The Granger Causality Study Between Exchange Rate And Stock Prices In The Indian Context

Abstract

This paper identifies the dynamic linkage between stock rate indices and exchange rate in the Indian Market for the last 26 years. There has not been such a significant and detailed study on this in an Indian context, and we have extensively studied the granger causality between different industrial sector-wise stock market indices with the US Dollar - Indian Rupee exchange rate. The regression is split adequately into phases of economic significance, and daily data is studied. We do not find any bidirectional causality in most of the sectors during all periods of study except during 2014-2019, where many sectors including Auto, PSU, Metal and Manufacturing, show a bidirectional dependance. This paper further links the empirical findings to the possible scenario of the economy that may have caused the relation for the sector during that period. These results and discussions have few significant implications for policymakers, stock analysts and foreign investors.

Keywords: Causal relationship, Stock market, Exchange rate, Industrial sectors

JEL Classification: G10