SYNOPSIS

Effect of Macroeconomic Variables

on Indian Stock Market

Date: 09/04/2021

SUBMITTED TO:
SUBMITTED BY:
DR. VINAY JOSHI
AKCHAT MOR
CHANDNIWALA
2019BAEH002
Professor and Research
Director of JAGRAN LAKECITY
UNIVERSITY
 ACKNOWLEDGEMENT
I would like to express my special thanks of gratitude to my
Professor Dr Vinay Joshi who gave me the excellent opportunity
to do this wonderful project on the topic Effect of
Macroeconomic Variables on Stock Market. They have helped
me in doing a lot of Research and I with this I also learned so
many new things.

Akchat Mor
2019BAEH002

TABLE OF CONTENT
1.)Introduction
2.)Review of Literature
3.)Research Methodology
a. Objective
b. Importance of Study
c. Hypothesis
d. Methodology
e. Reasons and Data Collection
f. Conceptual Framework
g. Limitation
4.)Expected Outcome
 Introduction
There has been undergone tremendous changes in Indian Stock Market since from when the
liberalization and globalization policies has been adopted by the government. This leads to
increasing importance of stock market in the aggregate economy. Stock market has become
nowadays a huge source of raising money in the Indian Corporate and since it has led to
enable the economic growth and financial development therefore the Indian stock market is
one of the emerging market in the world.
There are two main stock exchange in India that is Bombay Stock Exchange
and National Stock Exchange however we will do the study with the Bombay Stock
Exchange.
With the smooth development process in Indian stock market the Bombay
Stock Exchange(BSE) that is the oldest stock exchange of India, their Sensitivity Index
(SENSEX) has reached to 45,000 points on December 2020 from 2,000 points in 1999 and at
current it is 49,746. However, the SENSEX fluctuates on regular basis and the reason is due
to some variables factors that affect the whole stock market. For Example, the recent global
financial crisis in 2008-09 has affected the SENSEX due to which it has fallen by 1000
points. In the context of this effect in the Indian Stock Market the critical question is whether
the macroeconomic variables is influenced in the degradation of market or not. Agrawalla
(2006) stated “that rising indices in the stock markets cannot be taken to be a leading
indicator of the revival of the economy in India and vice-versa.” Also as expressed by
King(1966), “share prices are subject to the impact of macroeconomic factors by an average
of 50”. There are several researches done in the study of impact of economic variable on
stock market and all studies has provided a different conclusion related to their test and
methodology.
Result of this study will help to know that whether the fluctuations in SENSEX
is due some selected macroeconomic variables or because they are fluctuating by some other
factors. In the study some of the macroeconomics variables that will consider will be
Consumer Price Index(CPI), Index of Industrial Production(IIP), Call Money Rate(CMR) and
Dollar Prices and the Bombay Stock Exchange indices will be in the form of SENSEX with
the help of monthly data with the time spam from April, 2016 to March 2020.
In the study we will use the correlation, regression analysis, ADF test and
Granger Casually test to see the effect of Macroeconomic variables on the BSE indices. This
study will be helpful to the traders and investors to better analyze the market.

Literature Review
Relationship between Macroeconomic Variables and Stock Market fluctuations.

There are many researchers and financial analyst who did the study and research on the
prediction on the relationship between the stock market movement and the macroeconomic
variables. They did it by conducting the empirical studies to examine the relation of
Macroeconomic variables and Stock market prices fluctuations however different researchers
used different kinds of test and methodology which leads to arrive at different conclusion.
Here, we have some of the different research paper and conclusion related to our sector.

Dr. Nishat (2004) studied found that that there exists a causal relationship among the stock
price and macroeconomics variables Most of the time series data is non-stationary hence unit
root technique was employed to make data into stationary. Further, the result also indicates
that industrial production significantly affects to macroeconomic variables.

Mukherjee (2002) study found that Foreign Institutional Investments(FIIs) activities had a
strong demonstration effect.

