The study investigates the dynamic effect of macroeconomic variables on BSE returns. In recent phenomena, stock market is a leading indicator of an economy growth and economic fundamentals are determinants of the stock market movements. The study results found that selected macroeconomic variables were weakly correlated with BSE and each other variable. The macroeconomic variables influenced approximately 93 percent of the variation on BSE return, which indicated the high impact of macroeconomic variables on BSE return. The results of Durbin Wastan test exhibited that no auto correlation in the selected sample of the study. The estimated coefficients of CMR, GP, IIP, INF R, MKT TO BSE and TB recorded negative impact on BSE. The coefficient of EXCR, M3 and MKT CAP BSE exercised positive effect on BSE. In cointegration values of selected macroeconomic variables of likelihood ratio were higher than critical values at 99, 95 and 90 percent and it indicated that there was long run relation. The VAR results revealed that the shock of macroeconomic variables administered to BSE was very flat and not statistically significant. The stock market was not affected in the short term by the macroeconomic variables. The CUSUM Test exhibited the existence of stability in the long run coefficient. There were only call money rate and inflation rate caused BSE sensex returns. The study concludes that there was stability in the long run cointegration and high impact of macroeconomic variable on BSE sensex but absence of short term relation during the study period. EXCR, GP, MKT CAP BSE and MKT TO BSE were highly residual plotted. the study would suggest the investor community should aware and to understand the movement of CMR, IIP, INF R, GP, MKT TO BSE and TB. These variables cause negative effect and which may be irrespective of the price fluctuation. The study advised that investor community should study the changes of macro-eocnomic variables regime to enhance their returns and investments in capital market. The policy makers needs to improve the economy policy and in terms of reduce the inflation rate, call money rate volatility, high interest rate, enhance the growth of money supply, appreciation of exchange rate, increase the net FIIs, increases the growth of IIP and control the gold price fluctuation, from these, variables shows glossiness of stock market development and the growth of economy of a country.