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Stock prices and their volatility have now become the widespread features of securities markets. The growing linkages of stock
market indices with inflation, liquidity, growth rate, crude oil prices, exchange rates etc. have given volatility a new
dimension - influence of macroeconomic variables. This research paper revisits the relationship between stock price and some
key macro-economic variables in India for the period 2010-2015 using quarterly time series data.
KEYWORDS
Stock Market, Stock Prices, Volatility, Liquidity, Macroeconomic Variables etc.
INTRODUCTION
In the year 1991, the government of India initiated the process of economic reforms. The deregulation of the Indian economic
system led to a tremendous change in the Indian capital market. Since then the Indian Capital Market has undergone metamorphic
reforms. Indian Capital Market is now being known amongst the most transparent, well-organized and clean markets across the
world. Stock market has gained significant importance from the economy point of view. It is a key driver of the economy‟s
financial development and growth.
The Indian Stock Market has always exhibited dramatic movements. Form 3,739.69 points on 31st March 1999, Bombay Stock
Exchange (BSE) Sensitivity Index (SENSEX) had reached to...level points in March, 2015. At times, the stock prices have
appeared too volatile to be justified by changes in fundamentals. In the recent past, there have been perceptions that volatility in
the market has gone up; Inter and Intra-day volatility. According to a comprehensive analysis undertaken by SEBI - the volatility
has not gone up much in the recent past, as it has been perceived. Indian stock market provides a very high rate of return and
comparatively moderate volatility. Efficiency of Indian market appear to have improved in the past few years owing to contraction
in settlement cycles, introduction of derivative products, improvement in corporate governance practices etc. In addition, the stock
market is in many ways influenced by the domestic and international macroeconomic fundamentals. According to Aggarwal
(1981), “the rising indices in the stock markets cannot be taken to be a leading indicator of the revival of the economy in India and
vice-versa”. On the contrary, Shah and Thomas (1997) supported the idea that stock prices are a minor, which reflect the real
economy. Many more researchers have studied the interaction of share market returns and the macroeconomic variables and all
studies provide different conclusions.
Stock Market Volatility: Many factors like expected corporate earnings, interest rates, monetary flows, political stability and
liquidity within the banking system, drive stock prices. All these factors have the power to roil the stock markets. Merton Miller
(1991) the winner of the 1990 Nobel Prize in economics - writes in his book Financial Innovation and Market Volatility - “By
volatility public seems to mean days when large market movements, particularly down moves, occur. These precipitous market
wide price drops cannot always be traced to a specific news event. Nor should this lack of smoking gun be seen as in any way
anomalous in market for assets like common stock whose value depends on subjective judgment about cash flow and resale prices
in highly uncertain future. The public takes a more deterministic view of stock prices; if the market crashes, there must be a
specific reason.”
Macro-Economic Variables: The characteristics that describe a macro economy are usually referred to as the macroeconomic
variables. Macroeconomics is the study of the economy as a whole. It examines the cyclical moments and trends in economy wide
phenomenon, such as unemployment, inflation, economic growth, money supply, budget deficits and exchange rates etc. These
variables are pertinent to a broad economy at the national level and affect a large population rather than a few select individuals.
These are the key indicators of economic performance and are closely monitored by governments, businesses and consumers.
This research paper tries to explore whether the movement of Bombay Stock Exchange and National Stock Exchange‟s indices is
the result of some selected macroeconomic variables. The study considers macroeconomic variables as Index of Industrial
production (IIP), Wholesale price Index (WPI), Cash Reserve Ratio (CRR), US Dollar Price (USD into INR), Crude Oil Prices,
Gross Domestic Product (GDP) and Bombay Stock Exchange‟s and National Stock Exchange‟s indices in the form of SENSEX
19Assistant Professor, Chandigarh Business School of Administration, Punjab, India, [email protected] 20Assistant Professor, Chandigarh Business School of Administration, Punjab, India, [email protected]
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14. Quarterly data of cash reserve ratio, exchange rate (US dollar price) was taken from Reserve Bank of India (RBI)
database site. Retrieved from http://dbie.rbi.org.in/
15. Bombay stock exchange indices were taken from Bombay Stock exchange Limited site. Retrieved from
http://www.bseindia.com/
16. National Stock Exchange Indices were taken from the National Stock Exchange Limited site. Retrieved from
http://www.nseindia.com/
17. Quarterly Index of industrial production, wholesale price index, GDP was taken from Central Statistical Office site. Retrieved from http://mospi.nic.in/Mospi_New/site/home.aspx
18. Quarterly crude oil prices data was taken index mundi site. Retrieved from http://www.indexmundi.com/india/