Share Prices, Macroeconomic Variables in India

The present paper is an attempt to examine the causal relationships between the share price index and industrial production for India in a multivariate vector error correction model which involves certain other crucial macroeconomic variables namely money supply, credit to the private sector, exchange rate, wholesale price index, and money market rate for the reason of right and robust model specification. The purpose is to highlight the relationship between economic growth and stock market especially in terms of stock prices. The present study thus proceeds with a single point investigative agenda what is the relationship between the health of the real economy and the health of the stock market? Does a rally in share prices reflect better health of the economy or is it the pink economic health that causes share prices to rise? The present study reports causality running from economic growth proxied by industrial production to share price index and not the other way round.