ISSN: 2348 9510

International Journal Of Core Engineering & Management(IJCEM)

Volume 1, Issue 3, June 2014

Relationship between Stock Index and Macroeconomic Determinants:

A Study of Post Globalization Era

Sangeeta Jauhari
Assistant Professor, AISECT University, Bhopal .
[email protected]

H.S. Yadav
Professor, Department of Regional planning & economic growth
Barktullah University, Bhopal
[email protected]
Kavita Indrapurkar
Professor, AMITY University

Abstract
The Indian economy with low level of industrialization and surplus money caused by
underdevelopment conditions, the stock market had no footage and could not acquire the
significant position. Economic reforms initiated during 1980s brought recognizable state to the
stock market by public issues and incentives to private capital, which under the condition of
globalization reached to a stage and provided direction to the macroeconomic variables and vice
versa. The macroeconomic policy opened the capital market for domestic and transnational
capital has not only changed the structure but also the behavior of investors.
The present study is based on secondary data on macroeconomic variables and indices of
stock market. The time series data are transformed to comparative units and correlation
coefficients are applied to measure the degree of relationship.Further to test the causality in the
relationship between sensex and the other macroeconomic determinants the granger causality test
have been applied. The post globalization period demonstrate clear concurrence between the
Sensex indices and the growth in capital formation, GDP, per capita income, investment by FIIs
and other macroeconomic variables considered in the study.

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Volume 1, Issue 3, June 2014

