Impact of Macroeconomic Variables on Equity Prices in India Essay Sample

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1. Introduction:

The motion of stock indices is extremely sensitive to the alterations in basicss of the economic system and to the alterations in outlooks about future chances. Expectations are influenced by the micro and macro basicss which may be formed either rationally or adaptively on economic basicss. every bit good as by many subjective factors which are unpredictable and besides not quantifiable. It is assumed that domestic economic basicss play finding function in the public presentation of stock market. However. in the globally incorporate economic system. domestic economic variables are besides capable to alter due to the policies adopted and expected to be adopted by other states or some planetary events. The common external factors act uponing the stock return would be stock monetary values in planetary economic system. the involvement rate and the exchange rate. For case. capital influxs and escapes are non determined by domestic involvement rate merely but besides by alterations in the involvement rate by major economic systems in the universe. Burning illustration in India is the grasp of currency due to higher influx of foreign exchange. Rupee grasp has declined stock monetary values of major export oriented companies.

Information engineering and fabric sector are the illustration of falling stock monetary values due to rupee grasp. From the beginning of the 1990s in India. a figure of steps have been taken for economic liberalisation. At the same clip. big figure of stairss has been taken to beef up the stock market such as gap of the stock markets to international investors. regulative power of SEBI. trading in derived functions. etc. These steps have resulted in important betterments in the size and deepness of stock markets in India and they are get downing to play their due function. Soon. the motion in stock market in India is viewed and analyzed carefully by big figure of planetary participants.

Understanding macro kineticss of Indian stock market may be utile for policy shapers. bargainers and investors. Consequences may uncover whether the motion of stock monetary values is the result of Something else or it is one of the causes of motion in other macro dimension in the economic system. The survey besides expects to research whether the motion of stock market are associated with existent sector of the economic system or fiscal sector or both. We analyze the long term relationship between NSE and certain macroeconomic variables. We use the arrested development equation theoretical account ( Galton. 1877 ) in order to look into the relationship among these factors. Consequences reveal that there is high correlativity between the empirical consequences reveal that exchange rate and gold monetary values extremely consequence the stock monetary values on the other manus the influence of index of industrial production and Inflation on the stock monetary value is up to limited extend merely.

The paper aims at the following aims:
1 ) To research the major macro economic variables.
2 ) To analyze the consequence these macro economic variables on stock monetary value 3 ) To analyze is at that place any correlativity between stock monetary value and macro economic variables.


The aims of this survey have been decided after discoursing the assorted issues and challenges faced by the stock market and existent economic system. The chief aim of this research survey is better apprehension of the integrating of stock market and existent economic system at the basic degree. Due to less handiness of the informations and lesser clip. the range and aims had to be kept in fewer but surely with the intent of carry throughing the basic principle and motivation of a research undertaking.


In this survey the major aim is to happen out the correlativity and causal relationship. if any. between the stock market and existent economic variables. It will cast visible radiation on the grade of integrating of the two markets and how they affect each other. The specific sets of aims of the survey are as follows:

( 1 ) To cipher correlativity and causality. if any. between the stock market Index SENSEX and existent economic variables.
( 2 ) To unknot out the nature of causal relationship that exists between the

Stock market and existent economic variables. i. e. . is it one-sided or bilateral. ( 3 ) To research that to what degree the two. stock market and existent economic variables cause each other.

Data and variables in the survey

In this survey Annual informations from 1950-51 onwards to 2007-08 has been used in instance of all the variables like. GDP ( Gross Domestic Product ) . SENSEX ( Sensitive Index ) . per capita GNP ( Gross National Product ) . bank rate. forex ( foreign exchange ) militias. sweeping monetary value index ( WPI ) . domestic nest eggs. gross domestic capital formation ( GDCF ) . and pecuniary ratio M3 ( wide money ) . The major beginning of informations of all the above macro economic variables is Handbook of Statistics on Indian Economy maintained by Reserve Bank of India ( RBI ) and for SENSEX is International Financial Statistics maintained by International Monetary Fund online informations beginning. The major macro economic variables used in this survey are briefly explained below. The assorted variables undertaken in this survey are in existent monetary values form so as to make off with the affect of rising prices over the period of clip and one can understand and see the yesteryear and present economic scenario in a clearer and precise mode.


