Testing Granger Causal Relationship between Macroeconomic Variables and Stock Price Behaviour: Evidence from India




 The key objective of the present study is to explore the impact of different macroeconomic variables on the stock prices in India using annual data from 1990-91 to 2010-11. A multiple regression model is designed to test the effects of macroeconomic variables on the stock prices and granger causality test is conducted to examine whether there exist any causal linkage between stock prices and macro economic variables. Our estimates of  multivariate Granger causality indicate that there is no causal association between stock price and interest rate, stock price and index of industrial production, but unidirectional causality exist  between stock price and inflation, stock price and foreign direct investment ,stock price and gross domestic product, stock price and exchange rate, stock price and gross fixed capital formation. However, bi- directional causality exist between stock price and foreign exchange reserve, stock price and money supply, stock price and crude oil price and stock price and whole price index. The multiple regression results of the study indicate that oil price and gold price have a significant negative effect on stock price, while balance of trade, interest rate, foreign exchange reserve, gross domestic product, industrial production index and money supply positively influence Indian stock price. On the other hand, inflation rate, foreign direct investment, exchange rate and wholesale price index do not appear to have any significant effect on stock price.   The results have implications on domestic as well as foreign investors, stock market regulators, policy makers and stock market analysts.


Key words: Granger Causality, Multivariate Regression Model, Macroeconomic Variables, Stock Prices, India.

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