Financial Risk Management

Interrelationship Between Rainfall and NSE Nifty Index: An Empirical Study

Article Details

Pub. Date	: Mar, 2022
Product Name	: The IUP Journal of Financial Risk Management
Product Type	: Article
Product Code	: IJFRM010322
Author Name	: Dileep N* and G Kotreshwar**
Availability	: YES
Subject/Domain	: Finance Management
Download Format	: PDF Format
No. of Pages	: 10

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Abstract

Many studies have analyzed the interrelationship between weather and stock markets across the world, but few have studied it in the Indian context. This paper attempts to determine whether there exists a relationship between average rainfall and the NSE Nifty index. The study uses the monthly mean rainfall data collected by the Indian Meteorological Department (IMD) and monthly closing price of Nifty 50. To analyze the interrelationship, the study applies Augmented Dickey-Fuller (ADF) test, correlation analysis, GARCH(1,1) model, and Granger causality test. The results of correlation matrix show that there is no interrelationship between the two variables. The GARCH(1,1) model found that the NSE Nifty index is not affected by the mean rainfall, and Granger causality test displays no causal relationship.

Introduction

The NSE Nifty 50 (hereafter Nifty index) is a benchmark Indian stock market index and one of the major financial indicators showing economic changes. It is affected by many factors, including rainfall. Rainfall variability is one of the systemic risks for the Indian economy. India is among the few countries that experience all of the world's weather variations, and rainfall has a significant impact on the economy. India is still a developing country and it depends on the monsoon for economic development (Narula et al., 2021). The equity market is one of the leading economic indicators and is impacted by the monsoon in India. The Efficient Market Hypothesis is one of the modern investment theories, and it states that prices of stocks quickly adjust to all the available information. Rainfall is one of the weather factors that shows revenue direction for the rainfall-dependent industries. Normal rainfall increases farmers' purchasing power and improves trade balances by increasing exports and decreasing imports. The deficit rainfall results in higher prices of goods and it leads to higher inflation. Higher inflation adversely affects the economic development of a country. According to the Indian Meteorological Department (IMD), total quantum rainfall of less than 90% of the Long Period Average (LPA) indicates drought; 90% to 96% of the LPA indicates normal rainfall; 104% to 110% of the LPA indicates above normal rainfall; and more than 110% of