What Moves Indian Stock Market: A Study on the Linkage with Real Economy in the Post-Reform Era

Abstract

This paper is a fresh attempt to unravel the relationship between the real economic variables and the capital market in Indian context. The paper considers the monthly data of several economic variables like the national output, fiscal deficit, interest rate, inflation, exchange rate, money supply, foreign institutional investment in Indian markets between 1994 and 2003, and tries to reveal the relative influence of these variables on the sensitive index of the Bombay stock exchange. Compared to the earlier similar attempts, this paper applies the modern non-linear technique like VAR and Artificial Neural Network and compares the results. The finding shows that certain variables like the interest rate, output, money supply, inflation rate and the exchange rate has considerable influence in the stock market movement in the considered period, while the other variables have very negligible impact on the stock market.