Integration and Efficiency of Stock and Foreign Exchange Markets in India

Abstract

This article attempts to examine the integration and efficiency of Indian stock and foreign exchange markets. The study employed Time series ordinary least square regression, Unit Root test, Grangers causality test, Vector Auto Regression techniques on monthly data of stock return and exchange rate return for the period spanning from February 1995 to March 2005.The major finding of this study are as follows. Both the stock indices return (Rsensex and Rnifty) are near normal whereas exchange rate return is not normal and more peak. The stock return and exchange rate return are positively related. The policy implication of this above result of the positive relation between stock return and exchange rate return for the foreign investors in India should be further studied. From the Granger's causality test, it is found that there is no causality for the return series of stock indices and exchange rate except return Nifty and return exchange rate. Weak form of market efficiency hypothesis is also corroborated for stock and foreign exchange markets.