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Share Prices And Macroeconomic Variables In India

Share Prices and Macroeconomic Variables in India:
An Approach to Investigate the Relationship
Between Stock Markets and Economic Growth

By

Raman K. Agrawalla
And
S K Tuteja

Abstract

Of late increasing attention is being paid to the relationship between share prices and the macroeconomic variables both by economists and finance specialists. It is in fact hard to imagine an economy without stock markets now. In the contemporary scenario, which can be described by increasing integration of the financial markets and implementation of various stock market reform measures in India, the activities in the stock markets and their relationships with the macro economy have assumed significant importance. The present paper is an attempt to examine for India the causal relationships between the share price index and industrial production in a multivariate vector error correction model which involved certain other crucial macroeconomic variables namely money supply, credit to the private sector, exchange rate, wholesale price index, and money market rate for the reason of right and robust model specification. The purpose is to make a finer point with respect to the relationship between economic growth and stock market especially in terms of stock prices. The present study thus proceeds with a single point investigative agenda- what is the relationship between the health of the real economy and the health of the stock market? Does a rally in share prices reflect better health of the economy or is it the pink economic health that causes share prices to rise? The present study reports causality running from economic growth proxied by industrial production to share price index and not the other way round. It may therefore be stated that the state of the economy has a bearing on the share prices but the health of the stock market in the sense of a rising share price index is not reflective of an improvement in the health of the economy. This finding has lot of...