Stock Market and Exhange Rates in India

A STUDY ON THE RELATIONSHIP BETWEEN THE STOCK MARKET AND
FOREIGN EXCHANGE RATES IN INDIA
Dissertation submitted in partial fulfilment of the requirement
For the degree of
MASTERS IN COMMERCE
Submitted by
STEVE PRINCE
21MCOM43
Under the guidance of
DR. HARIHARAN R
Assistant Professor
DEPARTMENT OF COMMERCE AND MANAGEMENT

ST. JOSEPH’S COLLEGE (AUTONOMOUS)
Recognised as ‘College of Excellence’ by UGC
Re-Accredited by NAAC with ‘A++’ grade& 3.79/4.00 CGPA
Lalbagh Road, Bangalore-560 027
Karnataka
May 2023
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CERTIFICATE OF PRESENTATION
iii
St. Joseph’s College (Autonomous)
DECLARATION
I, Steve prince (21MCOM43) declare that this dissertation entitled “A STUDY ON

THE RELATIONSHIP OF THE STOCK MARKET AND FOREIGN EXCHANGE
RATES IN INDIA” was carried out by me in the year 2022-2023 in the Department of
Commerce and Management, St. Joseph’s College (Autonomous), under guidance of Dr.
Hariharan R.
I declare that this study has not been submitted to any other institution for the award of
any degree or diploma.
Place: Bangalore
Date: Steve Prince
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St. Joseph’s College (Autonomous)
CERTIFICATE
This is to certify that the dissertation titled “A STUDY ON THE RELATIONSHIP

BETWEEN THE STOCK MARKET AND FOREIGN EXCHANGE RATES IN
INDIA” is an original work of Steve Prince bearing Register Number 21MCOM43 and
is being submitted in partial fulfilment for the award of the degree of MASTERS IN
COMMERCE at St Joseph’s College (Autonomous), Bangalore.
Signature of Guide
Date:
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Acknowledgement
I, Steve Prince would like to thank the Almighty God for his enduring grace, guidance
and protection that He has bestowed upon me during the research.
I would like to acknowledge and thank my guide and mentor, Professor Dr Hariharan R,
for his continuous support in my research, patience, motivation and immense knowledge.
His guidance and advice carried me through all the stages of writing my dissertation.
I am also grateful to the Vice Chancellor, Academic Dean, PG Coordinator, HOD and
Professors for this opportunity. I would also like to thank the librarian and library support
staff for their support.
My sincere thanks to my parents, for the parental presence and constant guidance to me,
who have continuously supported me financially to accomplish my studies.
My appreciation also extends to classmates and friends for the stimulating discussions,
which inspired me to concentrate on my research work.
Steve Prince
21MCOM43
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Table of Contents
SL. CONTENTS PAGE

NO. NO.
1 CHAPTER 1- INTRODUCTION 1
1.1 Introduction 2
1.2 Research Problem 5
1.3 Scope of the Study 5
1.4 Research Questions 6
1.5 Research Objectives 6
1.6 Variable 7
1.7 Research Hypothesis 8
1.8 Research Design 9
1.8.1 Sources of Data 9
1.8.2 Sampling Design 10
1.8.3 Tools and Techniques 11
1.8.4 Limitations of the Study 13
1.9 Chapter Design 14
2 CHAPTER 2- REVIEW OF LITERATURE 15

2.1 Introduction 16
2.2 Review of Literature 16
2.3 Research Gap 33
3 CHAPTER 3- BACKGROUND OF THE STUDY 34
3.1 An Overview of the Indian Financial Market and 35

Economy
3.2 Historical Patterns in India's Stock Market and Exchange 36

Rate
3.3 Stock Market in India- Pre-Independence Period 37
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3.4 Stock Market in India- Post Independence Period 37
3.5 Discussion of the Indian Economy's Current State and Its 38

Relevance to the Study
3.6 Current Overview of the Stock Market 39
3.7 Current Overview of the Forex Market 43
3.8 Understanding of the Role of the Interaction of Stock 47

Market and Forex Market
4 CHAPTER 4- DATA ANALYSIS AND 49

INTERPRETATION
4.1 Introduction 50
4.2 Econometric Models 50
4.3 The Data 50
4.4 Descriptive Statistics 52
4.5 Tests of Association 57
4.6 Test of Stationarity 59
4.7 Johansen’s Cointegration Analysis 61
4.8 Granger’s Causality Test 64
5 CHAPTER 5- FINDINGS, SUGGESTIONS, CONCLUSION 7.1

5.1 Introduction 7.2
5.2 Findings 7.2
5.2.1 Findings of Nifty 7.2
5.2.2 Relationship Between Nifty and USD/INR 73
5.2.3 Relationship Between Nifty and GBP/INR 74
5.2.4 Relationship Between Nifty and EUR/INR 75
5.2.5 Relationship Between Nifty and JPY/INR 77
5.3 Discussion 78
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5.4 Suggestion 79
5.4.1 For Investors and Traders 79
5.5 Conclusion 80
5.6 Scope for Further Studies 81
Reference 83
Bibliography 86
Appendix 88
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LIST OF TABLES
SL.NO. TITLE PAGE
NO.
Table 1:1 Specification and Parameter of the Study 7
Table 1.2 Details of the Sample for the Study 10
Table 1.3 Table Depicting an Overview of the Chapter Design 14
Table 3.1 Table Depicting Timeline of the Growth of the Stock

