Journal of Commerce and Accounting Research

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Nexus Between Foreign Exchange Rates and Stock Market Indices: Evidence from India


Affiliations
1 ICFAI Business School, ICFAI Foundation for Higher Education, Hyderabad, Telangana, India
2 Xavier Business School, St. Xavier’s University, Kolkata, West Bengal, India
     

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The foreign exchange market and the stock markets in India are among the most important financial markets that are constantly being monitored by the investors, regulators, and the policy-makers. The present study makes an attempt to investigate whether any causal relationship exists between the foreign exchange market and the stock markets in India. The BSE and the NSE annual returns have been used as a substitute for the stock prices, while the currency rate of Indian Rupee against the US Dollar (INR/USD) has been considered as a substitute for the exchange rate exposure covering a time-period of 20 years, from 1 January 2000 to 31 December 2019. The applications of the unit root or Augmented Dickey-Fuller test, Johansen cointegration, and Granger causality tests, as employed in the present study, examined the relationship between the USD/INR exchange rates and Indian stock market indices (SENSEX and NIFTY-50). The Granger causality test indicated that both the BSE and NSE stock indices granger cause INR/USD exchange rates. However, the INR/USD rates do not granger cause the BSE and NSE stock returns. The study has portrayed a unidirectional relation between the stock indices and INR/USD rates, but a bi-directional relation between the BSE and NSE stock returns.

Keywords

BSE, NSE, Exchange Rate, Unit Root, Cointegration, Granger Causality
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  • Nexus Between Foreign Exchange Rates and Stock Market Indices: Evidence from India

Abstract Views: 171  |  PDF Views: 0

Authors

Joy Chakraborty
ICFAI Business School, ICFAI Foundation for Higher Education, Hyderabad, Telangana, India
Sambit Sen
Xavier Business School, St. Xavier’s University, Kolkata, West Bengal, India

Abstract


The foreign exchange market and the stock markets in India are among the most important financial markets that are constantly being monitored by the investors, regulators, and the policy-makers. The present study makes an attempt to investigate whether any causal relationship exists between the foreign exchange market and the stock markets in India. The BSE and the NSE annual returns have been used as a substitute for the stock prices, while the currency rate of Indian Rupee against the US Dollar (INR/USD) has been considered as a substitute for the exchange rate exposure covering a time-period of 20 years, from 1 January 2000 to 31 December 2019. The applications of the unit root or Augmented Dickey-Fuller test, Johansen cointegration, and Granger causality tests, as employed in the present study, examined the relationship between the USD/INR exchange rates and Indian stock market indices (SENSEX and NIFTY-50). The Granger causality test indicated that both the BSE and NSE stock indices granger cause INR/USD exchange rates. However, the INR/USD rates do not granger cause the BSE and NSE stock returns. The study has portrayed a unidirectional relation between the stock indices and INR/USD rates, but a bi-directional relation between the BSE and NSE stock returns.

Keywords


BSE, NSE, Exchange Rate, Unit Root, Cointegration, Granger Causality

References