Causality Relationship between Exchange Rate and Stock Returns in India - An Analytical Study

The present study tries to estimate causality relationship that exists between exchange rate and stock returns. The impact of exchange rate on the returns from stock in India is examined, by using periodical data from the beginning of 1997 to the close of 2014. Macro variables are considered for the study: Real Exchange Effective Rate (REER) and BSE SENSEX. The study reveals that there exists some relationship between these two elements found through Granger Causality Technique [8]. However, from the short run results one cannot confirm that the exchange rate does not influence return on shares and vice versa. This study asserts that the exchange rate neither affects stock returns nor stock return affects the exchange rate. Thus, the present study empirically proves that the former does not induce the latter and in turn stock returns have no influence over exchange rate.