This paper’s parts are as follows. First by encompassing a survey period that extends beyond January 2008. this paper provides an effort to analyse the wellness of stock market. Naka ( 1990 ) employed a vector mistake rectification theoretical account ( VECM ) ( Johansen ( 1991 ) ) in a system of five equations to look into the presence of cointegration among these factors. analyzed a negative relationship between involvement rates or rising prices and stock monetary values. and a positive relation between end product growing and stock monetary values. Sharma ( 2008 ) tests weak signifier of efficiency of the NSE. Bhattacharya ( 2001 ) by using the techniques of unit–root trials. cointegration and the long–run Granger non–causality trial late proposed by Toda and Yamamoto ( 1995 ) . tests the causal relationships between the NSE Sensitive Index and the five macroeconomic variables. viz. . money supply. index of industrial production. national income. involvement rate and rate of rising prices utilizing monthly informations for the period 1992-93 to 2000-01. They found that ( I ) there is no causal linkage between stock monetary values and money supply. stock monetary values and national income and stock monetary values and involvement rate. ( two ) index of industrial production lead the stock monetary value. and ( three ) there exists a two – manner causing between stock monetary value and rate of rising prices.

Mishra ( 2004 ) by utilizing monthly informations for the period 1992 to 2002. examined the relationship between stock market and foreign exchange markets utilizing Granger causality trial and Vector Auto Regression technique survey suggested that there is no Granger causality between the exchange rate return and stock return. Ray ( 1993 ) effort to unknot the relationship between the existent economic variables and the capital market in Indian context by utilizing modern non-linear technique like VAR and Artificial Neural Network researcher finds out that certain variables like the involvement rate. end product. money supply. rising prices rate and the exchange rate has considerable influence in the stock market motion in the considered period. while the other variables have really negligible impact on the stock market. Abdalla ( 1996 ) look into interactions between exchange rates and stock monetary values in the emerging fiscal markets of India. Korea. Pakistan and the Philippines. The consequences of the farmer causality trials consequences show uni-directional causality from exchange rates to stock monetary values in all the sample states. except the Philippines Dornbusch ( 1980 ) alternate account for the relation between exchange rates and stock monetary values can be provided through portfolio balance attacks that stress the function of capital history dealing He found that lifting ( worsening ) stock monetary values would take to an grasp ( depreciation ) in exchange rates.

Chen ( 1986 ) have argued that stock returns should be affected by any factor that influences future hard currency flows or the price reduction rate of those hard currency flows by utilizing discounted hard currency flow or present value theoretical account ( PVM ) the research worker tries to associate the stock monetary value to future expected hard currency flows and the future price reduction rate of the hard currency flows. Again. all macroeconomic factors that influence future expected hard currency flows or the price reduction rate by which the hard currency flows are discounted should hold an influence on stock monetary value. Sangeeta Chakravarty indicates that there is no causal relation between stock monetary value and exchange rate. Similarly there is no causal linkage between gilded monetary value and stock monetary value. Sahid Ahmed ( 2008 ) utilizing quarterly informations. Johansen`s attack of cointegration and Toda and Yamamoto Granger causality trial have been applied to research the long-term relationships while BVAR patterning for discrepancy decomposition and impulse response maps has been applied to analyze short tally relationships. The survey reveals that the motion of stock monetary values is non merely the result of behavior of cardinal macro economic variables but it is besides one of the causes of motion in other macro dimension in the economic system. Mukherjee ( 1995 ) and Bernanke ( 2005 ) argue that a alteration in the money supply provides information on money demand. which is caused by future end product outlooks.

Agrawalla ( 2005 ) by utilizing VECM ( vector mistake rectification theoretical account ) has estimated that the portion monetary value index and the macroeconomic variables are cointegrated. Hondroyiannis ( 2001 ) by making VAR analysis attempts to look into whether motions in the indexs of economic activity affect the public presentation of the stock market for Greece. The major findings of the survey is that the domestic market economic activity affects the public presentation of domestic stock market. Habibullah et Al ( 2000 ) determines the lead and lag relationships between Malayan stock market and five cardinal macroeconomic variables. Naka ( 2001 ) analyses long-run equilibrium relationship among selected macroeconomic variables and the Bombay Stock Exchange index. The consequences of the survey suggest that domestic rising prices is the most terrible hindrance to Indian stock market public presentation. and domestic end product growing as its prevailing drive force. Pethe ( 2000 ) utilizing Indian informations for April 1992 to December 1997 studies weak causality running from IIP to portion monetary value index ( Nifty and Nifty ) but non the other manner unit of ammunition. Bhattacharya ( 2002 ) investigates the nature of the causal relationship between stock monetary values and macroeconomic sums in the foreign sector in India. By using the techniques of unit–root trials. cointegration and the long–run Granger non–causality trial late proposed by Toda and Yamamoto ( 1995 ) finds out that that there is no causal linkage between stock monetary values and the variables.

