Understanding the Sensex: India’s Leading Stock Market Index

What Is the Sensex?

The Sensex is the benchmark index of the BSE in India. The Sensex comprises 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 reflecting India's markets 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.

Analyzing the Sensex Components

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. This makes it the most tracked index in India.

Market Cap Insights and Top Holdings

The Sensex is valued in both Indian rupees (INR) and U.S. dollars. On Dec. 29, 2023, its average market cap was $141.7 billion.

As of Dec. 29, 2023, the top five companies in the index were:

• HDFC Bank
• Reliance Industries
• ICICI Bank
  
• Infosys
• Larsen and Toubro

Sensex Calculation Methodology

The evolution of the Indian economy has shaped and changed the methodology of the Sensex. Initially, it used market cap but switched to a free-float method in September 2003.

This provided a weighting for the effect of a company on the index. The index considers only the shares available for trade, not restricted ones held by 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.
  

Evolution of the Sensex Over Time

Since India opened its economy in 1991, the index has grown significantly. In the 21st century, the index surged from about 5,000 in 2000 to nearly 42,000 by 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.

The outbreak of the global Coronavirus pandemic in early 2020 slowed India's economy like it did all economies around the world. The Sensex fell to below 30,000 in 2020.

Like many economies, India recovered after the COVID-19 pandemic, and the Sensex climbed well beyond pre-pandemic levels. In 2021, the index passed 50,000, and in 2022 it passed 60,000. In 2023, it crossed the 65,000 mark.

The growth of India's economy is closely linked to the rise of its middle class. 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.

The Bottom Line

The Sensex is a benchmark index that represents 30 of India's largest and most financially sound companies. It's a gauge of India’s economy, reflecting the development and decline of particular industries. Established in 1986, it allows investors to gain exposure to the Indian stock market, which may otherwise prove difficult given the requirements India places on foreign investors.

For investors looking for diversification and exposure to emerging markets and one of the largest economies in the world, investing in the Sensex could be a good option. It focuses on shares available for public trading, thus providing a more accurate representation of market dynamics.