Financialization of the Indian Economy: Has the Stock Market Become Detached from Real Economic Activity?

Abstract

This paper empirically examines whether India's stock market has become detached from real economic activity during 2014–2024. Using 43 quarterly observations sourced from the Reserve Bank of India, OLS multiple regression and Granger causality tests are applied with Nifty 50 returns as the dependent variable and the Market Capitalization-to-GDP ratio (McapGDP), Foreign Portfolio Investment (FPI), real GDP, USD/INR exchange rate change, and CPI inflation as independent variables. Results show that the McapGDP ratio positively and significantly drives equity returns (β = +0.083, p = 0.001), while GDP growth is negatively associated with returns (β = −4.2×10⁻⁶, p = 0.002). Granger causality tests confirm that GDP does not predict Nifty returns at any horizon up to four quarters. These findings support the financialization hypothesis, indicating a progressive and statistically significant decoupling between India's financial markets and its real economy.