Scrutinizing Causal Relationship Between Stock Market Development and Economic Growth: Case of India

Abstract

With the rapid changing trends in financial system it becomes imperative to identify the vitality of financial system and its importance in context of growth of an economy. The present study analysed relationship between the selected indicators of Indian Stock Exchange and index of industrial production by considering the duration 1996-1997 to 2015-2016. The autoregressive distributed lag technique is applied to identify the long-run cointegration and vector error correction technique is used to identify the long-run and short-run relationship between the variables. A detailed analysis indicates that a long-run cointegration relationship do exist between the variables of stock market and economic growth. The study recommends relaxation in some of the stringent requirements for entry into the stock market to ensure that more companies are listed, as industries are the large user of external funds and they grow faster in countries with higher opportunity of growth for stock market sector.