Macro-Economic Indicators and Their Linkages with BSE Sensex Index: Causality Analysis and Vector Error Correction Model

Abstract

This research study investigates the functioning of the Indian Stock market with the global and domestic macro-economic factors namely Foreign Exchange Rate, Price of Gold, Price of Crude Oil, Index of industrial production(IIP), Interest Rate and the wholesale price index(WPI) over the period January 2001 to December 2018 using monthly data. The research paper studies causality between the selected macroeconomic indicators with BSE Sensex. Econometric tools namely the Granger-Causality test, Cointegration test and Vector Error Correction Model(VECM) are employed in finding the relationship between them. The Granger-Causality test shows a unidirectional causality between BSE Sensex, Foreign Exchange rate, IIP, Crude oil prices and interest rate. For India, data are consistent with one cointegration equation between the BSE Sensex and the macroeconomic variables. The VECM indicates BSE Sensex has long-run causality between Exchange Rate, Wholesale Price index. The Wald test reveals BSE Sensex has a short-run causal relationship with the interest rate.