What Is the Sensex?
The Sensex stands as the benchmark index of the Bombay Stock Exchange (BSE) in India. Comprising 30 of the largest and most actively traded stocks on BSE, the Sensex serves as a significant barometer of India’s economic health. Notably, it is both float-adjusted and market capitalization-weighted. Established in 1986, it boasts the title of the oldest stock index representing India’s markets. Analysts and investors rely on the Sensex to interpret the cycles of India’s economy and evaluate the progress or regression of key industries.
Key Takeaways
- The Sensex is the primary stock index reflecting India’s economy through its 30 major and most well-capitalized stocks listed on the BSE.
- Launched in 1986, it operates under the management of S&P Dow Jones Indices.
- The index values are computed in both Indian rupees and U.S. dollars.
- It employs a free-float capitalization-weighted methodology.
- The Sensex has seen substantial growth since India liberalized its economy in 1991.
Deep Dive into the Sensex
The Genesis of the Sensex
The Sensex was introduced on January 1, 1986, earning its reputation as a bellwether and investable index for tracking the performance of India’s 30 largest and financially robust companies. These firms, listed on the BSE, span across key sectors of the Indian economy, making the Sensex India’s most-followed index.
Market Cap and Components
The Sensex indexes its values in both Indian rupees (INR) and U.S. dollars. As of December 29, 2023, the cumulative market cap of the index was approximately $141.7 billion. The top five listed companies were:
- HDFC Bank
- Reliance Industries
- ICICI Bank
- Infosys
- Larsen & Toubro
Methodology Revolution
India’s economic evolution has directly influenced the methodologies underlying the Sensex. Initially calculated based on the full market cap, it transitioned to a free-float capitalization method in September 2003. This approach weighs the effect of a company’s tradable shares on the index while excluding restricted shares held by insiders. Despite adjusted methodologies, the Sensex’s goals have remained consistent.
Key selection criteria for the index constituents include:
- Listing on the BSE
- Large to mega-cap status
- Sufficient liquidity
- Revenue from core activities
- Broad-sector representation aligning with the Indian equity market.
The term ‘Sensex’ merges ‘sensitive’ and ‘index,’ reflecting its critical role in the market.
Historical Milestones of the Sensex
The Sensex witnessed unprecedented growth since India’s economic liberalization in 1991. Significant milestones include an ascent from 5,000 in 2000 to almost 42,000 by January 2020. However, the global Coronavirus pandemic in early 2020 led to a market decline below 30,000. Nevertheless, a strong recovery followed, crossing 50,000 in 2021, 60,000 in 2022, and surpassing 65,000 in 2023.
India’s emerging middle class has been crucial to this economic boom. By 2030, nearly 80% of Indian households are projected to belong to the middle-income group, significantly driving consumer demand.
Mechanisms Behind the Sensex
How Sensex Operates
The Sensex or S&P BSE Sensex encapsulates 30 of the most significant and liquid public companies traded on the BSE. Globally, it is used by investors as a proxy for gauging the overall health of India’s considerably growing economy.
Calculation Methodology
The Sensex employs a free-float capitalization method, which resembles the market capitalization-weighting approach. Larger companies have a greater influence. Unlike market-cap weighting, it considers only the shares available for trading, excluding insiders’ restricted shares.
Performance Trajectory
As of December 29, 2023, the Sensex delivered an annualized return of 14.52% over ten years and 16.28% over five years.
Conclusion
Investors keen on accessing the Indian stock market—with its considerable growth constraints and promising projections—often find the Sensex appealing. It offers a unique opportunity to tap into one of the world’s fastest-growing economies while ensuring diverse and sound investments through their stock portfolios.
Related Terms: Indian stock market, BSE, market capitalization, free-float method, top Sensex companies, Indian economy growth
References
- S&P Dow Jones Indices. “S&P BSE SENSEX”. Download Factsheet, Page 1.
- S&P Dow Jones Indices. “S&P BSE SENSEX: Data”.
- Asia Index Private Limited. “The Sensex: Where It All Began”.
- S&P Dow Jones Indices. “S&P BSE Indices Methodology”. Page 9.
- Asia Index Private Limited. “How the Sensex Works”. Page 1.
- Yahoo! Finance. “S&P BSE Sensex: Chart”. Select Max View.
- The World Bank. “GDP Growth (Annual %) - India”.
- World Economic Forum. “How India Will Consume in 2030: 10 Mega Trends”.
- S&P Dow Jones Indices. “S&P BSE SENSEX”. Download Factsheet, Page 2.
