Relationships between macroeconomic variables and BSE sensex: A causal study for India of the past two decades

This paper investigates the relationship between foreign exchange rates, foreign exchange reserve and BSE-Sensex return from March 1992 to June 2012 (monthly data) with reference to India. Several econometric tests are applied; these are correlation analysis, regression analysis, unit root test, Johansen co-integration test and granger causality. The Karl Pearson's coefficient of correlation conferred high correlation (96.3%) between foreign exchange rates and stock return. Regression analysis found that there is a significant impact of returns of exchange rate, foreign exchange reserves on the returns of BSE-Sensex return. It has been observed that all variables are not stationary in ADF Test and have unit root. Johansen co-integration test proves that, variables are not co-integrated and hence, have not long term relationship. The granger causality test concludes that, foreign exchange rate causes the BSE-Sensex return and no causation between foreign exchange reserve and BSE-Sensex return.