An Empirical Analysis of the Relationship Between Stock Market Indices And Macroeconomic Variables: Evidences from India

Abstract

The purpose of this study is to investigate the relationships between stock prices and macroeconomic variables in India. For this purpose the techniques of unit root tests, multivariate co-integration test and the Granger causality test have been applied between the BSE Sensitivity Index and the macroeconomic variables, viz., 91 days T-bills rate (TB), Foreign Institutional Investors (FIIs), Reserve Money (RM), Money Supply (Narrow Money-M1, Broad Money-M3), Gold Prices (GP), Crude Oil Prices (CP), Index of Industrial production (IIP), Foreign Exchange Reserve (FER), and Real Effective Exchange Rate (REER) using monthly data for the period
from April 1994 to December 2012. The analysis reveals that macroeconomic variables and the stock market index are co-integrated. The granger causality test result shows that there exist unidirectional causal relationship from Foreign Exchange Reserve (FER) and T-Bill Rates (TB) to BSE Sensitivity Index, which shows that these two variables leads BSE Sensitivity Index, however, there is neither unidirectional nor bi-directional causal relationship between other macroeconomic variables with BSE sensitivity index during the period of study.