Impact of Macroeconomic Variables on Equity Prices in India

Topics: Inflation, Central bank, Stock market Pages: 10 (3216 words) Published: March 2, 2013

The movement of stock indices is highly sensitive to the changes in fundamentals of the economy and to the changes in expectations about future prospects. Expectations are influenced by the micro and macro fundamentals which may be formed either rationally or adaptively on economic fundamentals, as well as by many subjective factors which are unpredictable and also non quantifiable. It is assumed that domestic economic fundamentals play determining role in the performance of stock market. However, in the globally integrated economy, domestic economic variables are also subject to change due to the policies adopted and expected to be adopted by other countries or some global events. The common external factors influencing the stock return would be stock prices in global economy, the interest rate and the exchange rate. For instance, capital inflows and outflows are not determined by domestic interest rate only but also by changes in the interest rate by major economies in the world. Burning example in India is the appreciation of currency due to higher inflow of foreign exchange. Rupee appreciation has declined stock prices of major export oriented companies. Information technology and textile sector are the example of falling stock prices due to rupee appreciation.From the beginning of the 1990s in India, a number of measures have been taken for economic liberalization. At the same time, large number of steps has been taken to strengthen the stock market such as opening of the stock markets to international investors, regulatory power of SEBI, trading in derivatives, etc. These measures have resulted in significant improvements in the size and depth of stock markets in India and they are beginning to play their due role. Presently, the movement in stock market in India is viewed and analyzed carefully by large number of global players. Understanding macro dynamics of Indian stock market may be useful for policy makers, traders and investors. Results may reveal whether the movement of stock prices is the outcome of Something else or it is one of the causes of movement in other macro dimension in the economy. The study also expects to explore whether the movement of stock market are associated with real sector of the economy or financial sector or both. We analyze the long term relationship between NSE and certain macroeconomic variables. We use the regression equation model (Galton, 1877) in order to investigate the relationship among these factors. Results reveal that there is high correlation between the empirical results reveal that exchange rate and gold prices highly effect the stock prices on the other hand the influence of index of industrial production and Inflation on the stock price is up to limited extend only.

The paper aims at the following objectives:
1) To explore the major macro economic variables.
2) To study the effect these macro economic variables on stock price 3) To study is there any correlation between stock price and macro economic variables.


The objectives of this study have been decided after discussing the various issues and challenges faced by the stock market and real economy. The main objective of this research study is better understanding of the integration of stock market and real economy at the basic level. Due to less availability of the data and lesser time, the scope and objectives had to be kept in fewer but certainly with the purpose of fulfilling the basic rationale and motive of a research project.


In this study the major objective is to find out the correlation and causal relationship, if any, between the stock market and real economic variables. It will shed light on the degree of integration of the two markets and how they affect each other. The specific sets of objectives of the study are as follows:

(1) To calculate correlation and causality, if...
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