Dynamics of macroeconomic variables and Indian stock market an exploration

Abstract

Stock markets exposure emanating from dynamics of cogent variables and investors behaviour is gaining significance due to the function of these markets in mobilization and channelization of capital towards productive activities. As a protocol of wealth creation, investment activities executed by diverse groups in the stock market are crucial to economic development and both developed and developing economies are intensely pegged with the performance of their stock markets. Besides, the proliferation of techno-driven information sharing architecture has substantiated the dissemination of information both ex-ante and ex-post pertaining to endogenous as well as exogenous issues which in turn lead to intricate and intermingle relationships among variables of economy and stock market. newlineWith the opening up of emerging economies and manifestation of liberalized policies during last few decades, stock markets of such economies are witnessed as volatile markets compared to their counterparts. Further, stock markets of emerging economies are prone to factors viz. changes in the level of economic activities, changes in the political and international economic environment and also related to the changes in other macroeconomic factors. Generally, growth rate in gross domestic product; rate of inflation; rate of interest; fiscal position and exchange rate are considered as barometers of measuring the performance of the economy and are the major determinants of the growth of an economy. Moreover, it is asserted in theoretical and empirical literature that stock prices accurately reflect expectations about future corporate performance and corporate profits per se reflect the level of economic activities. If stock prices reflect the underlying fundamentals, they are expected to be adopted as leading indicators of future economic activities. Hence, dynamic interactions and causal relations among stock prices and macroeconomic variables are imperative to the formulation of macroeconomic policy of a country. newline