Basabi ( 2006 ) investigates the nature of the causal relationship between stock returns. net foreign institutional investing ( FII ) and exchange rate in India and finds out that that ( a ) a bi-directional causality exists between stock return and the FII. ( B ) unidirectional causality tallies from alteration in exchange rate to stock returns ( at 10 % degree of significance ) . non frailty versa. and ( degree Celsius ) no causal relationship exist between exchange rate and net investing by FIIs. . Horobet Livia ( 2007 ) explore the interactions between exchange rates and stock market monetary values applied to Romania. one of the emerging economic systems in Central and Eastern Europe and a new member of European Union since January 2007. The survey uses standard bivariate cointegration trials. utilizing both the Engle-Granger and the Johansen-Juselius methodological analysis. every bit good as criterion and modified Granger causality trials. .

The analysis involved the January 1999 – June 2007 period. but besides two sub-periods ( January 1999 -October 2004 and November 2004 – June 2007 ) to take into history the change of the Romanian foreign exchange market happening after the terminal of 2004. The consequences indicate indicates no cointegration between the exchange rates and the stock monetary values. the usage of the Johansen-Juselius process suggests the presence of cointegration between the two stock market indices and the exchange rates. either nominal bilateral. nominal effectual or existent effectual rates. When standard Granger causality trial were performed on non co-integrated variables. they identified one-sided causality dealingss from the stock monetary values to interchange rates for the full period and the 2nd sub-period. and one bilateral causality relation between the stock monetary values and the bilateral exchange rate against the US dollar for the first sub-period. Mazharul H. Kazi ( 2008 ) reviewed the recent tendencies of analysing the relationship between the security market motion and a priori variables. while retaining the basic properties of plus pricing theory He used the co-integration attack one can expeditiously analyse the long-term relationship between a priori variables ( macroeconomic variables ) that are considered as placeholder for systematic hazard factors and security market monetary values.

Mookerjee and Yu ( 1997 ) analyze the Singapore stock market pricing mechanism by look intoing whether there are long-run relationships between macroeconomic variables and stock market pricing. They find that three out of four macroeconomic variables are co-integrated with stock market monetary values. Nasseh ( 2000 ) study the long tally relationships between stock market monetary values ( represented by relevant portion monetary value indices ) and domestic and international economic activity in six states that included France. Germany. Italy. Netherlands. Switzerland and the UK. and happen out that although stock monetary values are explained by economic basicss in the medium and short tally. the underlying volatility inherent in stock monetary values is related to macroeconomic motions in the long-run. Mohiuddin ( 2008 ) investigated the explanatory power of assorted macro-factors on the variableness of stock monetary values Multiple arrested development analysis has been conducted to asses the relationship No important relationship has been found between the stock monetary value and any of the macroeconomic factors.

Cheah Lee Hen 3 ( 2006 ) makes usage of Kalman filter and assortment of ARCH type theoretical accounts to look into the feedback causal relationship between stock monetary values with each of currency exchange and derivative merchandise. Since the development by Kalman and Bucy in 1960s. Kalman filter technique has been the topic of extended research and application. . and happen out that there is no grounds of risk-return trade-off in the Malayan stock market. Kandir ( 2008 ) investigates the function of macroeconomic factors in explicating Turkish stock returns. A macroeconomic factor theoretical account is employed for the period that spans from July 1997 to June 2005 Empirical findings reveal that exchange rate. involvement rate and universe market return seem to impact all of the portfolio returns. while rising prices rate is important for merely three of the 12 portfolios. On the other manus. industrial production. money supply and oil monetary values do non look to hold any important affect on stock returns. okuyan ( 2008 ) look into the relationship between existent macroeconomic variables and stock monetary values in Turkey under “Proxy hypothesis” developed by Fama ( 1981 ) The long-term relationship between the variables is tested by Bound proving attack developed by Paseran et Al ( 2001 ) .


