A causality investigation into stock prices and macroeconomic indicators in the Indian stock market.

Abstract

Background of the study: The systematic impact of macroeconomic variables on stock market returns makes it crucial to comprehend the link between macroeconomic variables and the stock market. Stock prices are closely linked to macroeconomic indicators, a crucial aspect for investors, policymakers, and researchers in emerging markets like India, influencing investment decisions and policy formulation.

Methods: The autoregressive distributed lag (ARDL) model was used in this study to examine the causal links between specific macroeconomic factors and Indian stock prices from April 2009 to March 2023.

Results: The outcomes of the research suggest that macroeconomic variables exert influence on the Indian stock market, across the short and long term. Moreover, the results of the paired Granger causality test suggest that the domestic macroeconomic variables possess predictive significance for stock prices in the Indian stock market.

Conclusion: The study reveals that macroeconomic variables significantly impact the Indian stock market, highlighting the need for investors and portfolio managers to monitor these conditions to optimize returns and mitigate risks. The Reserve Bank of India should maintain an optimal money supply to prevent inflation and exchange rate fluctuations, while bolstering the export sector and facilitating imports through initiatives like Atma-nirbhar Bharat Abhiyan and Make in India. Policies focusing on productivity, infrastructure, and a favourable business environment are also crucial. Therefore, it is crucial for investors and portfolio managers to consistently analyse the current macroeconomic conditions in order to maximize their profits and minimize risks. This research has extensive significance for comprehending the intricate connections between the stock market and macroeconomic issues.