SENSEX is a primary index  of the Bombay Stock Exchange of India. This index comprises the top 30 stocks of the exchange. The movement of SENSEX and the economy of India is correlated, as substantiated by historical data. In fact, many economists and theorists suggest that the Indian economy is affected by the SENSEX and stock markets. While these claims are yet to be substantiated, the SENSEX certainly can be used as an indicator to predict the position of the Indian economy in the near future. 

The position of SENSEX is determined by a value called the SENSEX number. Any expected growth in this number in future determines the economic growth, while any decline points towards a rough path for the economy. Here’s a deeper dive into the subject. 

Indicating the rough path 

As believed, SENSEX and the Indian economy are correlated, and the rough path of the economy can be predicted by observing an exponential downward slump in trend or sharp decline in SENEX numbers. A detailed analysis of previous numbers can present  organisations, people or governments with a fairly accurate understanding of the economic trend in the near future, and can allow them to prepare accordingly. A prior signal of a rough path can even help the government introduce preemptive measures to insulate the economy and curb the problems before any significant consequences occur. 

When the average SENSEX number is observed to be falling over time, it is an indicator that the stake in top players is getting oversold. As a result, investors who hold, start losing their investment values or profits. This entire scenario would create unrest among investors and result in more investors opting out of the market, which results in further decline in the investment values of holders. Ultimately, the values lost in decline would affect the net worth of investors. Inadvertently, this will affect the country’s GDP, and creates a rough path for the economy.  

• Example of how the decline is observed

In the event that the stock prices of these companies drop by 5%, the SENSEX number also drops by 5%. For instance, if the SENSEX number was 10,000 a month ago and India’s top 30 companies’ stocks fell by 5%, the SENSEX number would be 9500. (i.e., 10000 – 5%).

Correlation with economy

The correlation is the most crucial aspect of SENSEX as an indicator of economic growth. Long-term movements of the economy and SENSEX have followed an almost identical pattern. For example, in 2010, the GDP of India was approximately 1.68 lakh crore, and that of the year 2019 was counted as 2.87 lakh crore. The growth was nearly 1.5x times. On the other hand, the SENSEX number at the end of 2010 was about 18000. 

After an extended period, in 2019, the SENSEX number was 40000, which is again nearly 1.5x growth. Likewise, after 2019, the economy of India and the world fell sharply due to the COVID outbreak in the last 2019 (financial year). The GDP at the start of the financial year 2020 was pegged at 2.66 lakh crores, and the SENSEX at the beginning of 2020 was nearly 30000. A sharp proportional decline can be observed in both. 

Reflection of top contributors

Since SENSEX includes the top 30 stocks of the exchange, it gives an idea of which companies are doing. As a result, people tend to invest more in these stocks, resulting in the index being overbought than sold, and the index’s price in turn increases. This entire cycle increases the investment value of all participating investors. Further, this will increase their net worth, and positive economic growth can be observed. 

Conclusion

We learned how the SENSEX is an important signal for robust economic growth. To summarise, SENSEX is a crucial indicator due to its correlation with the Indian economy. We observed its correlation via their data sets of different years (2010, 2019 and 2020). Moreover, it can indicate the rough path of the economy beforehand. In turn, the government and other groups can prepare to preempt and prepare for the crisis or try to stop the decline. Aside from it, SENSEX is also an essential signal for growth since it reflects the top 30 players of exchange so that people can invest according to this indicator.