INTRODUCTION:
Globalization and financial sector reforms in India have ushered significant structural change in
the financial sector in general and stock market in particular. Until the 1980s, with the focus on
self reliance and import substitution domestic and foreign investment in the portfolio was
limited, but initiation of reform process in early 1990s, under the WTO regime, have allowed the
free play of monopoly capital in the name of competitiveness for industrial licensing, foreign
trade, foreign direct investment, exchange rate and the financial sector of the country. In order to
promote Industrial development in the country through efficient resource mobilization by the
way of corporate securities the concept of stock exchange (a part of capital market), the capital
was allowed to penetrate in the economy in a large number of ways in almost all sectors.
The questions of FDI and industrial development have different facets. One may ask what the
course of FDI flow is and how far it has helped to the industrial production to generate income
and employment in the hands of common masses. A large number of economists designate the
process of globalization as globalization of finance. The question is, does the macroeconomic
variable show any bearing as the major proportion of FDI has come as portfolio investment
through FIIs. A stock market is intricately interwoven currently in the fabric of nations
economic life. With the development of the stock market in India in the post reform period
indicating growing participation of institutional investors both foreign and domestic along with
the retail investor. As a result analysis of stock market has come to the force as it is assumed that
through this segment of market the country gets exposed to the outer world. It has been observed
that with the development of capitalistic mode of production in India, the process has widened up
the platform for stock market. The underdeveloped nations also participate in the process and the
result is that there is a considerable increase of participants who has made this market more
popular.The subject matter has acquired importance during recent past and a large number of
studies have been carried out on the investment pattern and behavior of the indices related to the
stock market. Similarly a good number of scholars have also addressed the phenomena and
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Volume 1, Issue 3, June 2014
found that there is a concurrence between macroeconomic variable and the sensex indices along
with the general impact of stock market behavior on the economy & vice versa.
Theoretically the relation between stock market and economy in general has two
diversion perspectives. The market is understood to be as speculative market where no
commodity is produced and exchanged therefore it becomes difficult to find any relationship
except that the performance of individual industry leads to the change of the index of the stock
market. But in case of industrial advancement the economic parameters influenced and get
influenced by the market. An equal no. of scholars are of the view that the amount of capital can
be made available to the firms through the domestic and foreign investors for expansion which
indirectly have the impact on economy and therefore, there can be a direct, indirect relation of
stock market indices to the macroeconomic variables. A significant amount of literature exists
that examines the relationship between stock market with macroeconomic and financial variables
for different stock markets. The literature reveals divergent conclusions where several studies
found no relation between them and opposed to this an equal number of studies suggest that there
is bearing and macroeconomic variables determine the movement of indices.
The US stock (Poterba and Summer 1988, and Famma and French 1989) and UK stock
(Macdonald and Power 1991) are partly predictable because they have a market return
tendencies. Similarly, these market also hold the efficient market hypothesis to show strong
linkages between stock market and real economic variables such as GDP, industrial production,
inflation and employment (Famma1981, Famma and Gibbons1982, Summers 1986 and Chen
1991) .Mukherjee and Naka (1995) have founded that there exist relationship between exchange
rate, inflation, money supply, real economic activity, government bond rate and call money rate
in the Japanese stock market. Studies on Taiwan and other Asian countries (Fang and Lee 1990
sand 1995) have suggested that the response of the market is mixed. They conclude that the stock
return volatility respond to information on trade. Chaudhuri and Koo (2001) investigated the
volatility of stock returns in some Asian emerging markets in terms of the volatility of domestic
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International Journal Of Core Engineering & Management(IJCEM)
Volume 1, Issue 3, June 2014
and external factors; found that both domestic macroeconomic variables and international
variables have significant impact on stock return volatility. Their empirical results suggest the
presence of a significant contagion effect and integration of capital market in this region. The
results also suggested the role of government in terms of fiscal and monetary policy in smooth
functioning of the stock market is crucial in this region. In Indian context, Bhattacharya and
Mukherjee (2002) studied the nature of the causal relationship between stock prices and macro
aggregates in India by using the methodology proposed by Toda and Yamamoto for the period of
1992-93 to 2000-2001. Their results show that there is no causal relationship between stock price
and macroeconomic variables like money supply, national income and interest rate but there
exists two way causation between stock price and rate of inflation. According to them index of
industrial production lead the stock price. The behavior of stock prices (BSE) in relation to some
key macro economic variables in India during the scam period 1992 was studied by Bhattacharya
and Chakravarty (1994). Their dynamic forecast indicate the behavior of stock prices is unrelated
to key macro variables. Krishna Reddy Chittedi (2007) have done a study on the validity and
growth path of Sensex as well as the quantum of contribution of FIIs in enhancing the validity
of Sensex. The study has described the various milestone achieved by Sensex after the post
globalization period, and also highlighted the reason for the same. In the study it has been
mentioned that as such there is no correlation between FIIs investment and the movement of
Sensex. Dharmendra Singh (2010) has derived a relation especially the causal relation between
stock market index i.e. BSE Sensex and three key macroeconomic variables of India Economy
by using correlation unit root test and Granger Causality test or monthly data from April 1995 to
March 2001. The result have indicated that index of industrial production is the only variable
having bilateral causal relationship with BSE Sensex where as WPI .
The above stated studies carried on establishing relationship between the macroeconomic
variables of the economy and the stock market indices provide the general conclusions that the
studies on developed economies have supported the thesis that there is strong bearing of the
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Volume 1, Issue 3, June 2014
macro variables on the stock market indices. Contrary to this the stock market in the developing
countries the said relationship has not been undoubtedly confirmed rather the two studies cited
with reference to India has found to be unrelated.
In absence of general disagreement on the relationship of two it seems to be convincing
that in the pre reforms period the macroeconomic variables of the economy were tuned to
planned development and hence the stock market indices not having bearing does not come to be
a surprise. But the post globalization period has tuned the economy domestically to the market
and secondly the Indian economy and financial market has been exposed to the global
economies. Hence the relationship between these two is expected.
Therefore, the present study is an attempt to explore the direction and nature of
relationship between macroeconomic variables like GDP, FIIs investment on year basis, gold
prices, capital formation, manufacturing industrial output, exchange rate, WPI, Turnover of cash
segment, Intrest Rate, savings and Average Sensex (BSE index) movements during post
globalization period .The study is expected to fill the existing gap and to answer the basic
question.

The broad objectives of the study are to:

1) Establish and analyze the relationship between the macro variables and sensex
movements.
2) To understand the Causality between different variables and average sensex.

Data and Methodology:

The study is based on secondary data on macroeconomic variables and indices of stock
market.. The secondary data for economic variables such as GDP,savings, capital formation, FII
investment, gold price bank interest rate ,industrial production and exchange rates are collected
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International Journal Of Core Engineering & Management(IJCEM)
Volume 1, Issue 3, June 2014
from various published and semi published sources of RBI, CSO and other agencies for a period
of 1992-2011. The simple and relevant statistics is used to determine the required results. First,
the interval data is converted to the comparative units and then the bivariate correlation has been
used to measure the degree of relationship and the level of explanation to the stock indices. The
test of Granger Causality has been applied to check the directionality.