Market in India
Table Log Return Values of Nifty 50 Index and USD/INR,

4.3.4 GBP/INR, EUR/ INR AND JPY/INR
Table Descriptive Statistics of the Data Collected

4.4.1
Table Log Values of Nifty 50 and USD/ INR, GBP/INR,

4.4.2 EUR/INR and JPY/INR
Table Association Level of the Collected Data

4.5.1
Table The Table Depicting Association Between the Different

4.5.2 Variables with LOG returns
Table Results of cointegration Test

4.7.1
Table Results showing Pairwise Granger Causality Tests of

4.8.1 NIFTY and USD returns

4.8.2 NIFTY and GBP returns
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4.8.3 NIFTY and EUR returns

4.8.4 NIFTY and JPY returns
Table Combined Results Showing Pairwise Granger Causality

4.8.5 Tests
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List of Figures
SL.NO TITLE PAGE NO
Fig. 3.1 Structure of the Indian Stock Market
Fig 3.2 The Stock Market Participants
Fig 4.1 Graphs Depicting the Price Movement of the Nifty Index
and Exchange Rate Prices
Fig 4.2 Graphical Depiction of the Collected Data at Log Returns
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LIST OF ABBRIVATION
ABBRIVATION FULL FORM
ADF Augmented Dickey-Fuller
APA American Psychological Association
ARDC Agriculture Refinance and Development Corporation
BRICS Brazil. Russia, India, People’s Republic of China, South
Africa.
BSE Bombay Stock Exchange
CNX Credit Rating Information Services of India Limited
COVID-19 Coronavirus Disease
GARCH Generalized autoregressive Conditional Heteroskedasticity
EUR Eurodollar
FII Foreign Institutional investors
GBP British pound sterling
GDP Gross Domestic product
IIP Index of industrial Production
INR Indian Rupee
ISE International Securities Exchange
IFC International Finance Corporation
JPY Japanese Yen
MCX Multi Commodity Exchange of India Limited
NIFTY National Stock Exchange Fifty
NSE National Stock Exchange of India Limited
PMG Pooled Mean Group
PT Price Target
RBI Reserve Bank of India
RMB Rand Merchant Bank
SEBI Securities and Exchange Board of India
USD United State Dollars
VECM Vector Error Correction Model
WPI Worthington Pump India
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CHAPTER 1
INTRODUCTION
1
CHAPTER 1
1.1 INTRODUCTION
India has a fast-growing economy with a variety of industries, including manufacturing,

services, and agriculture. The stock market in India is on an upward trend, with the
Bombay Stock Exchange (BSE) and the country’s National Stock Exchange (NSE)
posting significant gains in recent years. Exchange rates has played a significant role with
and in determining the performance of the stock market of India. The main objective of
this study here is to examine the relationship between the exchange rates and its stock
prices in India.
The relationship between the exchange rates and the stock prices in India is complex and
multifaceted. Exchange rates plays a crucial role in the development of stock market of
India as they affect the competitiveness of Indian goods in relation to the international
market and the demand for domestic products.
The relationship between exchange rates and the stock prices in India is a topic of interest
to researchers, policymakers, and its investors. While some studies have reported
bidirectional volatility spill overs between the exchange rates and the stock prices in
India, others have not found a causal relationship. Moreover, there is a gap in
understanding how this relationship evolves over different time horizons and during
periods of market stress or economic turmoil.
In addition, the impact of global economic events, the impact created by the exchange
rate volatility on the stock price volatility, and the role of market structure on this
relationship have not been adequately explored in India. Moreover, the COVID -19
pandemic has had a profound impact upon the global economy, including India, but little
is known about the aftermath of the pandemic on the causal relationship between
exchange rates and stock prices in India, especially in the long run.
2
Previous studies have focused on the short-term effects and ignored the long-term
consequences of the pandemic on the stock market and its exchange rate dynamics. This
study therefore aims to comprehensively examine these gaps and provide insights into the
relationship between the stock prices and its exchange rates in India to help policy
makers and investors manage risk and to make informed decisions.
In India, the exchange rate is calculated by the value of the rupee against major
currencies namely the U.S. dollar, the Euro, and the pound. The stock market is
represented by two major indices, namely the Bombay Stock Exchange (BSE) and the
National Stock Exchange (NSE). The stock exchange that is BSE Sensex and the NSE
Nifty are the two main stock market indices that reflect the performance of the Indian
stock market.
Studies have shown that the exchange rate has had a significant impact positive or
negative on the Indian stock market. Rupee depreciation can have a positive impact on
the stock market by increasing export competitiveness and leading to an increase in
foreign investment. This was observed in 2013-2014 when the rupee depreciated and the
stock market recorded significant gains (The Economic Times, 2013).
In 2015 as well, the weak rupee boosted the stock market at in India, leading to
significant gains in the Sensex and Nifty (Business Today, 2015). However, the impact of
the exchange rate on the stock market has not always been optimistic. For example, a
sudden appreciation of the rupee can have an adverse negative impact on the stock
market, leading to a decline in exports and foreign investment.
Studies have also examined the impact of global economic events on the relationship
between exchange rates and stock prices in India. For example, the 2008 global financial
crisis had a significant impact on the Indian economy, leading to a sharp decline in the
stock market and a depreciation of the rupee. Similarly, the outbreak of the COVID -19
pandemic disrupted the traditional relationship between the exchange rates and the stock
prices in India.
3
The COVID -19 pandemic had a profound impact upon the existing global economy,
leading to a slowdown in economic activity, a decline in global trade, and a depreciation
of currencies. In India, the COVID -19 pandemic led to a decline in economic activity
and a significant contraction in GDP. However, the pandemic has impacted the stock
market and its exchange rate and in turn the dynamics of India remains unclear.
Moreover, the market structure and its role and its relationship between the exchange
rates and the stock prices in India has not been fully explored. India has a unique market
structure with a great number of retail investors and a relatively small base of institutional
investors. The implications of this market structure and its relationship remains unclear
and calls for further investigation between the exchange rates and the stock prices in
India
To address these gaps, this study will take a comprehensive approach and examine the
relationship between the exchange rates and the economy of its stock prices in India
across the different time horizons and during the periods its stress on the market or
economic turmoil. The study will also examine the impact of global economic events, the
impact of exchange rate, its volatility on stock price and the role of market structure on
this relationship in India.
Various empirical methods will be used for the study, including time series analysis. The
study period covers from 2016 to 2022, allowing for a comprehensive analysis of the
long-term relationship between exchange rates and stock prices in India.
Overall, this study provides valuable insights into the relationship between exchange
rates and the Indian stock prices. The results of this study potentially will be useful for
policy makers and investors to manage risks and make informed decisions. In addition,
the study contributes to the dynamics of its literature that establishes the relationship
between exchange rates and the stock prices and providing new insights into the
dynamics of this relationship in the Indian context.
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1.2 RESEARCH PROBLEM
The research problem identified for this dissertation is the need to investigate the
relationship between the stock market and foreign exchange rate in India. While there
have been several studies conducted on the subject in other countries, there is a lack
of research that focuses specifically on the Indian context.
The relationship between stock prices and its rate of exchange in India has been the
subject of conflicting findings in the literature, with some studies reporting
bidirectional volatility spillovers while others find no causal relationship. There is
also a gap in understanding how this relationship evolves over different time horizons
and during periods of market stress or economic turmoil. In addition, the impact of
global economic events, the impact of exchange rate volatility with the volatility of
stock price, and the role of market structure on this relationship have not been
adequately explored in India. Moreover, the pandemic COVID -19 has had a profound
impact on the global economy, including India, but little is known about the aftermath
of the pandemic on the causal relationship between exchange rates and stock prices in
India, especially in the long run. Previous studies have focused on the short-term
effects and ignored the long-term consequences of the pandemic on the stock market
and dynamics of the rate of exchange. Therefore, this study aims to comprehensively
examine these gaps and provide insights into the relationship between stock prices
and exchange rates in India to help policy makers and investors manage risk and make
informed decisions.
1.3. SCOPE OF THE STUDY
The objective of this study is to examine the relationship between rate of exchange
with the stock prices of India. The study will provide a comprehensive insight into the
long-term relationship between the rate of exchange and the stock prices of India,
considering different time horizons and periods of market stress or economic turmoil.
The study will also examine and analysis the global economics impact and its events
on this relationship, the impact of exchange rate volatility on the volatility of the stock
5
prices, and the role of market structure in India. The outcome of the study will help
policymakers and investors manage risk and make informed decisions.
The study period covers 2016 to 2022, has a comprehensive analysis that has allowed
to examine the long-term relationship between the then exchange rates along with the
stock prices in India. Various empirical methods are used for the study, including time
series analysis and Granger causality tests.
Overall, the study aims to provide an in-depth comprehensive understanding of the

