Impact of Macro Economic Indicators affecting Indian Stock Markets: Evidence from Pre- and Post-Crisis

Abstract

Volatility is quite evident in stock market fluctuations and often economic factors results in share prices movements. However, there are some fundamental elements, which have a strong impact over the fluctuations of the stock market by and large. This study empirically tested the interconnection between macro-economic factors and Indian stock market. By applying multivariate regression analysis, the effect of macro-economic factors on Indian stock market is tested. The explanatory variables are Wholesale Price Index (WPI), Index of Industrial Production (IIP), Money Supply (M3), Consumer Price Index (CPI), Exchange Rate (ER), Call Money Rate (CMR), Gold Price (GP), Foreign Institutional Investment (FII) and Trade Balance (TB) while explained factors are average monthly closing prices of BSE Sensex and S&P Nifty. Further, for testing the interconnection between macro-economic factors and Indian stock market Pearson's correlation, Factor Analysis and Multiple Regression test have been applied. Three variables namely Economy Rates, Macro Environment and Foreign Investment are obtained by using Principal Component Technique (varimax pivot). It shows that all elements play critical role in affecting the stock market.