Relationship between Indian Stock Market Performance and Macroeconomic Variables: An Empirical Study

K. Latha, Sunita Gupta and Arnav Kumar

International Journal of Financial Markets, 2016, vol. 2, issue 4, 109-121

Abstract: Macroeconomic variables have long been hypothesised to significantly affect stock market performance. But no consensus for this relationship exists in case of developing markets. We examine the short and long run dynamic relationship between Indian Stock Index and Major Macroeconomic variables, viz. GDP, Inflation, Interest Rate, Exchange Rate, Money Supply and International Oil Prices. Financial econometric techniques comprising of ADF Unit Root test, Multiple Regression Analysis, Granger Causality test, Johansen Cointegration test and Auto Regressive Distributed Lag (ARDL) Model was used on quarterly data for 1995:Q1 – 2014:Q4.ADF unit root test results established that variables where I(1). Regression results revealed only GDP and Exchange rate where significant macroeconomic variables. Granger causality results indicate unidirectional causality from Indian Stock returns to GDP and Oil prices. In long run, there is bidirectional causality of Indian Stock Index with GDP, Money Supply and Oil Prices along with a unidirectional causality from Indian Stock Index to Exchange Rate. Indian Stock Index is cointegrated with Money Supply, GDP and Inflation. ARDL model evidenced a significant positive relation with contemporaneous GDP and significant negative relation with own lagged values; lagged values of interest rate and long run money supply. These results have pertinent implications for Policy Makers, Regulators, Investors, Academicians and Researchers. Policy makers and regulators can use the results to work out strategies to insulate and fortify Indian stock markets from sustained periods of high volatility stemming from fluctuations and unpredictability of macroeconomic variables. In the same vein, analysts can use macroeconomic variables particularly GDP and Exchange rate to predict future Indian stock performance in short run. Investors and stock market analysts can search for presence of exploitable arbitrage opportunities in Indian market to earn above normal returns by formulating long run investment strategies on the basis of GDP, Money Supply and Inflation.

Keywords: Macroeconomic Variables; Stock Returns; Auto Regressive Distributed Lag (ARDL) Model; Cointegration (search for similar items in EconPapers)
Date: 2016
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