Investigating the Long-run and the Short-run Relationship Between Domestic Macroeconomic Forces and Indian Equity Market: Evidence Based on ARDL Bounds Testing Approach

Abstract

Understanding the effect of domestic macroeconomic forces on equity market is essential since macroeconomic forces have a systematic effect on the equity market returns. The present study uses monthly observations from India for the period from January 2012 to December 2019 to investigate the long-run and short-run relationship between the domestic macroeconomic forces and equity market. The study employed the autoregressive distributed lag (ARDL) bounds testing approach and pair-wise granger causality test to attain the objective. The long-run empirical results indicated that the Indian equity market and the domestic macroeconomic forces are cointegrated. The long-run coefficients of foreign exchange rate and money supply are found to be significant. The short-run coefficients suggest that money supply, inflation and foreign exchange rate significantly influence the Indian equity market. The study also observed the presence of feedback mechanism between foreign exchange rate and Indian equity market. The study provides the policy and managerial implications.