The IUP Journal of Applied Finance
Linkages Between the Movement of Sectoral Indices and Macroeconomic Variables in Indian Stock Market: An Empirical Study

Article Details
Pub. Date : Jan, 2022
Product Name : The IUP Journal of Applied Finance
Product Type : Article
Product Code : IJAF20122
Author Name : Sitaram Pandey
Availability : YES
Subject/Domain : Finance
Download Format : PDF Format
No. of Pages : 11



The objective of this study is to examine the dynamic linkages between the movement of Indian stock market sectoral indices and the three macroeconomic variables, namely, oil price, gold price and exchange rate, for the period 2016 to 2020. The data of sectoral indices was collected from Bombay Stock Exchange. The underlying series is evaluated as non-stationary at level, but stationary in the first difference, using the Augmented Dickey-Fuller unit root test. The use of the Multivariate Cointegration and Vector Error Correction Model suggests that there are long-term connections between macroeconomic variables and sectoral indices, specifically in the information technology sector. Meanwhile, the analysis based on Vector Autoregression Model technique indicates that there are short-run linkages between macroeconomic variables and sectoral indices, namely, basic materials, fast moving consumer goods, finance, healthcare, information technology, auto, bankex, power, and realty. The results document that oil price, gold price and exchange rate simultaneously have a significant effect on sectoral indices in Indian stock market. To stabilize the stock market post Covid-19, the authorities are advised to put economic policies sector-wise to accelerate economic growth and to maintain fiscal discipline. They need to stabilize the above-mentioned macroeconomic variables to accelerate the economic growth as the exchange rate has a significant negative impact on all sectors.


The economic losses due to Covid-19 have also affected the global stock markets. The contagion effect of the pandemic on global stock markets has been observed in almost every continent and Indian stock market is no exception. There have been a number of stock market crashes like cryptocurrency crash in 2018, European sovereign debt crisis of 2010, financial crisis of 2007-08, etc. These crises have always affected the volatility of the market. It is considered important to understand the volatility of the stock market to assess the cost of capital and the evaluation of investment and leverage decisions as uncertainty increases risk in the market. Thus, the stock market has become an important instrument in capital formation and economic growth in the Indian stock market. Several studies in India as well as other countries have been conducted on the linkages between macroeconomic variables and stock market (Mukherjee and Naka, 1995; Maysami et al., 2004; Gan et al., 2006; Patra and Poshakwale, 2006; Hosseini et al., 2011; and Ouma and Muriu, 2014). The previous studies clearly indicate that the changing macroeconomic variables have significant effect on developing markets like India. Tripathi et al. (2014), in their study related to macroeconomic variables on sectoral indices in India, concluded that there is a high correlation among the