In India, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) are two of the most prominent platforms for companies to list their Initial Public Offerings (IPOs). While both exchanges help companies raise capital, the process of listing IPO on these stock exchanges can vary. Understanding the correlation between Sensex and Nifty which are the stock market indices of BSE and NSE respectively helps investors interpret broader market trends, providing valuable insights for investment decisions.
What Are Nifty & Sensex?
Nifty 50
Nifty 50 is a stock market index representing the performance of 50 major companies listed on the NSE. It accounts for over 65% of the market capitalisation of the NSE, making it a key indicator of the Indian stock market.
Sensex
The Sensex which is a blend of “Sensitive Index” is a benchmark index comprising 30 of the largest and most actively traded companies on the BSE. It represents roughly 50% of the market capitalisation of the BSE, reflecting the performance of the various industrial sectors in the economy.
Measuring the Correlation Between Nifty and Sensex
The correlation between Sensex and Nifty is measured using the correlation coefficient, a statistical tool that quantifies the relationship between two data sets.
India’s two most closely watched equity market indices Nifty 50 and Sensex are often seen moving in tandem. When one rises, the other typically follows. This correlation is not coincidental; it is rooted in the index construction, sectoral representation, and the presence of common large-cap companies that dominate India’s financial markets.
The correlation coefficient between the NSE Nifty 50 and the BSE Sensex is typically positive, often exceeding +0.98. A correlation coefficient which is close to +1 signifies that both Sensex and Nifty generally move in the same direction, thus reflecting the overall sentiment of the Indian equity market.
| Time Period | Index Correlation (Approx) |
| 1 Month | 0.98 – 0.99 |
| 1 Year | 0.97 – 0.99 |
| 5 Year | 0.98+ |
Factors Influencing the Correlation
Overlapping composition:
Although the Sensex contains 30 companies and the Nifty has 50, there is a significant overlap in their constituent stocks. Many of the largest and well-known companies in India are included in both the indexes. 25-28 out of 30 Sensex stocks are also part of Nifty 50, which means both track largely the same economic drivers.
Sectoral Representation
While Nifty & Sensex represent various sets of companies, they consist of several sectors as listed below. This overlap contributes to their strong correlation, as sector performance generally drives both these indexes.
| Sector | Nifty 50 | Sensex 30 |
| Financial Services | 35% | 40% |
| IT | 14% | 15% |
| Energy | 12% | 11% |
| FMCG | 9% | 8% |
| Automobiles | 5% | 6% |
| Other Sectors | 25% | 20% |
Economic Factors
Macroeconomic indicators such as GDP growth, inflation, and interest rates affect both indexes similarly. When the Indian economy performs well, both typically rise, reflecting the strong performance of large-cap companies.
Market Sentiment
Investor sentiment plays a key role in both. Positive sentiment, driven by factors like government policies or global market trends, often results in a rally in both Nifty & Sensex. Negative sentiment can lead to sell-offs, impacting both indexes similarly.
Implications for Investors
Portfolio Diversification
Since both indexes tend to move in the same direction, investing in both may not offer significant diversification. Investors seeking diversification can consider assets outside of these indices or explore sector-specific investments.
Market Trends and Strategy
When both indices are rising, it signals a broad-based bull market. Conversely, a decline in both suggests a bearish market sentiment. Investors can use this information to make informed decisions about their investment strategies.
Arbitrage and Trading Opportunities
While both indices are highly correlated, short-term price deviations may open opportunities.
Cross-exchange arbitrage
This is a classic arbitrage strategy where a trader buys a stock on the BSE and sells it on the NSE, or vice versa, to profit from a price difference.
Index Futures arbitrage
If one index future trades at a premium relative to its fair value, traders can simultaneously buy one and sell the other to profit when prices converge.
Which Index Should You Track?
| Investor Type | Index Choice | Why |
| Retail (long-term) | Both / Either | Same long-term trends, similar returns |
| Traders | Nifty | Higher futures & options liquidity |
| Passive Investors | Nifty/Sensex ETFs | Easy way to gain exposure to India’s major companies |
| Global Investors | Nifty | More widely tracked internationally |
Conclusion
- Nifty and Sensex are closely correlated due to substantial overlap in their constituents, similar sector weights, and common macroeconomic drivers.
- For long-term investors, tracking either index yields similar results.
- For traders, Nifty is preferred due to deeper derivatives markets.
- Arbitrage opportunities exist due to momentary inefficiencies, particularly in futures, ETFs, and cross-exchange prices.
Final Insight
Nifty represents “breadth and liquidity,” while Sensex represents “legacy and stability.” But both move in the same direction and tell the same story — the growth of India’s corporate giants.
Disclaimer: No Business Standard Journalist was involved in creation of this content