Hypothesis:
The process of globalization and structural reforms has provided the free hand to the
domestic and transnational capital in the name of attraction to FDI and competitiveness. The new
economic policies have given boost to the monopoly capital both domestic and foreign and
sensex in turn is directly linked with the growth of big industrial houses. The growth of
monopoly capital and GDP show the movements hand in hand. Secondly the earlier studies
carried out on India fail to establish relation between stock market and macroeconomic variables
other that inflation. Therefore the present study under the changed economic policy and structure
put forward the hypothesis that the post globalization period has a strong positive relation
between the macroeconomic variables and the movement of sensex. Secondly, the structural
change in the economic policy is pushing forward the growth of private capital and has created
an environment of stability to the movement of sensex.

Results and Analysis:

Growth of Sensex and Macroeconomic variables:
Growth of the economy and its close association with the BSE index over a period of 1992-2011
further provides the insight into their concurrence as how they have differed in their growth over
time. Linear and exponential growth rates are calculated to examine and compare so as to
identify which of the variables have grown linearly and the other with geometric progression.
The two trends also helped in identifying that what trends fit the best and explain the growth
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pattern. The coefficient of determination (r Square) provides this explanation such that
whichever has higher (r square) proves better fit to the trend. Further the quadratic function is
applied to examine whether the variables over time have shown acceleration or deceleration in
their growths . The negative sign of b2 indicates that the growth has slowed down and the
positive sign shows the progression in the growth with the increasing time.
The growth of sensex shows that there is a positive growth over time and it was more near to
linear growth of 186 points every year with a higher Rsquare =.572.The F value of both linear
and exponential b1 are lower but statistically significant at 5 % levels. The general level of index
also confirms the trend that the indices were lower for quite some time which picked up showing
acceleration in the recent past. The growth rates of GDP at current price, capital formation and
savings show quite similar trends. The b1 values are not only high with linear trend and
exponential functions but are statistically also significant at 1 5 level of significance with f
value being high. The growth trends and the quadratic functions confirm the understanding that
the three major macroeconomic variables are not only have increased level after the globalization
but shown acceleration during the last twenty years. The quadratic function coefficient b2 are
positive and high show that growth has accelerated.
The prices of gold have been slow in general and have not shown significant growth the b
coefficients are not significant statistically and the quadratic function also o reveal that the lower
growth rates has decelerated during the study period. The b2 coefficient of quadratic function is 46.57. The growth rate of investment by FIIs shows more trend fitting of linear nature as the b1
is statistically significant and the r square is higher to the level of .894 compared to the
exponential function r square = .55. The linear function expands about 90 % of the variance. This
means the period of post globalization era the foreign investment in the portfolio segment has
increased linearly but the quadratic function shows that it has slowed down over time as the b2
coefficient is negative and high. Trends of bank interest have been reduced during this period but
the reduction in the interest rate is quite marginal. The negative coefficient are not statistically
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significant that shows that there is no significant change in the interest rate but even the marginal
change in the interest rate becomes important for the withdrawal of savings from back and to be
diverted to other forms. WPI has a positive trend means that the consumer goods have become
costlier with increase of prices.
Industrial growth is important to the economy as it constitutes the backbone of sustained growth
in terms not only for domestic consumption but also for exports. The growth rate of Industry
sector has been slow in terms of percent as it has been between 2-4.5. The absolute values of the
industrial output show high positive growth such that the annual linear growth of production has
been to the tune of 3200 crores per year which is also significant statistically at 1 % level of
significance. Despite of the fact that the growth rate of industrial output is positive and
statistically significant the quadratic function clearly indicates that the industrial growth has
decelerated means that the growth has slowed down during study period.

