THE NATURE OF THE CAUSAL RELATIONSHIP BETWEEN STOCK MARKET AND MACROECONOMIC AGGREGATES IN

This paper investigates the nature of the causal relationship between stock prices and macroeconomic aggregates in India. By applying the techniques of unit–root tests, cointegration and the long–run Granger non–causality test recently proposed by Toda and Yamamoto (1995), we test the causal relationships between the BSE Sensitive Index and the five macroeconomic variables, viz., money supply, index of industrial production, national income, interest rate and rate of inflation using monthly data for the period 1992-93 to 2000-01. The major findings are (i) there is no causal linkage between stock prices and money supply, stock prices and national income and stock prices and interest rate, (ii) index of industrial production lead the stock price, and (iii) there exists a two – way causation between stock price and rate of inflation