relationship between exchange rates and stock prices in India and provide new
insights into the dynamics of this relationship in the Indian context.
1.4. RESEARCH QUESTIONS
In order to understand the effect of the relationship between the Nifty Index and the
Foreign currency exchanges based in India, it is of considerable interest to know:
 What is the level of influence of foreign currency exchanges on Indian Stock

Market?
 Is there a causal relationship between the Indian Stock Market and Foreign
Exchange Rates?
 Can investing in a combination of exchange rates and the Nifty index be an
effective hedging tool for investors?
1.5. RESEARCH OBJECTIVES:
A descriptive study to understand the nature of the relationship between the Nifty
index and currency exchange is to be studied to find answers to the questions raised
above and hence, the present study is conducted with the following objectives:
 To determine the strength of the association between the Nifty index and
Foreign Currency Exchange Rates currently.
 To assess the stationarity of the data or the presence of unit root.
6
 To understand the causal relationship between the Nifty Index and Foreign
Currency Exchange Rates in recent times.
 To examine the existence of long-term equilibrium between the selected
series.
1.6. VARIABLES
A variable is a characteristics, property, or attribute that can be measured or observed.

The Table below, depicts the specifications and the parameter that can be used to
achieve the objectives of the study.
Table 1.1: Specification and Parameter of the Study
Sl. No. Concept Specification Parameter
1. Stock Market Nifty Index Prices corresponding

to the Nifty Index
2. Exchange Rates Selected Currency Exchange Prices corresponding

Pairs to Exchange Rate
Pairs
3. Price Behaviour Unexpected Price behaviour Unexpected

component of
residuals in the Price
Series
Hence, for the purpose of this study two key variables are to be investigated to
understand the causal relationship between the stock market in India and Exchange
rates, they are:
Dependent variable: Price of the Nifty Index

Independent variable: Price of the foreign exchange rates, i.e.-
7
USD/INR
GBP/INR
EUR/INR
JPY/INR
1.7. RESEARCH HYPOTHESES
For this study, a number of hypotheses have to be tested based on the objectives
mentioned previously. The hypotheses that have to be tested may include:
(a) Level of association between Nifty Index and foreign currency pairs
H01: There no level of association between Nifty Index and the selected four foreign
currency pairs.
Ha1: There is some level of positive or negative association between the Nifty Index
and the selected four foreign currency pairs.
(b) Long-term relationship between foreign currency pairs and Nifty Index
H02: There is no cointegration between the Nifty Index and the selected four foreign
currency pairs.
Ha2: There is cointegration between the Nifty Index and the selected four foreign
currency pairs.
(c) Lead- lag relationship between foreign currency pairs and Nifty Index
H03: Nifty Index does not granger cause the selected four foreign currency pair.
Ha3: Nifty Index does granger cause the selected four foreign currency pair.
H04: The selected four foreign currency pairs does not granger cause the Nifty Index.
8
Ha4: the selected four foreign currency pairs does granger cause the Nifty Index.
9
1.8. RESEARCH DESIGN
The study is entirely based on secondary data gathered from reliable internet sources.
A total of 1728 observations where made based on the close prices of the nifty index,
and exchange rates on a daily basis.
1.8.1. SOURCES OF DATA:
The data for this study will be obtained from two sources. The exchange rate data for
the four currency pairs (USD/INR, GBP/INR, JPY/INR, and EUR/INR) will be
obtained from the Reserve Bank of India (RBI) website (m.rbi.org.in). The stock price
data for the Nifty 50 index was obtained from EquityPandit.com, which is a reliable
financial website that provides up-to-date stock market data.
m.rbi.org.in-
m.rbi.org.in is the official website of the Reserve Bank of India (RBI), the central
banking institution of India. As the primary regulator of the country's monetary and
financial systems, the RBI plays a pivotal role that is crucial in shaping the country's
economy. The website serves as a central hub for a wide range of information related
to the RBI's activities, policies, and initiatives. Visitors to the site can access a wealth
of data and statistics on topics such as inflation, exchange rates, banking regulations,
and the Indian economy and its state as a whole. The website also provides access to
research publications, reports, and other publications that provide insight into various
aspects of the Indian economy. Its status as the official website of the RBI, combined
with the depth and breadth of information that it provides, make it an invaluable
resource for anyone looking to understand the Indian economy.
Equitypandit.com
Equitypandit.com is a financial information website that provides investment advice,

market analysis, and news related to the Indian stock market. Its team of experienced
market analysts, comprehensive coverage of market trends and developments, and
10
strong social media presence make it a valuable resource for investors and traders who
want to stay informed and make well-informed investment decisions.
1.8.2. SAMPLING DESIGN:
The sample period for this study will be from January 2016 to December 2022.
studying the Indian economy during this period provides a unique opportunity to gain
insights into the economic landscape of the country and to identify areas for
improvement and growth.
Table 1.2: Details of the Sample for the Study
SL. NO. SAMPLE PERIOD OF STUDY NO. OF

