Economic Forces and Stock Price in an Emerging Market: The Case of India

This paper examines the relationship among oil prices, exchange rate, wholesale price Index, index of industrial production, short term interest rates and long term interest rates and stock market in India. Initially SENSEX was found to have a positive relationship with wholesale price index, index of industrial production and short term interest rate and a negative relationship with oil prices and exchange rates. I then applied various time series methods like VAR tests and Granger causality tests were applied which showed positive short run relationships of Sensex with lags of Sensex itself, WPI and long term interest rates. However Sensex showed negative short run relationship with oil prices and short term interest rates. The granger causality tests proved that there is a short run causality running from WPI, and short term interest rate to Sensex. Finally by performing Vector auto regression it was found that Sensex is positively related to wholesale price index and long term interest rate in the long run. The findings of this study are of particular interest and importance to policy makers, financial managers, financial analysts and investors dealing with the Indian economy and the Indian stock market.