Investigating the Dynamic Interlinkages between Exchange Rates and the NSE NIFTY Index

Vijay Victor,Meenu Bhaskar,Farheen Naz,Dibin K K

doi:10.3390/jrfm14010020

Abstract

This study aims at examining the short-run and long-run dynamic linkages among exchange rates and stock market index in India through a structured cointegration and Granger causality tests. Daily exchange rates of USD, EUR, CNY, JPY, and GBP to INR along with the daily movement of NSE NIFTY for a period spanning 13 years from 6 September 2005 to 31 December 2018 were used for the analysis. The results reveal that there is no evidence for a stable long-run relationship between NSE NIFTY and the exchange rates under study. However, the VAR-based Granger causality test shows that USD, JPY, and CNY have short-run causal relationship with NSE NIFTY. The NSE NIFTY also seemed to have an influence on USD expressed in terms of Indian rupee. The impulse response analysis further supports the results of the Granger causality test and provides information on the time required for the NSE NIFTY index to recover from a shock caused by the fluctuation in exchange rates.

Highlights

Fluctuation in exchange rates is one of the significant factors that affect stock prices, which subsequently influences a firm’s market value
This study aimed at analyzing the short-run and long-run linkages between exchange rates and National Stock Exchange of India (NSE) NIFTY index through a Johansen cointegration and a Granger causality test
This result implies that the variations in the exchange rates under this study may not have a significant influence on NIFTY index in the long-run, the investors who are into long-term trading do not necessarily have to be cautious about the short-term fluctuations in the exchange rates

Summary

Introduction

Fluctuation in exchange rates is one of the significant factors that affect stock prices, which subsequently influences a firm’s market value. The interest rates and exchange rates significantly influence the value of a firm and the upward and downward movements of the exchange rate play a pivotal role in determining the stock prices. In both developed as well as developing countries, the stock market plays a crucial role as far as financial intermediation is concerned. It channels the funds in an economy from surplus units to deficit units through resource mobilization, which is critical in the process of expansion and growth of an economy. The stock market acts as a channel in mobilizing savings and helps in the efficient allocation of funds, thereby fostering economic growth (Olugbenga 2012; Alile 1984)

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