OBSERVATIONS
1. NIFTY 01/01/2016- 1728

30/12/2022
2. USD/INR 01/01/2016- 1728

30/12/2022
3. GBP/INR 01/01/2016- 1728

30/12/2022
4. EUR/INR 01/01/2016- 1728

30/12/2022
5. JPY/INR 01/01/2016- 1728

30/12/2022
**Sources*- m.rbi.org.in; EquityPandit.com.
The data is a time series data, where observations were made at regular time intervals,
i.e., on the days the market was open for trading. The availability of reliable and
comprehensive data from this period will enable the study to fulfil its objectives.
Overall, for each variable, there were 1728 observations made.
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1.8.3. TOOLS AND TECHNIQUES:
The nature of this study is exploratory and uses time series data from various sources
for the study. The Four currency pairs, i.e.- USD/INR, GBP/INR, EUR/INR and
JPY/INR which are traded in India, and the nifty index were selected based purposive
sampling methods. In order to fulfil the purpose of this study, the data has been edited
and classified as required. Based on descriptive statistics the nature of the foreign
exchange currency pairs and nifty index have been determined. The study also tried to
understand the association between the variables, before investigating the nature of
their relationship. Hence, for the purpose of this study econometric models have been
used.
ECONOMETRIC MODELS
Econometric models are statistical models used to study economic phenomena and
relationships. These models use mathematical equations and statistical techniques to
analyse data and estimate the parameters of the model. Econometric models are
commonly used in empirical research to make predictions, test hypotheses, and draw
conclusions about the relationships between variables.
There are various types of econometric models, such as time series models, panel data
models, and simultaneous equation models. These models allow for the estimation of
the causal relationships between economic variables, the identification of the most
important variables affecting an outcome, and the forecasting of future trends in
economic variables.
Econometric models typically involve specifying a set of equations that describe the
behaviour of the economic variables of interest. These equations can be estimated
using statistical software packages such as Stata, R, or EViews. Once the model is
estimated, it can be used to make predictions, test hypotheses, and simulate different
scenarios to understand the potential effects of changes in economic policies or other
factors on the variables of interest.
13
The type of data used in this model is a time series data. A time series is a collection
of observations or measurements of a particular variable taken at regular intervals
over time. Time series data are commonly used in a wide range of fields, including
economics, and finance, to study and analyse trends and patterns in data over time. In
a time series, the observations are typically ordered chronologically, with equal time
intervals between each observation. Time series data can be used to forecast future
values of the variable, identify seasonal patterns or cycles, and study the impact of
external factors on the variable over time. Some common examples of time series data
include stock prices, weather patterns, sales figures, and GDP growth rates. Time
series analysis is a powerful tool for understanding and interpreting complex data
patterns, making it an important technique in many fields of study. Therefore, the log
returns values will be calculated and used for the purpose of the research.
Econometric models used in this study include:
UNIT ROOT TEST
Unit root tests are commonly used in econometrics to determine whether a time series
variable is stationary or non-stationary. If a unit root is present, it indicates that the
variable has a long-term trend that needs to be modelled or removed before any
further analysis can be conducted.
In this study, the Augmented Dickey-Fuller (ADF) test, a popular statistical test has
been used to check for stationarity in a time series. The test is based on the null
hypothesis that the series under study has a unit root present, indicating non-
stationarity.
COINTEGRATION TEST
Cointegration test is a statistical method used to determine whether two or more time
series are non-stationary but have a long-term equilibrium relationship between them.
In the present study, Johansen's cointegration test, a widely used statistical method, is
used to examine the long-term equilibrium relationship between the Nifty index and
the selected foreign currency exchange rates in India.
14
GRANGER’S CAUSALITY TEST
Granger causality test is a statistical method used to determine whether one time
series can be used to predict another time series. In other words, it checks if the past
values of one series have a causal effect on the present values of another series. In the
present study, Granger causality test is used to examine the causal relationship
between the Nifty index and the selected foreign currency exchange rates in India, and
to determine if one variable can be used to predict the other.
All these models have been used to test and understand the nature of the relationship
shared between the forex market and the stock market by using the E-views software
(version 8).
1.8.4. LIMITATIONS OF THE STUDY:
The following limitations may affect the validity of the study:
 The study focuses only on the relationship between exchange rates and stock
prices in India and does not consider the impact of global events or external
factors on this relationship.
 The study uses only one stock market index (Nifty 50) and may not capture
the performance of all the companies listed on the stock market.
 The study assumes that the selected variables are the only factors that affect
stock prices and exchange rates and does not account for other variables that
may have an impact on these variables.
 The study uses daily data, which may not capture the full extent of market
dynamics or may be affected by market noise.
15
1.9. CHAPTER DESIGN
The study is presented in five chapters.
Table 1.3: Table Depicting an overview of the chapter design.
CHAPTER TOPIC
CHAPTER 1 Introduction and research design
CHAPTER 2 Review of literature
CHAPTER 3 Background of the study
CHAPTER 4 Data analysis and interpretation
CHAPTER 5 Findings, suggestions, and conclusion
 The First chapter discusses the introduction, problem definition, scope,

objectives and limitations of the study. It also introduces the tools and the
econometrics models that is used in the study.
 The Second chapter sheds light on the review of literature conducted in
relation to the study. It focuses on the studies done in the past, and recently in
other countries, in relation to the study and helps in understanding how to
analyse the variables using the econometric tools. The research gap for the
purpose of the study has been discussed.
 The third chapter examines the background of the study, and provides insights
into the overview, origin, evolution and current situation of the Indian Stock
Market and the Foreign Exchanges.
 The Fourth chapter deals with the data analysis and interpretation by using the
secondary data collected for the study.
 The Fifth and final chapter brings together the final findings, discussions,
suggestions, conclusions and scope for further study.
***************************************************************************
16
CHAPTER 2
REVIEW OF LITERATURE
17
2.1 INTRODUCTION
The literature review chapter is a critical component of any research study, including
the relationship between the stock market and foreign exchange rates in India. The
chapter provides a comprehensive overview of the existing literature and research
studies related to the topic. Through this review, researchers can identify the research
gaps and knowledge limitations in the field and propose new research questions that
can be addressed in their study.
The purpose of this literature review chapter is to provide a comprehensive overview

