A Study of Impact of Selected Macro Economic Variables on Nifty

Abstract

The dynamic linkage between stock market and macro-economic variables is one of the most enduring thoughts in the present scenario. The study focuses on this relationship only with due consideration towards the most important macro-economic variables like index of industrial production, consumer price index as a proxy for inflation and interest rates along-with the major stock index Nifty. The paper uses Johansen and Juselius (1990) cointegration technique to explore the long-run relationship between NSE-Nifty share price index and above mentioned macroeconomic variables. For examining the short run relationship Vector Error Correction Model (VECM) was applied. The empirical results revealed that the NSE-Nifty index does not have a significant long-run relationship with interest rate, index of industrial production, and consumer price index but there were existence of short run relationship. Based on this relationship a model was created and residual testing of the model was conducted to check its validity with respect to heteroskedasticity, auto correlation and normality tests. Further, Granger Causality test revealed bidirectional relationship between CPI, IIP, interest rates and nifty. Lastly, application of impulse response function resulted negative impact on Nifty in the initial years when standard deviation shocks were given to the variables like CPI, IIP and interest rates.