IS the 30-share Bombay Stock Exchange (BSE) index, popularly referred to as the sensitive index or Sensex, an imperfect indicator of the market's health? If Arvind Kolhatkar, executive director of the BSE, is to be believed, this is indeed so. In view of the steadily rising market, where half the investors are working on sheer speculation, Mr Kolhatkar has suggested the scrapping of the Sensex. ''We are replacing the Sensex by a slightly broader index of highly capitalised counters that are the present-day market leaders,'' said Mr Kolhatkar. ''We also want to introduce a brand-new dollar-based index on the BSE, to benefit foreign institutional investors. Work on both indices has already been started.'' For the benefit of foreign investors, all rupee prices of issues listed on Indian exchanges will be converted into the dollar equivalent at the prevalent exchange rate. The dollar-based index will be compiled with due weightings on the dollar-equivalentprices of the selected shares. The new ordinary sensitive index (a name for which has yet to be decided) will comprise all the current heavyweights on the market. In a long overdue move, the weightings are also being revised, and the base year (currently 1978-79 equals 100) is being changed to make the new index more up-to-date. The new Sensex will not only reflect the prices of the selected equities, but also their volume turnover in actual trading on the market floor. Initially, the volume updating on the new index will be done at least once a day. Mr Kolhatkar clearly feels the Sensex has been fuelling speculation, since a few counters tend to give a lop-sided view of the market's health. ''Not only is the base year out of tune with the post-1992 market scenario, but many scrips on the Sensex have long since ceased to be market leaders,'' he said. He asserts that the scrapping of the Sensex will be a body blow to speculators. ''Actually, we may allow the 30-share index to continue for a while side-by-side with the new one, until it dies a natural death,'' he said. While the powerful speculative lobby has come out strongly against the BSE move to scrap the Sensex, support for it has also come from more erudite market observers. ''To blame the Sensex for an overheated market is as ridiculous as blaming a thermometer for a hot day,'' said Jawahar Mulraj, a former stockbroker who writes a regular column for a powerful financial daily. Mr Mulraj argued that the objection that the Sensex had just 30 issues was not tenable, since the Dow Jones Industrial average was also based on 30 stocks. Like the Sensex, the Dow is weighted by market capitalisation; and no one argues that the Dow can be manipulated. ''To prop up the prices of the top five counters for any length of time, so as to lure the naive into the game, would require funds of a magnitude that nobody possesses,'' said Mr Mulraj. But he conceded that some issues in the Sensex needed to be replaced by others that had more relevance today. ''But changing a few shares around is different from scrapping the index altogether,'' he said. ''There is no justification for throwing the baby out with the bath water.'' Others have argued that, from the 1993 lowest point for share quotations to the 1994 high point, the 100-share National Index has outperformed the 30-share Sensex. ''Can you consider this to be evidence of manipulation?'' asked chartered accountant Bhagirath Merchant. ''If you scrap the Sensex, you throw out not only a history, but a valuable basis of comparison.'' Even as the debate rages, the BSE authorities have offered to re-compute the Sensex for the last 10 years, and give the new figures as a historical benchmark. Both brokers and investors have objected to the idea of having to re-learn a set of figures.