of the existing literature on the relationship between the stock market and foreign
exchange rates in India, identify the gaps in current knowledge, and highlight the
areas where further research is needed. The chapter will explore the various
theoretical perspectives and empirical studies related to the topic and provide a critical
evaluation of the strengths and limitations of these studies. Ultimately, the review will
serve as a foundation for the research study, guiding the research questions and
providing a framework for the analysis and interpretation of the findings.
2.2. REVIEW OF LITERATURE
Wahyuni, R.S. & Sekarwati, A. (2023). “The Effect of Exchange Rate and Interest
Rate to Banking Companies Stock Prices in the Period 2018-2020.”, conducted
research that aimed to examine the impact of the exchange rates and its interest rates
on the stock prices of two of the banking companies in Indonesia namely , PT Bank
Mandiri (Persero) Tbk and PT Bank Central Asia Tbk, during the period of 2018-
2020. The study hypothesized that the exchange rates and it’s interest rates would
negatively affect the stock prices of PT Bank Mandiri (Persero) Tbk but not PT Bank
Central Asia Tbk. The study utilized data on the stock prices, exchange rates, and rate
of interest of the two companies during the period mentioned and applied multiple
linear regression models for analysis. The study's key finding suggests that currency
rates and rate of interest have a significant negative impact on the stock prices of PT
Bank Mandiri (Persero) Tbk but have no significant effect on PT Bank Central Asia
Tbk's stock price. Furthermore, the exchange rate and interest rate considerably
18
influence PT Bank Mandiri (Persero) Tbk's stock price but have no significant effect
on PT Bank Central Asia Tbk's stock price. Investors in the Indonesian banking
industry, could use the outcome of the study conducted and could utilize these
findings to inform their investment strategies. Furthermore, research could deep dive
investigation on the impact of other variables on stock prices and compare the results
with those of this study.
Wstabdullah, S.M., Hamarashid, H.K., & Kamal, M.A. (2022). “An Approach to
Study the Effects of GBP/USD Exchange Rate and Gold Prices on Brent Oil Prices
Using Autoregressive Distributed Lag (ARDL).”, analyzed the study aimed to
investigate the relationship between the GBP/USD it’s rate of exchange, the price of
Gold, and the oil prices (Brent) using the Autoregressive Distributed Lag (ARDL)
approach. Daily data on Brent oil prices, GBP/USD with the rate of exchange, and
price of gold (rate) were used for the study. The study hypothesized that the
relationship is a positive long-term equilibrium between the variables of interest, and
any changes in the GBP/USD exchange rate that leads to a change in the oil price of
Brent oil.
The findings of the study revealed that there is a positive long-term equilibrium
relationship between the rate of exchange of the GBP/USD, the price of gold and the
oil prices of Brent. The study highlighted the significance of the GBP/USD rate of
exchange, in affecting Brent oil prices. Additionally, a positive correlation between
the rate of exchange and price of oil was observed. Moreover, a unidirectional causal
relationship between the prices of gold and oil price and between the exchange rate
and oil prices was found. The study concludes that the ARDL approach is an effective
tool for examining the relationships between economic and financial indicators and
provides useful insights for researchers, policymakers, and investors.
Diniz-Maganini, N., Rasheed, A.A., & Sheng, H.H. (2022). “Price efficiency of the
foreign exchange rates of BRICS countries: A comparative analysis.”, aimed to
compare the long-term exchange rate market efficiency of BRICS countries using
daily exchange rates from 2009 to 2021. The authors hypothesized that a country's
price efficiency improves after shifting to a flexible exchange rate regime, but not
19
immediately. The study used Multifractal detrended fluctuation analysis (MFDFA) to
analyse the data.
The key finding of the study show a considerable difference in the exchange rate
efficiency of BRICS countries, with South Africa as being the most efficient whereas
on the other hand China being the least efficient country. The authors also found that
the price efficiency of a country's currency improves over time after shifting to a
flexible exchange rate regime, with all BRICS countries showing improvements over
a period of thirteen years of study. The hypothesis of the adaptive market was found
to be supportive over a period of time, in the finding of efficiency improvements than
the efficient market hypothesis.
These findings suggest that further research can be conducted to investigate the
reasons behind the differences in rate of exchange efficiency among the BRICS
countries, and to explore the potential impact of exchange rate regime shifts on
market efficiency. Additionally, the study highlights the usefulness of MFDFA as a
tool for analysing exchange rate data.
Bhama, V. (2022). “Effect of Macroeconomic Variables and the COVID-19

