Determinants of Stock Market Index in India

Abstract

Investigating the factors affects the stock markets has gained attention worldwide and is a well-regarded subject in finance. The study examines the determinants of stock market index in India. In particular, the aim of the paper is to analyse the interaction between macro-economic variables and Indian stock market indices. Monthly data of NIFTY500 index NAV, consumer price index (CPI), index for industrial production (IIP), USD-INR exchange rate, asset under management (AUM), and Treasury bill rate were collected for the period November 2005 to April 2024 and applied Johansen (1991) cointegration technique to examine the long run relationship between these variables. Short run relationship was estimated by the Vector Error correction Model. The results of the study shows that there exists long run relationship between stock market index, and other fundamental economic variables, viz. CPI, IIP, USD -INR exchange rate and rate of interest in India. The normalized coefficients of the cointegrating vector suggest that while AUM positively and significantly influence nifty500 index, the exchange rate has negative and significant effects on it. The results of the study would be useful for predicting the stock market index in India that can further help in making better investment decisions.