Causal Nexus between Stock Market Return and Selected Macroeconomic Variables in India : Evidence from the National Stock Exchange (NSE)

This paper uses Johansen and Juselius (1990) multivariate cointegration technique to explore the long-run relationships between NSE-Nifty share price index and certain other crucial macroeconomic variables, namely, index of industrial production, money supply, interest rate, exchange rate, consumer price index and the US stock price index. Besides, the multivariate Vector Error Correction Model (VECM) was also applied to examine the short-run causal nexus between NSE-Nifty share price index and the selected macroeconomic variables in India. The empirical results reveal that the NSE-Nifty share price index has a significantly positive long-run relationship with money supply, interest rate, index of industrial production, and the US stock market index. Further, there exists a significant negative relationship between the NSE-Nifty share price index and exchange rate in the long run. Further, the empirical results indicate that there is a strong unidirectional causation running from interest rate to NSE stock market return and the US stock market return to NSE stock market return. Other than this, there is significant short-run causality between a few monetary variables like money supply and interest rate, inflation and money supply, and the US stock market and exchange rate