Pandemic on the Indian Stock Market.”, was an analytical study by Vandana Bhama
aimed to investigate the impact of the pandemic COVID-19 and certain
macroeconomic variables on the performance of the Indian stock market. The study
used data from the NIFTY 100 firms and macroeconomic variables related to
COVID-19 cases, exchange rates, and oil prices. The data was analysed using the co-
integration and vector error correction model. The results showed that there is a long-
term association among the variables, and the stock market of Indian experienced an
inverse connection with the exchange rate volatility. The study found that pandemic
cases had a weak impact on the stock market, but the negative influence of COVID-19
on the economy had a relatively stronger impact. These findings suggest that investors
should closely monitor exchange rate patterns before investing and use this
information to hedge against foreign exchange risk. An Jena, P.R. & Majhi, R. (2022).
Are Twitter sentiments during COVID-19 pandemic a critical determinant to predict
stock market movements? A machine learning approach. research is needed to
20
understand the factors that influence the relationship between the macroeconomic
variables and the stock market especially during the pandemic.
Jena, P.R. & Majhi, R. (2022). “Are Twitter sentiments during COVID-19
pandemic a critical determinant to predict stock market movements? A machine
learning approach.” analysed the study by Jena and Majhi aims to investigate the
relationship between Twitter sentiments related to the Covid-19 pandemic,
macroeconomic indicators, and the stock indices in the United States and India. The
study proposes that the use of these sentiments and machine learning models such as
LSTM networks can effectively predict stock indices. The authors hypothesize that
the LSTM model will produce more accurate predictions than traditional time-series
statistical models. The study utilized Twitter sentiments related to Covid-19,
macroeconomic indicators, and stock indices data from the United States and India.
The LSTM network, autoregressive moving average model, and linear regression
model were used for data analysis. The study found that Twitter sentiments related to
Covid-19 and other macroeconomic indicators, when used with machine learning
models, can effectively predict stock indices. In terms of accuracy, the model of
LSTM was found to be more accurate than traditional time-series statistical models.
The authors established a significant link between non-monetary factors such as the
sentiments of social media and the variations of the stock market. Additionally, the
study found that Twitter sentiments had a stronger impact on the Finance and
Consumer Goods sectors and on the U.S. stock market. Economic indicators that are
stronger can be used in the extension of this study, by trying other neutral network
models, which improves the interpretability.
Pandey, S. (2022). “An Empirical Study of the Movement of Sectoral Indices and
Macroeconomic Variables in the Indian Stock Market.” examined the relationship
between the sectoral indices and the macroeconomic variables, specifically the price
of oil, the price of gold and the rate of exchange in the Indian stock mark for a period
between 2016 and 2020. The sectoral indices used in this study were the data that was
taken from the Bombay Stock Exchange and the macroeconomic variables. The study
utilized various methods such as multivariate co-integration analysis, vector error
correction model, and vector auto regression model to analyse the variables and derive
21
the relationship between them. The key findings from his research show that there are
significant impacts of OP, GP, and ER on sectoral indices in the stock market of
India. The importance of sector-wise economic policies to accelerate economic
growth and maintain fiscal discipline are highlighted in the studies conducted.
Moreover, stabilizing macroeconomic variables is crucial to promote economic
growth. The results of this study can provide valuable insights for investors in
building well-diversified portfolios by understanding the dynamic movement of
sectoral indices in relation to macroeconomic variables. However, the study has
limitations due to the limited time span and the use of only three macroeconomic
variables and BSE sectoral indices. A comprehensive understanding of the stock
market of India and its relationship to the additional macroeconomic variables and its
sectoral indices can be researched further.
Azaryoun, A., Yazdanian, N., Mirarab, A., & Hemmati, H. (2021). “Evaluation of
Parallel Market's Long-term Memory Based on DFA and ARDL-Based Detrending
(Case Study: Stock Market and Exchange Rate).”, aimed to examine the possibility of
a relationship between the long-term memory of the Indian stock market with the
exchange rate in parallel markets, employing the analysis of detrended fluctuations.
The research uses daily information of the Indian stock market index against the
dollar exchange rate between the period of 2014/03/25 to 2021/02/07. The study
analyses the data using detrending methods and regression models. The study found
that the cross-detrending of parallel markets produces different results in estimating
the long-term memory of the data. The stock index has a short-term memory under the
conventional detrending method, while the cross-detrending method shows long-term
memory for this index. The exchange rate loses its long-term memory in the face of
increasing market fluctuations under the cross-detrending method. The study in
additional found that there is a direct, significant relationship between long-term
memory of the Indian stock market index with the exchange rate under the cross-
trending method. These findings have implications for understanding the dynamics of
parallel markets, and suggest further research could investigate the factors driving a
relationship that is between the long-term memory of the stock market in India and its
exchange rate in parallel markets.
22
Lakshmanasamy, T. (2021). “The relationship between exchange rate and stock
market volatilities in India: ARCH-GARCH estimation of the causal effects.” - The
existing literature has been added by the studies, on the relationship between the
exchange rate and the stock market volatilities in India. Studies conducted prior to this
have examined impacts of the fluctuation of the exchange rate on stock market
returns in various countries, including developed and emerging markets. While some
studies observe a positive relationship that is significant between the exchange rate
volatility and the stock market volatility, others have observed a relationship that is
negative or has no significant relationship.
There has been a mixed finding in the previous studies which examined the impact of
the exchange rate volatility on the Indian stock market, in the Indian context. Some
studies have shown a relationship that is positive between the exchange rate volatility
and the Indian stock market volatility, while on the other hand other studies have
shown a relationship that is negative.
The study by Lakshmanasamy T contributes to this literature by using more recent

data and employing advanced econometric techniques, such as ARCH and GARCH
estimation. The study's findings suggest that the fluctuations in the Euro/rupee
exchange rates have a effect that is significantly positive on the volatility of the Indian
stock market, while the fluctuations of the US dollar/rupee and the British
pound/rupee exchange rate have little effect. The investors and policy makers have an
added understanding to the relationship between the exchange rate volatility and the
Indian stock market volatility.
Prabheesh, K.P. and Kumar, Sanjiv. (2021). “The Dynamics of Oil Prices,
Exchange Rates, and the Stock Market Under COVID-19 Uncertainty: Evidence from
India” aimed to analyse a relationship that is dynamic between the price of oil and its
returns, the exchange rates, the stock returns, along with its uncertainty shocks in
India during the COVID-19 pandemic. The authors utilized daily data between
January 2, 2020, and August 31, 2020, and employed the structural vector
autoregression (SVAR) econometric technique to analyse the data. The study found
that the induced uncertainty of COVID-19 had negatively impacted the oil and the
stock markets in India, but not on the foreign exchange market, since the Reserve
23
Bank of India had intervened. Additionally, the dynamics between the oil and the
stock prices were distorted during the initial periods of the pandemic thanks to the
cautious investor behaviour. The authors suggest that the uncertainty caused by the
COVID-19 pandemic had significantly impacted the Indian stock and the oil markets,
which can be of interest to policymakers and investors. The study has provided a
novel contribution to literature by analysing the first relationship that lies between
these policy-relevant variables and the impact of uncertainty on the Indian economy.
A novel contribution to literature has risen from the study, by the analyses of the first
relationship. The results were robust to a robustness check using an alternative
measure of uncertainty.
Das, P.K., & Mallick, S.K. (2021). “Volatility and Relationship among BRICS Stock
Market: Evidence from GARCH and ARDL Analysis.” investigates the volatility and
relationships among the stock markets of BRICS countries after the COVID-19 crisis.
The authors hypothesized that the BRICS stock markets would be volatile and related
to each other. They analysed the returns data from the daily stock market from China,
Brazil, India, Russia and South Africa from November 2019 to May 2021, using
GARCH family and ARDL models. The study found that the Russian and Indian
stock markets were volatile, as well as there was a long-run relationship between the
stock markets of Russia with China and of the stock market in India with South
Africa. The study also identified short-run relationships between the Brazilian stock
market with other selected stock markets and between the stock market of South
Africa with the Indian stock market. The results suggest the investors to take adequate
measures in protecting their investments, and support between BRICS economies is
essential for their joint development in the post-pandemic COVID period. The study
recommends separate research to understand trade shocks and volatility measures for
non-BRICS countries. Further research can focus in the exploration of the various
factors on stock market volatility and relationships among other emerging market
economies and its impact.
Dasgupta, A., & Karmakar, A. (2021). “Do Banking and Financial Services Sectors
Show Herding Behaviour in Indian Stock Market Amid COVID-19 Pandemic?”,
aimed to investigate the presence of herding behaviour in the banking sector of India
24
along with the financial services sectors during the pandemic and the impact on
market stability. Using daily return data of 54 stocks listed in the National Stock
Exchange of India, the study employed a quantile regression framework to test the
hypothesis. The results showed evidence of herding behaviour in the public sector
banking and financial services sectors under bull market conditions in the 90th
quantile of the return distribution. The findings suggest that herding behaviour could
lead to market instability, and measures such as reducing information asymmetry
among market participants and policy initiatives to ensure market stability are
recommended. Further research is needed to understand the factors influencing
herding behaviour during the pandemic along with its implications for market stability
in India.
Mamun, M. A., & Shafiullah, M. (2021). "Volatility and Relationship among