The survey is focused on four major macro economic variables vis-a-vis Gold monetary value. index of industrial production. exchange rate and Inflation. We study the impact of these variables on the stock monetary values. Assorted factors played function in choosing these variables for survey as recession is heading so the exchange rate is fluctuating frequently and at that period of clip the value of dollar is besides deprecating and the value of Gold is appreciating as they have an opposite relationship and Inflation is besides upseting a batch at that point of clip hence our survey is based on these major economic variables. The paper presents the brief description of macro economic variables and after extended study we arrived at a decision that the macro variables mentioned played major function in the economic system utilizing these variables we try to happen out the relationship between NSE monetary values ( as dependant Variables ) and macro variables ( as independent variables ) For making this. we take the stock monetary values for the period Jan 2005 to Mar 2012 are taken into history.

Independent Variables

Industrial production Index

Industrial production index has been used as placeholder to mensurate the growing rate in existent sector. Industrial production presents a step of overall economic activity in the economic system and affects stock monetary values through its influence on expected future hard currency flows. It is hypothesized that an addition in industrial production is positively related t1o equity monetary values.


account that is offered is that high rates of rising prices increase the cost of life and a displacement of resources from investings to ingestion. This leads to a autumn in the demand for market instruments which lead to decrease in the volume of stock traded. Besides the pecuniary policy responds to the addition in the rate of rising prices with economic tightening policies. which in bend increases the nominal riskless rate and hence raises the price reduction rate in the rating theoretical account and leads to diminish in stock monetary values.

Exchange rate

Exchange rate as an index of a currency motion is a pecuniary variable that affect monetary values of stock in a manner similar to the rising prices variable. Depreciation of the local currency makes import expensive compared to export. Thus. production costs of import companies addition and since all the cost can non be passed on to the consumers because of the fight of the market. this reduces corporate earning and hence the stock monetary values. Even houses whose full operations are domestic may be affected by exchange rates. if their input and end product monetary values are influenced by currency motions. On the other manus. for exporting companies. depreciation of the local currency additions export and hence additions in stock monetary values.

Interest rates
The basic maps of involvement rates in an economic system. in which single economic agents take determinations as to whether they should borrow. invest. salvage and/or consume. can be said to hold three facets. viz. involvement rates as return on fiscal assets serve as inducement to rescuers. doing them postpone present ingestion to a future day of the month ; involvement rates being a constituent of cost of capital affect the demand for and allotment of loanable financess ; and the domestic involvement rate in concurrence with the rate of return on foreign fiscal assets and goods are hedged against rising prices. These wide functions of involvement rates emphasize their significance in the construction of plus monetary values. stock monetary values being one such plus. It is the interplay between these three maps of involvement rates that can be said to find the impact of involvement rate alterations on a company’s stock monetary values motions.

The analysis is conducted by utilizing hebdomadal informations for the period spans from Jan 2005 to impair 2012. The informations used in the survey is divided into two sub-groups. First information set consist of stock informations ( NSE Nifty ) . Second information set consist of macroeconomic factors such as rising prices rate. index of industrial production. exchange rate and gold monetary value In this survey merely Secondary information is used. Exchange rate informations is collected from the federal modesty statistical release. Inflation informations and foreign exchange modesty informations are obtained from Reserve Bank of India. Gold monetary value is obtained from NASDAQ. NSE. Stock returns are obtained from Bombay Stock Exchange and The Money Control

A statistical technique that at the same time develop a mathematical relationship between a individual dependant variable and two or more independent variables.

With four independent variables the anticipation of Y is expressed by the undermentioned equation:

Y’i = b0 + b1X1i + b2X2i + b3X3i + b4X4i

The “b” values are called arrested development weights and are computed in a manner that minimizes the amount of squared divergences

Y’i = is the return on the stock portfolio I.
X1i = is the alteration in whole sale monetary value
X2i = is the alteration in exchange rate.
X3i = is the alteration in foreign exchange modesty
X4i = is the alteration in gilded monetary value.

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