The Relationship between Exchange Rate & Stock Prices:Evidence from the Indian Market

The study investigates the relation between exchange rate Rs/$ and stock prices in India. S and P Bombay Stock Exchange 500 index is considered as an indicator for Stock Exchange while average exchange rate returns of Indian Rupee versus Dollar is taken as proxy for Exchange rate. Johansen’s co-integration and Granger causality test have been used to identify the long-run and short-run equilibrium relationship between the exchange rate and the stock price from 2007-2017. The study reveals that there is no long term co-integrated relationship between the two financial variables. However, the causality runs from the stock market to exchange rate confirming the portfolio approach. This relation between the exchange rates and stock prices corroborates that volatility of exchange rate in Foreign exchange market is caused by the inflow and out flow of foreign portfolio investment in India. Economic effect of the volatility of exchange rate is borne by the private corporate having foreign exposure in terms of erosion of Firm value.