Macro-Economic Variables & its Impact on Stock Market Prices

Abstract

It is often argued that Stock market prices and the real economic variables are related, more-so in the case of emerging and developing economies like India. In this paper, I have tried to analyze the above argument empirically, with the help of Multi-Regression analysis and the 8-point procedure for regression modelling. The paper examines the relationship between the BSE S&P 500 Index and some major macroeconomic indicators namely, gold prices, money supply, RBI reference exchange rate of INR vs USD, Wholesale Price Index (as a test of inflation affecting industrial products), Net Investments by Foreign Institutional Investments in Indian capital market, Index of Industrial Production (IIP), Consumer Sentiments index and Fiscal Deficit (Period of study January 2016 – July 2019, monthly data). Empirical results indicate that while some Macroeconomic indicators may have no meaningful association, others do affect the market prices. The principal indicators found to have a meaningful impact on stock prices are Gold prices, Money supply, RBI reference exchange rate of INR vs USD, Wholesale Price Index and Net foreign Institutional investments in the capital market. These results help us conclude that it is not only important for investors to be aware of such Macroeconomic variables but also for the government to make appropriate policies affecting these factors so as to enhance the stock market’s performance in a favourable direction. This becomes more crucial given the current economic slowdown where the government is looking to make critical policy decisions.