Linkages between Stock Market Development, Banks and Economic Growth in India: An ARDL Approach

Abstract

The banking and stock market development was perceived to be an essential channel for economic growth through mobilisation and allocating productive investments. On the other hand, it was emphasised that economic growth would create demand for financial services and would lead to financial sector development. Existing literature attempts to investigate whether financial development is the primary driver of economic growth or vice versa. However, the issue remains unsolved and ambiguous. The present study investigated the causal relationship between stock markets, banks and economic growth in India using Autoregressive Distributed Lag (ARDL) bounds testing approach. The empirical result confirmed the long-run bidirectional relationship between financial development and economic growth in India. In the short-run, the empirical evidence showed that the market capitalisation of the Bombay Stock Exchange and IIP were unrelated and that a bidirectional relationship existed between the value of shares traded on the Bombay Stock Exchange and output. Furthermore, the findings supported unidirectional causality from the National Stock Exchange market capitalisation to output in the short-run. The value of shares traded on the National Stock Exchange and output had a feedback connection.