The money supply and BSE stock exchange turnover has shown more linear trends of growth
rather than the geometric one. The linear growth of the two variables is also significant at 1 %
level of significance. The two variables have the acceleration also in the growth rates as revealed
by the quadratic function. Similarly the exchange rate of rupees to dollar has been increasing
showing that the value of rupee has gradually declined and the exchange rate has increased. The
dollar has been costlier 2 rupees per year and this trend has been continued through the period of
the study. The acceleration rate of exchange has not been very high as the b2 coefficient of
quadratic function equals to only .0293.
The growth trends of the sensex and the macroeconomic variables have shown that they have
significant growth over time after the globalization and structural reforms in the economy. The
variables such as GDP,Capital formation ,savings ,turnover of BSE and money supply have
shown high level of acceleration in growth ,whereas other variable are either have the low level

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of acceleration or have decelerated during this period. The below stated table will support the
explanation given for the growth `of sensex and other macroeconomic variables:

Table No. 1
Dependent

Mth

Rsq. d.f. F

Significance B0

Sensex

LIN

.572 4

5.34

.082

2741.15 186.517 6.0664

QUA .576 3

2.04

.276

2852.36 124.337

EXP

.543 4

4.76

.095

2785.54 .0520

LIN

.996 4

926.30

.000

492316

163981

QUA .999 3

1760.76 .000

562411

124791

EXP

.989 4

351.56

.000

641933

.1303

Capital

LIN

.988 4

337.39

.000

78223.1 46697.1 1387.55

Formation

QUA .994 3

242.10

.000

103661

32474.8

EXP

.979 4

184.12

.000

127819

.1594

LIN

.988 4

324.68

.000

74265.5 44492.9 1577.52

QUA .996 3

350.74

.000

103187

28323.4

EXP

.983 4

235.64

.000

122106

.1586

LIN

.079 4

.35

.588

4494.44 34.9188 -46.575

QUA .980 3

72.81

.003

3640.56 512.312

EXP

.085 4

.37

.574

4479.15 .0079

LIN

.894 4

33.70

.004

3718.27 3238.10 -303.94

QUA .944 3

25.32

.013

-1853.9

EXP

.550 4

4.90

.091

4307.52 .2681

LIN

.987 4

302.62

.000

86.5667 7.9125

QUA .997 3

430.90

.000

80.9054 11.0777

EXP

101.42

.001

90.0140 .0645

GDP

Savings

Gold Price

FII

WPI

.962 4

B1

B2

3823.37

6353.47

-.3088

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Interest

Industrial Output

Exchange Rate

Turnover

LIN

.025 4

.10

.765

11.2000 .0500

QUA .567 3

1.96

.285

9.5094

EXP

.030 4

.12

.744

11.1900 .0050

LIN

.992 4

502.66

.000

110756

QUA .996 3

340.02

.000

96956.0 39691.2

EXP

.950 4

76.75

.001

135546

LIN

.961 4

98.68

.001

24.7857 2.1977

QUA .962 3

38.11

.007

25.3228 1.8975

EXP

.943 4

66.56

.001

25.8320 .0621

LIN

.786 4

14.67

.019

118761

QUA .990 3

141.49

.001

246333

EXP

19.89

.011

192891

126805

.833 4

-.0922

.8952

31975.6 -752.73

.1270
.0293

23957.7

24676.7 .3701
Money Supply

LIN

.965 4

.000

161531

111345

QUA 1.00 3

3122.37 .000

314075

26058.8

EXP

11451.3 .000

293259

.1586

1.00 4

110.88

8320.57

The Relationship between Index and Macroeconomic variables: The Pearson coefficient of correlation of product moment was calculated to share the degree and
direction of relationship among the BSE indices and the Macro economic variables of India. It is
expected from the study that the correlation coefficient of BSE index is supposed to be positive
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encase the index has bearing on its behavior over time. The macroeconomics variables influence
the variability of the BSE Sensex index directly because it only the soundness of macroeconomic
variables provide the base at which the individuals and institutions participate in the trading and
increase in these economic indices leads to the growth of the stock market in terms of growth in
the index of the shares.
The zero order correlation coefficient given in the further stated in Table no Correlation Matrix
Shows that, the SENSEX of BSE has a very high correlation coefficient almost with all the
macro economics indicators. The average SENSEX shows the highest correlation coefficient
with GDP (r=0.95), capital formation (r=0.97), Savings (r=0.97) and industrial output (r=0.95).
All the correlation coefficients are significant at 1 percent level of significance. This high
relationship signifies that the higher level of growth of GDP reflect higher level of capital
formation and saving and is greatly related by industrial growth, show the soundness of the
economy. Once the general economic indicators are strong they lead to the phenomena that the
SENSEX behaves positively. The strong industrial base always gets reflected in the share prices
in the industries particularly those which are included in the determination SENSEX indices of
country. In the present case they show a complete bearing an the SENSEX. The growth of FIIs
investment also has the positive impact on the SENSEX as the coefficient is 0.91 which is also
significant at 1 percent level of significance. The gold price and the bank interest are the two
indicators which compete with the savings with the share market. The lowering of gold prices
and bank interest must provide the increasing trend for the savings in the share market. The
negative and significant correlation at 5 percent level of significance clearly indicates that the
SENSEX has inverse relation with bank interest rate (-) 0.22 but the relationship with gold price
is showing a positive and significant correlation at 1 percent level of significance. This is
because the gold price has also increased slowly along with the SENSEX of BSE.

