Causal relationship between stock price and exchange rate: evidence for India

The purpose of this study is to investigate the long and short-run relation between stock index and exchange rates for India. The study uses cointegration methodology to test for the long-run relationship. Empirical results suggest that there is no long-run relationship between them. Furthermore, the study examines the causal relationship between two series using linear and non-linear Granger causality tests. The non-linear causality is investigated using noisy Mackey-Glass model. The results of both the causality tests reveal evidence of bi-directional relationship between stock index and exchange rates. The findings imply that regulators can consider developments in these two markets into account to promote stability and economic growth.