Indian stock market plays vital role in the Indian economy. Any changes in the stock market will bring significant changes in the economic conditions of the country. It has grown exponentially as measured in terms of amount raised from the market, number of stock exchanges and the intermediaries, the number of listed stocks, market capitalisation, trading volumes and price indices. Inflation is crucial to investing because it can reduce the value of investment returns. Inflation affects all aspects of the economy, from consumer spending, stock market, employment rates, tax policies and interest rates. In fact the way the share market was going up was itself creating doubts in the minds of the people about its real growth. This paper is an attempt to study the relationship between the two variables i.e., changes in the stock market will affect the inflation and vice versa. The results shows that the series are integrated of order I(1). On the second step Johansen maximum likelihood test is done to find out whether inflation and Nifty Index is cointegrated. The result shows very clearly there is no cointegration vector between the nifty and inflation. Then the Pairwise Granger causality test for the study period April 2001 to March 2011 is performed as the next step. Granger causality test is used to test the hypothesis of the study and found out that the null hypothesis is rejected. The result found out that there is a bidirectional causal relationship between inflation and nifty.
Inflation, Stock Market, Nifty Index, Unit root test, Cointegration test, Granger Causality test
