Macroeconomic indicators and stock market boogie: The case of National Stock Exchange, India

What is it about?

The present paper intended to inspect the relationship between the selected macroeconomic variables and the Indian stock market by taking quarterly observations from April 2005 to March 2015. We considered exchange rate, foreign institutional investment, call money rate, and consumer price index (CPI) as macroeconomic variables. We applied Pearson's correlation, Augmented Dickey Fuller unit root test, Johansen co-integration test, and Granger causality test to check the relationship between stock market returns and the above mentioned variables. Our results discovered that positive correlation existed between macroeconomic variables and stock market indices and long run equilibrium existed with the NIFTY 50 Index. In addition, the Granger causality test revealed that causality ran from NIFTY 50 Index to exchange rate and call money rate to NIFTY 50 Index. Moreover, it was also observed that the stock indices' returns were not a leading indicator for macro economic variables.

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Why is it important?

In emerging markets like India, Many studies in the past have pointed out that stock markets represent the true portrait of an economy’s financial health. It is always being considered that macroeconomic events have a specific quantity of pressure on the stock markets. Therefore, every country produces several policies to facilitate foreign private capital flows in the form of portfolio investments. It is being noted that these investments would help the stock markets to widen their investor base and indirectly compelling local authorities to improve the trading system. While the volatility associated with portfolio capital flows is well known, in this context it is important for the investors to understand how the macroeconomic indicators affect the stock market in order to plan their investments.

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