Correlation and Causality between Stock Market and Macro Economic Variables in India: An Empirical Study

Abstract

The unusual rise and fall in of Bombay Stock Exchange (BSE) Sensitive Index (SENSEX) has received a lot of media attention over last couple of decades in India. Even some policy analyst has designated it as an “indicator” of India’s inevitable growth and development. In this research thesis, attempt has been made to explore the relation especially the causal relation between BSE SENSEX and some macro economic variables by using correlation, descriptive statistics, unit root stationarity tests and Granger causality. Annual data has been used from 1950 to 2006 for all the variables, like, SENSEX, per capita gross national product (GNP), forex reserves, gross domestic product (GDP), bank rate, wholesale price index (WPI), gross domestic capital formation, domestic savings, broad money. Sophisticated econometric techniques like unit root tests have been done to check out the stationarity and finally Granger causality has been applied to study the causal relationship between them and results that have come out are mixed, i.e., there is do a causal relationship but unilateral which directs from SENSEX to some macro economic variables. The perusal of all the derived results in this research nullifies the notion of SENSEX being an “indicator” of the financial health of India.