What 'Diwali Effect'?

Includes: IFN, IIF, INP
by: Nidhi Kadalbal

In an earlier post entitled, 'Diwali Should Drive Indian Market Growth', I compared the performance of the Indian stock market before and after Diwali. For 10 years from 1997 to 2006, the BSE sensex has gained an average of 0.62% in the 60 days leading up to Diwali and an average of 7.42% after Diwali. That is a significant difference in performance and makes us suspect Diwali has a market-lifting effect.

Lets see how the Diwali Effect fared in 2007, as January 10th marks 60 days after Diwali (November 10, 2007).

For the 60-day period preceding Diwali, the BSE sensex soared 21.23%; for the 60-day period after Diwali, the BSE sensex went up by 8.86%. We cannot clearly say that Diwali Effect made any difference this year.

In fact, I think the economic expansion in India has reduced the Diwali Effect to a level of white noise; as such, the Diwali Effect did not matter this year.

Additionally, the U.S. slowdown might have shrunk the returns for this period. The performances of the S&P 500 for the same periods were +0.14% and -2.27% respectively.

As mentioned in the earlier posting, the globalization effect on the Indian market is far outstripping domestic influences and hence, the Diwali Effect was not very pronounced.

The following chart illustrates how Indian Mutual funds and ETfs performed for the periods before and after Diwali 2007.

click to enlarge

Disclosure: Author is long the Indian market.