What Is the Sensex?
The term Sensex refers to the benchmark index of the BSE in India. The Sensex is comprised of 30 of the largest and most actively traded stocks on the BSE and provides a gauge of India's economy. It is float-adjusted and market capitalization-weighted. The Sensex is reviewed semiannually each year in June and December. Created in 1986, the Sensex is the oldest stock index in India and is operated by Standard & Poor's (S&P). Analysts and investors use it to observe the cycles of India's economy and the development and decline of particular industries.
- The Sensex is India's benchmark stock index and represents 30 of the country's largest and most well-capitalized stocks listed on the BSE.
- The index was launched in 1986 and is operated by S&P.
- It is calculated in Indian rupees and U.S. dollars.
- The index is float-adjusted and market capitalization-weighted.
- The Sensex has grown since India opened up its economy in 1991.
Understanding the Sensex
The Sensex was launched on Jan. 1, 1986. It is both a bellwether and an investable index used to track the performance of India's 30 largest and most financially sound companies. These companies are listed on the BSE (previously known as the Bombay Stock Exchange) and represent some of the biggest and most important sectors of the Indian economy. As such, it is India's most-tracked index.
The Sensex is calculated in Indian rupees (INR) and U.S. dollars. As of Aug. 31, 2021, the mean total market cap of the index was 3.71 trillion rupees. The top five constituents listed on the index were:
- Reliance Industries
- HDFC Bank
- Housing Development Finance Corp.
- ICICI Bank
The evolution of the Indian economy has shaped and changed the methodology of the Sensex. It was calculated based on the market cap when it was first launched but shifted to a free-float capitalization method in September 2003. This provided a weighting for the effect of a company on the index. The index uses a company's float rather than its outstanding shares, which means it doesn't include restricted stocks that can't be readily sold, such as those held by company insiders.
Despite all the changes to the methodology, the index's objectives haven't changed at all. Its constituents are selected by the S&P BSE index Committee based on several criteria:
- They should be listed in India on BSE.
- They should be a large-to mega-cap company.
- The stocks should be relatively liquid.
- The companies should generate revenue from core activities.
- They should keep the sector balanced broadly in line with the Indian equity market.
The term Sensex is a portmanteau of the words sensitive and index and was coined by stock market analyst Deepak Mohoni.
History of the Sensex
The BSE Sensex's plunged 12.7%—its worst-ever fall—on April 18, 1992, after revelations of a scam in which a prominent broker siphoned money from the public banking sector to pump money into stock.
The index experienced enormous growth since India opened up its economy in 1991. The biggest gains occurred in the 21st century when it rose from around 5,000 in early 2000 to more than 42,000 in January 2020. This has mainly been the result of India's surging economy, which for years has grown at one of the fastest paces in the world.
India’s expanding economy owes much to the rise of the nation's middle class and vice versa. According to one study, nearly 80% of the nation's households will be middle-income by 2030, up from about 50% in 2019. The middle class is an important driver of consumer demand.
However, India's economic growth has slowed in recent years, reaching the lowest level in a decade in 2019. The outbreak of the global coronavirus pandemic in early 2020 has slowed the economy further, casting a shadow over future gains.
How Does the Sensex Work?
The S&P BSE Sensex index, colloquially known as the Sensex or Sensex Index, is a benchmark index of 30 of India’s largest and most liquid public companies. The companies that make up the Sensex are drawn from the Bombay Stock Exchange, which is the largest in India and one of the largest stock exchanges in the world. Many investors throughout the world use the Sensex as a barometer of the overall state of the Indian economy, which has grown substantially in recent decades.
How Is the Sensex Calculated?
The Sensex is calculated using a free-float capitalization method. This method is similar to the market-capitalization weighting method, in which companies are weighted according to their share of the total market capitalization of the index. As such, the Sensex gives more weight to the largest companies within its index. But unlike the market-capitalization method, the free-float capitalization method only takes into account shares that are freely available to be traded, as opposed to restricted shares or those held by companies insiders.
How Has the Sensex Performed in Recent Decades?
The Sensex has grown at a compounded rate of roughly 14% per year between 1986 and 2021. This growth reflects the substantial growth of the Indian economy during that time frame, and in particular the expansion of that nation’s middle class. The Sensex declined by nearly 40% in March 2020 in the midst of the coronavirus health crisis but recovered strongly over the remainder of the year. The Sensex went on to set a new all-time high as of February 2021.