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Table No. 2: Correlation Matrix

Av
g.
Se
nse
x

Avg.
Sensex
GDP
Cap.
Forma
Saving
Gold
price
FII
WPI
Interest
rate
Industri
al.
Output
Exchan
ge rate
Turnov
er of
cash
segmen
t at
BSE

GDP

Capita
l
Forma
tion

Savin
gs

Gold
price

FII

WPI

Intere
st rate

Indus
trial.
Outp
ut

Exch
ange
rate

0.22*
*
0.38*

0.95*
*
1.00*
*

-.39*

.99**

.54*

-.42*

.99**

.55**

-.28*

.95**

.42*

-.26*

.92**

.49*
.70**
.74**

1
0.9
5

0.95**

0.97
**

0.97
**

0.99**

.97

.99

1.00

0.99*
1.00*
*

0.93
**
0.96
*
.96*
*

.97

.99

1.00

1.00

.95*

0.91
**
0.94
*
.94*
*
.94*
*

.93

.96

.96

.95

1.00

.91*

.91

.94

.94

.94

.91

1.00

0.90
**
0.98
*
.95*
*
.96*
*
.88*
*
.92*
*

.90
.22

.98

.95

.96

.88

.92

1.00

-.43*

.98**

.38

-.39

-.42

-.28

-.26

-.43

1.00

-.48*

0.45*
.63**

.95

.00

.99

.99

.95

.92

.98

-.48

1.00

.63**

.45

.63

.54

.55

.42

.49

.70

-.74

.63**

1.00

.71

.91

.91

.91

-.18

.76

.84

-.54

.85

.90

Turn
over
of
cash
seg
ment
at
BSE
0.71
**
.91*
*
.91*
*
.91*
*
-.18*
.76*
*
.84*
*

Mon
ey
supp
ly

0.94
**
1.00
**
.99*
*
.99*
*
.97*
*
.92*
*
.97*
*

-.54* -.47*
.85*
*
.90*
*

.99*
*
.60*
*

1.00

.96*
*
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Money
supply

1.00
.94
.99
.99
.97
.92
.97
-.47
.99
.60
.96
1.00
** 1% level of significance
*5% level of significance
The correlation coefficient among the macro economics variables themselves is very high and
significant for all the variables. This high correlation coefficient is the indication that all the
parameters of the economics are integrated with each other and the growth of one variable is
closely associated with other variables. The GDP and other variables such as capital for nation,
industrial output and saving have strengthened serving this period and almost all the variables
have grown very fast having very close association with each other. This high and strong
relationship has indicates that the post globalization period particularly after the structural
reforms and policies towards foreign direct investment have provided the multiplier effect to the
overall development of the economy resulting into the soundness of the macro economics
variables. A large number of economist see that the growing macro economics parameters of the
economy will trick down to the other areas and lower income group and will benefit the country
as a whole and the wellbeing of the massed or the other hand it is also been argued that although
the economy at the macro level has been growing but this is resulting into the growing regional
and interpersonal disparities and the problems of inflation poverty and unemployment are not
addressed as much they deserve. The economy has grown a balanced manner taking care of the
other entire sector than only that of gross domestic product.
Table No.3 Results of Causality by Granger Causality Test

Null Hypothesis
No. of Lags
GDP does not granger 2
cause Average Sensex
Average Sensex does 2
not granger cause
GDP

