Macro-Economic Variables And Stock Prices In India

This study investigates the effects of macroeconomic variables on stock prices in India using annual data for the period from January 1979 to December 2011. The multivariate regression was run using thirteen macroeconomic variables on BSE Sensex using six different models. The null hypothesis which states that macroeconomic variables collectively do not accord any impact on the share prices is rejected at 0.05 level of significance in overall and post-liberalization case but is accepted in pre-liberalization case. The results indicate that out of six models in all the three cases the model with higher R2. has been selected for further analysis which justifies higher explanatory power of macroeconomic variables in explaining stock prices. Consistent with similar results of the developed as well as emerging market studies, inflation rate and exchange rate react mainly negatively to stock prices in the Indian Stock Exchange. The negative effect of Treasury bill rate implies that whenever the interest rate on Treasury securities rise, investors tend to switch out of stocks causing stock prices to fall. However, lagged money supply variables do not appear to have a strong prediction of movements of stock prices while stocks do not provide effective hedge against inflation specially in Manufacturing, Trading and Diversified sectors in the CSE. These findings hold practical implications for policy makers, stock market regulators, investors and stock market analysts