as the curve representing all combinations of market baskets that provide a consumer with same level of satisfaction.
In graph shown the curve represents all the set of possible combination of bullion and other expenses for which the consumer will derive equal utility or satisfaction. b. Budget Line Budget line is the line, which shows what a consumer can purchase given his budget.
8
Interplay Between Stock,Bullion And Real Estateeconomic Theory
The budget line represents the maximum a consumer will spend on two items given his budget constraints. He would achieve the maximum utility at the given budget at the point of tangency of the budget line and the indifference curve shown below:
c. Application of Budget Line and Indifference Curves - Interplay between Bullion and Other Investments Unlike the real estate market where the prices are at a constant level although lower than the initial highs, the bullion market has experienced a downfall. 9
Interplay Between Stock,Bullion And Real Estateeconomic Theory
This is to say that in spite of the global bullion market experiencing an increasing in the price of bullion, the demand for the metal has gone down in India. Let’s analyse the same from an economic viewpoint of the budget line and indifference curve theories explained above:
We assume that with the decrease of the stock market the purchasing power of the people have gone down. In this scenario let us consider that the people had an earlier budget line of Q (B). In this initial scenario since investment in the bullion market was highly profitable the Indifference curve IC’ shifted more towards bullion market than the alternate investments as this combination was more profitable. With the fall in stock prices and so the fall in income level of the people the budget line shifts left (to a lower income level) to Q (B’). At this stage unlike earlier where the consumer preferred greater amount of bullion compared to the amount of other investments, a fall in both the amounts takes place. So, there is a decrease in demand for bullion. Now, with the price of bullion in the global market increasing and due to the decreased income of the people, they prefer to buy more of other alternative investment rather than bullion. This leads to an even more decrease in the demand for bullion in the market. So, the net effect remains that the demand for bullion goes down with the fall in the stock prices and the budget line shifts to Q (B”). The indifference curve now shifts more towards the alternate investment rather than the bullion since that seems to be a profitable investment compared to bullion.
10
Interplay Between Stock,Bullion And Real Estateeconomic Theory
4. References 1.http://www.bseindia.com/ 2.http://www.contrarianprofits.com/articles/tag/bullion-products 3.http://nrifinanceguide.com/2008/03/21/current-indian-stock-market-scenariovs-us-recession/ 4.http://info.goldavenue.com/Info_site/in_mark/in_ma_in_mm.htm 5.http://info.goldavenue.com/Info_site/in_mark/in_ma_in_mm.htm 6. www.indiastat.com 7. www.invest.gold.org 8. www.bseindia.com 9. www.ansals.com 10. www.eqitymaster.com 11. www.eqitymaster.com
11
doc_217327235.docx