Impact of Macroeconomic Variables on Equity Prices in India
1. INTRODUCTION:
The movement of stock indices is highly sensitive to the changes in fundamentals of the economy and to the changes in expectations about future prospects. Expectations are influenced by the micro and macro fundamentals which may be formed either rationally or adaptively on economic fundamentals, as well as by many subjective factors which are unpredictable and also non quantifiable. It is assumed that domestic economic fundamentals play determining role in the performance of stock market. However, in the globally integrated economy, domestic economic variables are also subject to change due to the policies adopted and expected to be adopted by other countries or some global events. The common external factors influencing the stock return would be stock prices in global economy, the interest rate and the exchange rate. For instance, capital inflows and outflows are not determined by domestic interest rate only but also by changes in the interest rate by major economies in the world. Burning example in India is the appreciation of currency due to higher inflow of foreign exchange. Rupee appreciation has declined stock prices of major export oriented companies. Information technology and textile sector are the example of falling stock prices due to rupee appreciation.From the beginning of the 1990s in India, a number of measures have been taken for economic liberalization. At the same time, large number of steps has been taken to strengthen the stock market such as opening of the stock markets to international investors, regulatory power of SEBI, trading in derivatives, etc. These measures have resulted in significant improvements in the size and depth of stock markets in India and they are beginning to play their due role. Presently, the movement in stock market in India is viewed and analyzed carefully by large number of global players. Understanding macro dynamics of Indian stock market may be useful for policy makers, traders and investors.
The movement of stock indices is highly sensitive to the changes in fundamentals of the economy and to the changes in expectations about future prospects. Expectations are influenced by the micro and macro fundamentals which may be formed either rationally or adaptively on economic fundamentals, as well as by many subjective factors which are unpredictable and also non quantifiable. It is assumed that domestic economic fundamentals play determining role in the performance of stock market. However, in the globally integrated economy, domestic economic variables are also subject to change due to the policies adopted and expected to be adopted by other countries or some global events. The common external factors influencing the stock return would be stock prices in global economy, the interest rate and the exchange rate. For instance, capital inflows and outflows are not determined by domestic interest rate only but also by changes in the interest rate by major economies in the world. Burning example in India is the appreciation of currency due to higher inflow of foreign exchange. Rupee appreciation has declined stock prices of major export oriented companies. Information technology and textile sector are the example of falling stock prices due to rupee appreciation.From the beginning of the 1990s in India, a number of measures have been taken for economic liberalization. At the same time, large number of steps has been taken to strengthen the stock market such as opening of the stock markets to international investors, regulatory power of SEBI, trading in derivatives, etc. These measures have resulted in significant improvements in the size and depth of stock markets in India and they are beginning to play their due role. Presently, the movement in stock market in India is viewed and analyzed carefully by large number of global players. Understanding macro dynamics of Indian stock market may be useful for policy makers, traders and investors.