Review of Literature on Macroeconomic Determinants of Equity Share Prices

The present study attempts to examine the relationship found in empirical studies of macroeconomic variables namely, exchange rate, money supply, inflation, industrial production, foreign exchange reserves and interest rate with stock market indices in the post-reform era of liberalization. Classical economists argued that the exchange rates lead stock prices with positive correlation whereas the proponents of portfolio-balance model argue that, being part of wealth, equity may affect the exchange rates through demand for money implying that stock prices lead exchange rates with negative correlation. Money supply was found to have negative and positive impact on stock prices. Several studies have found negative relationship between inflation and share prices. Industrial production would lead to a rise in stock prices thus implying positive relationship. Increase in foreign exchange reserves lead to a positive effect on stock market movements. In majority of studies interest rate wasfound to be negatively related with stock prices.