BRICS Stock Market Returns: Evidence from GARCH and ARDL Models.", aimed
to investigate the volatility and relationships among the stock markets of Brazil,
Russia, India, China, and South Africa, collectively known as the BRICS, in the
aftermath of the 2020 crisis. The authors hypothesized that the stock markets of these
countries are volatile, and there are relationships among them. The study utilized daily
stock market returns from November 18, 2019, to May 7, 2021, and employed
statistical tests of the GARCH family model and the ARDL model using views 11
software.
The key findings from the study were that the Indian as well as the Russian stock
markets exhibit high levels of volatility, with the Indian stock market showing a
leverage effect. Moreover, the study identified long-run relationships amidst the
Russian and Chinese stock markets, as well as amidst the Indian and South African
stock markets. In the short run, there were relationships running from the Brazilian
stock market to the other select stock markets, from the Indian stock market to the
stock markets of Brazil along with the South Africa, as well as from the South
African stock market to the Indian stock market. These results suggest that the
investors in BRICS stock markets must adopt appropriate hedging strategies to
safeguard their investments.
25
The study's data, findings, and analytical approach provide a useful foundation for
further research in the field of international finance. Future studies could expand on
this research by analysing additional financial indicators and employing different
statistical methods to further investigate the volatility and relationships among the
BRICS stock markets.
Khan, M. A., & Qayyum, A. (2020). “Stock Markets’ Reaction to COVID-19: Cases
or Deaths?”, investigated how stock markets respond to the COVID-19 pandemic,
specifically looking at the relationship amidst the stock market returns along with the
number of confirmed cases and deaths over time. The study used data from 64
countries and analysed it through regression analysis, t-tests, along with the Granger
causality test. Suggested findings from is that the stock market returns declined as
there was an increase in the number of confirmed cases increases, along with this the
negative reaction was stronger during the early days of the pandemic confirmed cases
as well as then between 40 to 60 days post the initial confirmation of the confirmed
cases. Moreover, the research identified that stock markets react more proactively to
the increase in the number of confirmed cases than the rise in the number of deaths.
The results highlighted on the significance of the pandemic upon the stock market, as
well as the need to understand the dynamics of its impact on the economy. Further
research may focus on the impact of government policies on stock markets during
pandemics and how the pandemic affects different sectors of the economy
Kaur, G., & Dhiman, B. (2019). “Dynamic linkage between Indian stock market and
commodity market. Journal of Advances in Management Research, 16(3), 306-325”.
examined in their study the dynamic linkage amidst the MCX Metal Commodity
Index along with the CNX Metal Index in India to determine if commodities can be
used as a hedge or safe haven for the stock market. The authors hypothesize that there
is a long-run integration amidst the two indices. They used monthly data that covered
the period from January 2007 to December 2015. They analysed the data by using
various statistical tools like Johansen cointegration test, the Granger causality test, the
variance decomposition analysis, as well as the impulse response function. The results
indicate the absence of long-run integration amidst the two indices as well as that of
the commodity index lead the stock index. The authors also found a unilateral causal
26
relationship amidst the two indices, with metal commodity returns leading to the
metal stock returns. Additionally, the authors discovered that a shock in metal stock
returns had a less negative impact on metal commodity returns, while a one-unit
shock in metal commodity returns has a high positive impact on metal stock returns.
These findings suggest that commodities cannot be used as a hedge or safe haven for
the Indian stock market. This study aimed to determine the nature of the relationship
amidst the two indices as well as provided useful information for market participants
interested in both the commodity and stock markets to reduce their associated risks.
Further research could explore the relationship among other commodity indices as
well as the stock indices in India or other countries.
Pantas, P. E., Ryandono, M. N. H., Munir, M., & Wahyudi, R. (2019).

“Cointegration of stock market and exchange rate in Indonesia.”, aimed to investigate
the long-term relationship among the stock market along with the exchange rate in
Indonesia. The authors hypothesized a long-term relationship among these two
variables. The study utilized the monthly data taken from January 2007 to December
2018. To analyse the relationship of this data, they applied the Johansen cointegration
test between the exchange rate, JII, as well as IHSG. The findings revealed that there
is no cointegration amidst the variables, thus indicating that the exchange rate, JII, as
well as the IHSG have no long-term relationship. Hence, the performance of the
capital market in Indonesia is not significantly affected by the exchange rate and its
fluctuations. These results support a previous study by Syahrer (2010), which also
found that the rate of exchange had no impact on the Indonesian stock market. These
findings provide useful insights to the investors as well as its policymakers in
understanding the dynamics of the Indonesian capital market along with the factors
that affect it. Future research could focus on exploring the short-term relationship
among the stock market along with the exchange rate, as well as investigating the
impact of other macroeconomic variables on the Indonesian capital market.
Kumarasamy, U., & Chellasamy, P. (2017). “An Empirical Study on Indian Stock
Market and Foreign Exchange Rates – A Review on Relationship. International
Journal of Economics and Financial Issues, 7(4), 499-505.”, aimed to analyse the
return relationship amidst the Indian Stock Market along with its Foreign Exchange
27
Rates. They used secondary data covering a five-year period beginning of January
2011 till December 2015, with closing prices of each variable collected over 1203
available harmonized days. The study utilized various statistical tools to analyse the
data, but the software used was not specified. The study's hypothesis was that there is
an inverse relationship amidst the returns from the Indian Stock Market along with the
Forex Rate Returns during the period of study.
The study's key findings revealed that the time series, the Stock as well as the
Exchange Rate Returns, were stationary at the level form itself, indicating that they
are relatively predictable. Additionally, the study found that there is an inverse
relationship amidst the returns from the Indian Stock Market as well Forex Rate
Returns during this period of study. The study's conclusion suggests that this
relationship is significant and could be used by investors to manage their portfolios
effectively.
The findings from this study provide value added insights for future research in
relationship of the area of Indian Stock Market along with the Foreign Exchange Rate.
For example, future studies could investigate the factors contributing to the observed
inverse relationship and the implications for investors. Moreover, researchers could
explore other tools and methodologies that may offer more in-depth insights into this
relationship, including the use of machine learning algorithms and data visualization
techniques. Overall, this study serves as a solid foundation for future research in this
area and provides valuable insights for policymakers and investors.
Singh, G. (2016). “Relationship between exchange rate and stock price in India: An
empirical study.”, conducted an empirical study that relates between the exchange rate
along with the stock price in India's National Stock Exchange. The study used data
between the period starting from January 2007 through March 2014. To analyse this
data the Johansen's co-integration as well as the Granger causality tests was
employed. The study found a co-integration relationship between the exchange rate
along with the stock price, indicating a long-run equilibrium relationship lies among
them. The exchange rate as well as the NIFTY stock price index were also positively
related, with exchange rate significantly affecting stock price and vice versa. The
28
Granger causality test revealed a bi-directional causality amidst the exchange rate
along with the stock price in both the long-run as well as the short-run.
In comparison, a study by an unidentified author aimed to investigate the relationship

