Investigating The Causal Association of Exchange Rate and Oil Price on Indian Stock Market: A Study on Sensex

Numerous domestic and international factors directly or indirectly affect the performance of the stock market. This study takes into consideration two macroeconomic variables-Exchange Rate and Oil Price, and one widely used complex index of the stock market of India-Sensex. The association between exchange rates, oil price and stock prices has always been in mind of the economists because all play a vital role in persuading the development of an economy including India. In recent times, Indian investors are demonstrating uncase in the stock markets due to exchange rate fluctuation. Exchange rate fluctuations will affect international trades, thus influence the stock market. On the other hand, higher international oil prices increase cost of production, which might decrease profit of firms, and hence decreases stock prices. Therefore, the expected relationship between oil price and stock price is negative. The present paper investigates the impact of exchange rate and oil price on sensex for the period starting from 2.1.99 to 31.12.2017 using daily data. The present paper has been designed with the application of unit root test, Johansen cointegration test and Granger causality test. Johansen cointegration test result indicates that there exists a long-term relationship among the selected variables. Granger causality test result shows that there must be either Unidirectional or no causality among the variables.