Gallagher & Taylor (2002) study found that the stock returns are negatively impacted by
both the expected and unexpected inflation.

Kumar(2008) established the long term relationship of stock price with exchange rate and
inflation in Indian context. His research primarily dealt with an empirical method by
combining different statistical techniques to check the presence of co-integration between the
stock index (Sensex) and other variables. The study took into consideration past ten years of
experience of Indian economy reflected into the stock index, wholesale price index and
exchange rates.

Dharmendra Singh (2010) explored the relation between BSE SENSEX and three
macroeconomic variables by using correlation, unit root stationarity test and Granger
causality test. Monthly data was used and the three macroeconomic variables were IIP, WPI
and exchange rate. Studies found that there is bilateral granger causality between IIP and
Sensex while WPI is having strong correlation and unilateral causality with Sensex which
means Indian stock market is approaching towards informational efficiency at least with
respect to two macroeconomic variables, viz. exchange rate and inflation.

Dasgupta (2012) explore the long run and short run relationship between BSE SENSEX and
four macroeconomics variables by using the Descriptive statistics, ADF tests and Granger
casuality test. Monthly data has been used for all the variables, i.e., BSE Sensex, WPI,, IIP,
EX and call money rate. Results showed that all the variables has contained a unit root and
are integrated of order one.

Several other studies on the relationship between stock prices and various
macroeconomic variables in the Indian market, such as Agrawalla and Tuteja
(2008),Sampath (2011), Kumar (2011, Sangmi and Hassan (2013), Kotha and Sahu
(2016), and Mangala and Rani (2015) reveals findings that vary depending on the time
period and data set. Agrawalla andTuteja (2008), Sampath (2011), and Kotha and Sahu
(2016) used data from the Bombay Stock Exchange (BSE), whereas the rest employed
data from the National Stock Exchange of India (NSE). Both Agrawalla and Tuteja
(2008) and Sampath (2011) exposed uni-directional causality and significant positive
relationship between economic growth (proxied by industrial production index) and stock
prices.
 Research Methodology
Objective-

1.To know the relationship between Indian stock market and four selected macroeconomic
variables namely Consumer Price Index(CPI), Index of Industrial Production(IIP), Call
Money Rate(CMR) and Dollar Prices.

2.To study the impact of Macroeconomic variables on Indian stock market sector wise.

3. To check whether any correlation between stock price & macroeconomic variables exists
and if exists then how much they are correlated to each other.

NOTE:-[A time spam is of 5 years for the study from April, 2016 to March, 2020 as a
monthly data]

Importance of Study-

1.This study will help individual to better analyse the market.

2.Useful for the investors who might be able to identify some economic variables and have an
advantage to make their own suitable decision while investing in stock market.

3.Different kinds of investors would find this study as an assistant, portfolio manager and
foreign investors.

Statement of Hypothesis
The Hypothesis for this study is stated below:

NULL HYPOTHESIS

H0: There is no significant relation between Consumer Price Index(CPI) and SENSEX

H0: There is no significant relation between Index of Industrial Production(IIP) and

SENSEX

H0: There is no significant relation between Call Money Rate(CMR) and SENSEX

H0: There is no significant relation between Dollar Prices and SENSEX

ALTERNATIVE HYPOTHESIS
Ha: There is significant relation between Consumer Price Index(CPI) and SENSEX

Ha: There is significant relation between Index of Industrial Production(IIP) and SENSEX

Ha: There is significant relation between Call Money Rate(CMR) and SENSEX

Ha: There is significant relation between Dollar Prices and SENSEX

Methodology

Descriptive statistics technique Inferential statistics technique

Mean Regression Model

Median R-Square

Sum Correlation

Minimum Unit Root Test (by ADF Test)

Maximum Granger Causality Test

Range

Standard Deviation

1.Regression model – Statistical technique to know the relationship between independent

variable (referred to as X) and dependent variable (referred to as Y). Regression equation is

Yi = β0 + β1 Xi + ui where Yi= dependent variable β0 is the constant

Xi=independent variable β1 is the slope

2.Statistics Test-
R-Square which is also known as the coefficient of determination. It tells
how good are independent variables at predicting the dependent variable. It ranges from 0-1.

