Impact of Macroeconomic Variables on Indian Stock Market

Abstract

Stock market plays an important role in the economy as it helps in diversifying the investments. However, to perform this role, it must have significant relationship with the economy. Thus, the analysis of macroeconomic factors is essential to understand the behavior of stock market. This paper examines the relationship between selected macroeconomic variables like Cash Reserve Ratio (CRR), reverse repo rate, gold price, Wholesale Price Index (WPI), oil rate, inflation rate, Gross Domestic Product (GDP), and Sensex. The data is collected on a monthly basis for the time period January 2001 to December 2009. It is found with the help of correlation and regression analysis that forex rate, inflation rate and gold prices are the most significant variables that help in forming models for forecasting the Sensex, and thus a forecasting model is developed combining these variables.