Revisiting Causal Relationship between NIFTY 50 Index and Macroeconomic Variables in India : A Partial Equilibrium Approach

In this paper we have consider the nexus between movement of stock prices and macroeconomic variables in Indian economy and establish stock market efficiency in India. For the investigation of Causality between the stock market prices and the selected macroeconomic variables we have used Auto-regressive Distributed Lag Model (ARDL) for bound test procedure and Granger causality test. In this paper we have collected monthly data from January 2006 to December 2018, of stock market of National Stock Exchange of India Ltd. (NSE) and NIFTY which are true reflection of the stock market in India. Selected six macroeconomic variables which are investigated against NIFTY 50 are Index of total industrial production, Consumer Price Index, Money supply in the narrow sense, Interest rate, Export Import Ratio and Exchange Rate. Using ARDL bound test procedure and Granger causality test results exhibit the unidirectional causal flow from stock prices to interest rate and to index of industrial production in short-run as well as long-run. Between consumer price index and stock prices is no Granger causality in both directions. However, stock market in turn is also Granger caused by export-import ratio and money supply. Results conclude that stock prices have a short-run causal relationship with macroeconomic variables under study except consumer price index