Impact of Macroeconomic Factors on SENSEX Returns

Abstract

Movements in SENSEX are the result of a complex interplay of a host of factors. Hence, it is not easy to make a correct assessment of its movement, and the task becomes all the more difficult when SENSEX witnesses a lot of volatility. Macroeconomic factors do have a lot of influence on the SENSEX movements. The objective of this study is to investigate several key macroeconomic factors and their influence on SENSEX variations. For this purpose, key macroeconomic parameters like Balance of Trade, Index of Industrial Production, Money Supply (M3), MIBOR Rates, FOREX Reserves, Wholesale Price Index based inflation and exchange rates between Rupee-Dollar and Rupee-Euro were considered to investigate the key factors amongst them which are influencing most the SENSEX variations. The study uses monthly data for past ten years (i.e. from 2001 to 2010), analyzed using Vector Autoregressive techniques.

The findings of the research identified three macroeconomic indicators, viz. MIBOR, FOREX reserves and INR/USD exchange rates, as having a significant impact on the SENSEX returns. Other macroeconomic indicators considered in our study were found to have no significant impact on the SENSEX returns. These findings are expected to help fundamental analysts and other market players to watch out for these variables while making investment decisions.

Keywords: volatility, macroeconomic factors, Vector Autoregressive techniques

JEL Classification: G12, G10