F statistics
2.19

P value
.15

.00

.99

GDP does not granger 4

cause Average Sensex
Average Sensex does 4
not granger cause
GDP

4.47**

.04

.30

.86

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GDP does not granger 5

cause Average Sensex
Average Sensex does 5
not granger cause
GDP

37.05*

.00

1.73

.30

Null Hypothesis
Capital
Formation
does not granger
cause average Sensex
Average Sensex does
not granger cause
capital formation
Capital
Formation
does not granger
cause average Sensex
Average Sensex does
not granger cause
capital formation
Capital
Formation
does not granger
cause average Sensex
Average Sensex does
not granger cause
capital formation

No. of Lags
2

F statistics
11.07*

P value
.00

1.49

.26

11.10*

.00

.48

.74

9.12**

.04

.25

.91

F statistics
9.01*

P value
.00

3.95

.35

Null Hypothesis
No. of Lags
Savings does not 2
granger cause average
Sensex
2
Average Sensex does
not granger cause

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Savings
Savings does not
granger cause average
Sensex
Average Sensex does
not granger cause
Savings
Savings does not
granger cause average
Sensex
Average Sensex does
not granger cause
Savings

Null Hypothesis
Gold Price does not
granger cause average
Sensex
Average Sensex does
not granger cause
Gold Price
Gold Price does not
granger cause average
Sensex
Average Sensex does
not granger cause
Gold Price
Gold Price does not
granger cause average
Sensex
Average Sensex does
not granger cause
Gold Price

10.65*

.00

.16

.94

6.42***

.07

.04

.99

No. of Lags
2

F statistics
13.05*

P value
.00

1.13

.35

11.60*

.00

.48

.74

7.29

.06

1.05

.5

F statistics
1.35

P value
.29

Null Hypothesis
No. of Lags
FII does not granger 2

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cause average Sensex
Average Sensex does
not granger cause FII
FII does not granger
cause average Sensex
Average Sensex does
not granger cause FII
FII does not granger
cause average Sensex
Average Sensex does
not granger cause FII

.16

.85

29.24*

.00

3.80**

.05

20.1*

.00

3.16

.14

Null Hypothesis
WPI does not granger
cause average Sensex
Average Sensex does
not granger cause
WPI
WPI does not granger
cause average Sensex
Average Sensex does
not granger cause
WPI
WPI does not granger
cause average Sensex
Average Sensex does
not granger cause
WPI

No. of Lags
2

F statistics
1.88

P value
.19

.82

.45

1.83

.22

18.2*

.00

1.53

.35

2.68

.17

Null Hypothesis
Intrest Rate does not
granger cause average
Sensex
Average Sensex does
not granger cause
Intrest rate
Intrest Rate does not
granger cause average

No. of Lags
2

F statistics
3.07***

P value
.08

.19

.82

3.14***

.08
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Sensex
Average Sensex does
not granger cause
Intrest rate

4
5

.30
2.72

.86
.17

.29

.89

Null Hypothesis
Industrial output does
not granger cause
average Sensex
Average Sensex does
not granger cause
Industrial output
Industrial output does
not granger cause
average Sensex
Average Sensex does
not granger cause
Industrial output

No. of Lags
2

F statistics
5.26**

P value
.02

1.16

.34

2.19

.18

4
5

2.66
3.09

.13
.19

6.44***

.07

Null Hypothesis
Exchange Rate does
not granger cause
average Sensex
Average Sensex does
not granger cause
exchange Rate
Exchange Rate does
not granger cause
average Sensex
Average Sensex does
not granger cause
exchange Rate
Exchange Rate does
not granger cause
average Sensex
Average Sensex does
not granger cause

No. of Lags
2

F statistics
2.94***

P value
.08

3.99**

.04

4.23**

.04

10.11*

.00

7.51**

.03

8.38**

.03
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exchange Rate
Null Hypothesis
Turnover of Cash
segment
does not
granger cause average
Sensex
Average Sensex does
not granger cause
turnover of Cash
Segment
Turnover of Cash
segment
does not
granger cause average
Sensex
Average Sensex does
not granger cause
turnover of Cash
Segment
Turnover of Cash
segment
does not
granger cause average
Sensex
Average Sensex does
not granger cause
turnover of Cash
Segment

