Impact of macroeconomic indicators on Indian capital markets

Abstract

Purpose -The purpose of this paper is to examine the long-run relationship between the Indian capital markets and key macroeconomic variables such as interest rates, inflation rate, exchange rates and gross domestic savings (GDS) of Indian economy. Design/methodology/approach -Quarterly time series data spanning the period from January 1995 to December 2008 has been used. The unit root test, the co-integration test and error correction mechanism (ECM) have been applied to derive the long run and short-term statistical dynamics. Findings -The findings of the study establish that there is co-integration between macroeconomic variables and Indian stock indices which is indicative of a long-run relationship. The ECM shows that the rate of inflation has a significant impact on both the BSE Sensex and the S&P CNX Nifty. Interest rates on the other hand, have a significant impact on S&P CNX Nifty only. However, in case of foreign exchange rate, significant impact is seen only on BSE Sensex. The changing GDS is observed as insignificantly associated with both the BSE Sensex and the S&P CNX Nifty. The paper, on the whole, conclusively establishes that the capital markets indices are dependent on macroeconomic variables even though the same may not be statistically significant in all the cases. Originality/value -This study emphasises on the impact of macroeconomic variables on the stock market performance of a developing economy, whose performance is measured by these variables.

Time Series Analysis of the Relationship between Macroeconomic Factors and the Stock Market Returns in Pakistan

“…The industrial production though small portion of Gross Domestic Product indicates the real activity in the country. On the contrary, inflation is negatively associated to the stock market returns (Pal and Mittal, 2011) 13 . Pakistan is a consumption oriented society and people do not go for the investment in the stocks.…”

“…The real income level, saving rate, financial intermediary development, and stock market liquidity proved to be significantly affecting the stock market development, while macroeconomic stability does not prove significant. Pal and Mittal (2011) examined the long term relationship between key macroeconomic variables and the Indian capital markets. They attempted to explore how Indian stock market reacts to different macroeconomic variables.…”

The Determinants of Stock Returns in the Emerging Market of Kenya: An Empirical Evidence

“…In the Indian market, a long-run positive relationship between stock prices and money supply and industrial production and a negative relation for inflation has been widely documented (Naik & Padhi, 2012;Kumar, 2013;Patel, 2012;Pal & Mittal, 2011;Aurangzeb, 2012). Benakovic and Posedel (2010) finds a positive relation between stock returns and the market index, interest rates, industrial production and oil influence, with inflation showing a negative relation for the Croatian Market.…”

Strategic Risk Factors for Indian Stock Markets

“…Wenjen Hsieh [27] examined the impact of macroeconomic factors on New Zealand stock market using GARCH model and found that New Zealand stock market positively respond to real GDP and world stock market index. Although some researchers like Pethe and Karnik [28], Bhattacharya and Mukherjee [29], Ahmed [30], Srivastava [25] and Pal and Mittal [31] attempted to identify economic factors affecting stock market in India but none of these are conclusive. In Indian contest negligible amount of research has been done for identifying systematic risk factors for Indian stock markets.…”