Sign-F: it determine whether the whole model is significant.

T-Test: the reliability of our estimate of the individual beta. For that we
can look at p- values.
3.Correlation- We will find the relationship between the BSE SENSEX(dependent variable)
with each macroeconomic variables(Independent variables).

4.Unit root test(Augmented Dickey-Fuller test)- As the research is based on time series
data we will find whether the data is stationary or not and for this we calculate unit root test
that define the data is stationary or not. Generally a data series is called a stationary series if
its mean and variance are constant over a given period of time.

The common method to find out the Unit Root Test is Augmented Dickey -Fuller (ADF)

Where Yt=variable in period

T=time trends
et=error term distribution
σ^2=variance
k= number of lags

Null and alternative hypothesis are as follows:

H 0 : ρ=0 [Variable is not stationary]

Ha : ρ<0 [Variable is stationary]

The time series variables considered in this study are the stock market indices(BSE SENSEX) and
four macroeconomic variables(Consumer Price Index(CPI), Index of Industrial Production(IIP),
Call Money Rate(CMR) and Dollar Prices).

5.Granger Causality test- Granger causality test is a technique for determining whether one time
series is significant in forecasting another. The standard Granger causality test seeks to determine
whether past values of a variable helps to predict changes in another variable. Granger causality
technique measures the information given by one variable in explaining the latest value of another
variable. The null hypothesis (H0) that we test in this case is that the X variable does not Granger
cause variable Y and variable Y does not Granger cause variable X.

where, Yt and Xt=variables to be tested , t=time periods

‘K’ and ‘I’= number of lags

The null hypothesis is:

 H 0 : αt = δt = 0 for all I [X does not granger cause Y]

The alternative hypothesis is:

Ha : αt ≠ 0 and δt ≠ 0 for at least some I [X granger cause Y]

And in this study the null and alternative hypothesis is being:

H0 : Macroeconomic variables do not granger causes Indian stock market.

Ha : Macroeconomic variables granger causes Indian stock market.

Reason for selecting these macroeconomics variables & Data Collection-

In this empirical analysis a particular software that has been used is E-views.

Like BSE SENSEX has been considered as a proxy of Indian Stock Market the other
variable is also a proxy of some macroeconomic variable like:-

1.Comsumer Price Index is the proxy of Inflation

2. Industrial Production Index of all commodities is considered as a proxy to GDP

growth rate.

3. Call rate as a proxy of domestic interest rate affecting stock market

4. Dollar price to show the effect of external world on Indian stock market

Data Collection-

Here the data that has been used in the empirical analysis is secondary data and it has
been taken from mostly of government websites.

1. The data of BSE SENSEX has been taken from BSE website.

2. The Consumer Price Index(CPI) & Index of Industrial Production(IIP) has been
extracted from DULS website.

3.)The Data of Call Money Rate(CMR) and Dollar Price has been taken from RBI
website.
Conceptual Framework

Consumer Price Index(CPI)

Index of Industrial Production(IIP)

Changes in Price Shift in SENSEX

of Stocks

Call Money Rate(CMR)

Dollar Prices

Limitation-

1.Accuracy- Due to the secondary data and selected time span the result and conclusion
cannot be accurate.

2.Limited Variable-Although there are many macroeconomics variables this study will
mainly focus on only 3 variables,

3.Realibility- As this is the secondary data which means it is already available and used for
analysis it cannot be reliable.

4.Time Period-A time spam of 5 years has been considered for examining the relation
between Indian stock market and macroeconomic variables.

Expected Outcomes
In this paper the study performed necessary analyses to answer the research question
of whether some of the identified macroeconomic factors can influence the Indian
stock market. So the outcome will be whether the any of the macroeconomic variable
affects the Indian Stock Market such that does there any relation exist between any
macroeconomic variable and BSE SENSEX.