No. of Lags
2

F statistics
7.19*

P value
.00

.59

.56

1.21

.42

.15

.94

3.08

.40

24.8

.15

Null Hypothesis
Money Supply does
not granger cause
average Sensex
Average Sensex does
not granger cause
Money Supply
Money Supply does
not granger cause
average Sensex

No. of Lags
2

F statistics
4.35**

P value
.03

6.36***

.01

2.91

.11

3.26***

.09

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Average Sensex does
not granger cause
Money Supply
Money Supply does 5
not granger cause
average Sensex
Average Sensex does 5
not granger cause
Money Supply
*1 %,**5% *** 10%

2.10

.28

1.90

.31

After applying the relevant test for checking the causality between average sensex value and
other macroeconomic variables, the results have been drawn. The results stated in the above
mentioned tables clearly depicts that the null hypothesis of Granger Causality cant be reject
even at the level of 5 lags from average sensex to GDP,capital formation ,savings, gold price
,interest rate ,Industrial output ,turnover of cash segment whereas it can be rejected from GDP to
Average sensex at 5 %level of significance, capital formation to Average sensex at 5 % level of
significance ,savings to average sensex at 1% level of significance ,gold price to Average sensex
at 1 % level of significance ,Interest rate to average sensex at 10 % level of significance and
industrial output to average sensex at 5 % level of significance. It is evident from the results that
the causality between average sensex and the variables like GDP, capital formation, savings,
gold price, Intrest rate, and Industrial output is unidirectional. The rationale behind these findings
is that all these variables are the indicators of economic movements in the country. Any change
in the policy framework in production levels has a direct bearing on the composition of these
variables. The sensex is a comprehensive index of the share prices of the major thirty companies
out of the listed companies in the Bombay stock exchange on the basis of their capitalization.
This index is considered as a benchmark to reflect the market the market movements on a whole
term basis. A fluctuation or alteration in the macroeconomic determinants produce a
considerable effect on the business environment across the corporate society and which leads to
make the alteration in the capital structure composition on long term basis. The fluctuations in
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the variables under study have a drive force to make the alteration in the movement of index as
these are the predictors to foresee the changes in the business environment. Any increase or
decrease in the level of GDP level will certainly have a direct bearing on capital levels and
saving levels among the society which in turn will have a significant bearing on the movement of
index (average sensex). The changes in the global economy alter the interest rate levels in the
country which again leads to produce changes in the composition of average sensex. Apart from
this some variables like FII, Exchange rate and money supply have a bidirectional relationship
with average sensex .. levels of significance.FIIs (Foreign Institutional Investor) are mainly
recognized as portfolio investors. The main aim of these institutions is to invest money in the
market to get the immediate returns in the most profitable way. These are considered as one of
the major driving force of the Indian stock market. These institutions produce a considerable
fluctuation in the composition of the index. On the other hand the fluctuation in the sensex
movements has also a considerable bearing on the psychology of these institutional investors.
The trends in the movement of the index give a base point to these institutions to frame their
decisions regarding the investment. Both the variables can be taken as predictors of each other to
foresee the changes. As the money invested I the Indian stock market is at the global level the
fluctuations in the values of currency against the foreign currency will certainly have a strong
bearing on the fluctuations in the index. The influence of the index is although very minute on
the movements in the exchange rate ,but it can be taken as a predictor to foresee the fluctuations
in the exchange rate levels of the currency as it is indirectly leads to the flow of money in the
market. To regulate the liquidity in the market the money supply is being regulated by the apex
body of our country i.e. RBI. The stock market is the most liquid market. Policies have been
framed to regulate the money supply in the economy which in turn regulates the liquidity in the
market and thus it affects the trends of the sensex movements. On the other side the investment
patterns, level of capital composition in the market have a drive on the flow of money in the
market
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Conclusion:
The behavior of the Indian stock market has been studied by large number of scholars
and found that the macroeconomic variables are not having Strong bearing except that of
inflation .The present study based on correlation reveals that the macroeconomic variables like
GDP, savings, capital formation, Gold price, industrial output, Money supply,FII,Exchange rate
,WPI turnover of cash segment ,interest rate have concurrence with the variability of the sensex
index during post globalization period. Further it is also clear that the causation in this
relationship is one way with the maximum variables but with certain variables like money
supply, exchange rate and FIIs shows the bidirectional relationship with the sensex.

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