What is SENSEX and how it relates to Indian economy?

Sensex is most effective tool to understand current Indian economy. We often hear Sensex ‘dropped’ or Sensex ‘is rising’. But exactly what is Sensex and how it affects on indian economy? and how do we interpret meaning of its value published in the news or how it is calculated?

Let’s try to find out about sensex. Actually Sensex is short form of “S&P Bombay Stock Exchange Sensitive Index”. S&P is a US based company which provides financial data all over the world. We all know that Bombay Stock Exchange or BSE is a place in Dalal Street, Mumbai where all companies sell their shares which are bought by investors.

How Sensex is calculated?

When a company performs better, earns more profit and produces more goods and services, its market value of shares rises eventually. Some shares are kept reserved by company itself which is normally more than 50%. Now all the remaining shares are traded in stock exchanges like BSE. Sensex estimates total value of these shares on current market value basis. So Sensex is a measurement of total outstanding shares based on their current market value.

How Sensex affects Indian economy?

But how Sensex relates to Indian Economy? BSE have selected 30 companies in India as representative of various industries on the basis of their value and how actively their stocks are traded. Some of those companies are BHEL, TCS, SBI, HDFC, Tata Motors, Sun Pharma, Hero Motocorp and L&T etc. These companies are leaders in their sectors. So Sensex shows free float market capitalization value of these 30 companies.

But since value of Indian rupee keeps changing throughout the day we have to decide some base value. So BSE took base value of ‘free-float market-weighted stock market index’ of 30 companies as 100 on 1 April 1979 taking base year as 1978-79. It was first published on 1 January 1986 and crossed 1000 mark on 25 July 1990. So next time you see value of Sensex you will know it is indicating market value of publicly traded shares of 30 leading companies on the base year 1978-79.

If Sensex rises then the market value of shares of leading companies is increasing. That means these companies are performing better. And if all sectors of industries are performing better it means we are becoming more productive. And wealth & prosperity follows.

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