amidst the stock market along with the Indian foreign exchange market beginning
from April 1992 through till March 2002. The study employed Granger's Causality
Test as well as the Vector Auto Regression (VAR) techniques to analyse the data. The
outcome suggests that there is no direct causality amidst the stock return as well as the
exchange rate return. However, the exchange rate return does affect the demand for
money, interest rate, as well as the returns in stock, while the demand for money
affects the interest rate as well as the returns in stock. The results should be
interpreted with caution due to their sensitivity to lag selection. Overall, the study
provides valuable insights into the relationship amidst the stock market along with the
Indian forex market and in turn suggests avenues to conduct further research.
Fauziah, Moeljadi, & Ratnawati, K. (2015). “Dynamic Relationship between

Exchange Rates and Stock Prices in Asia, 2009-2013. Journal of Applied Finance &
Banking, 5(3), 105-119.”, aimed to examine the dynamic relationship amidst the
exchange rates along with the stock prices in Asia for the period beginning from 2009
through till 2013. Two models, "Flow-Oriented" as well as "Stock-Oriented", were
tested to determine the relationship amidst the exchange rates along with the stock
prices in Asia. To analyse the relationship of the data cointegration as well as the
methods of causal relationship were employed. The secondary data was used from
monthly data on foreign exchange market along with the capital markets that were
obtained from the publications found through the website of the foreign exchange
market as well as the stock market. The objects of the research were focused on the
Asian countries, Thailand, Indonesia, Singapore, Malaysia, Taiwan, China, Hong
Kong, South Korea, Japan, and India. The several stages of data analysis, such as
degree of integration test, determination of lag length, the stationary test, Johansen
cointegration test, Granger causality test, as well as the Vector Error Correction
Model (VECM) have been utilized in this study. The findings by this study reveals
that there is a cointegration relationship among the exchange rate as well as the stock
prices in Asia, indicating a stability relationship or balance along with the equality
29
movement in the long run. The study also found that there is a causal relationship in
both the directions amidst the exchange rate along with the stock prices in Asia, that
indicates that the volatility occurred in the rate of exchange will also cause volatility
in stock prices. These findings provide useful insights for investors and policymakers
in Asia, and future research can build upon these findings by examining the
relationship amidst the exchange rates as well as the stock prices in other regions or
by using other econometric techniques.
Seri Suriani, M. Dileep Kumar, Farhan Jamil, and Saqib Muneer. (2015). Impact
of Exchange Rate on Stock Market.”, worked on a paper titled "Impact of Exchange
Rate on Stock Market" which investigated the relationship amidst the stock market
along with the exchange market of Pakistan. The authors teamed to collect the
monthly data on the stock prices taken from the KSE-100 index along with the data on
the exchange rate of Pak rupee against the US dollar from the State Bank of Pakistan
along with the Forex starting from January 2004 through till December 2009. Various
statistical tools were used in this study by the authors, such as Augmented Dickey
Fuller (ADF) test, Granger Causality test, along with the regression analysis using the
least square method to analyse the data. Studies reveal that there was no relationship
amidst the exchange rate with the stock price. Both the variables were independent
from each other in Pakistan during that period of study. The literature review revealed
inconsistency with the results in terms on the relationship amidst the stock prices as
well as the exchange rates in various countries. Further research could explore the
potential relationship between the stock prices along with the exchange rates in other
countries that will cover a longer period to confirm the findings noted from this study.
Additionally, researchers could examine the potential impact of other economic
factors that arise on the stock market along with the exchange rates.
Zubair, A. (2013). “Stock Market and Monetary Indicators: Cointegration and

Causality Analysis for Nigeria. Journal of Emerging Trends in Economics and
Management Sciences, 4(4), 424-432.”, investigates the relationship amidst the
Nigerian stock market index (ASI) along with the monetary indicators (exchange rate
and M2) using monthly data starting from 2001 through till 2011. Johansen's
cointegration along with the Granger-causality tests, were used in this case study to
30
examine the long-run relationship and causal relationship between the variables. The
study found no evidence of any long-run relationship amidst the ASI as well as the
monetary indicators before or during the financial crisis faced globally. The Granger-
causality tests reveal a uni-directional causality that ran from M2 through to ASI
before this crisis, but no causality between the variables during the crisis. The absence
of a direct linkage midst the ASI and its exchange rate suggests the inefficiency of the
market as it is unguided by fundamentals. Further research could explore the factors
driving the inefficiency of the Nigerian stock market, as well as the reasons behind the
absence of a causal relationship between the ASI amidst the exchange rate during the
financial has that has impacted globally. Additionally, more studies could examine the
relationship amidst the stock market indices along with the exchange rates in relation
to the other emerging markets to determine if similar inefficiencies exist.
Mishra, R.K., & Mohapatra, S. (2011). “Causal Relationship between Stock Market
Index and Macroeconomic Variables: Evidence from India. Journal of Economics and
International Finance, 3(7), 355-364.” aim to investigate the causal relationship
amidst the BSE Sensex along with three macroeconomic variables. These three
include the wholesale price index (WPI), the index of industrial production (IIP), as
well as the exchange rate (Rs/$) in India. The hypothesis is that there is a causal
relationship amidst the BSE Sensex along with these three macroeconomic variables.
The study utilized the monthly data taken from April 1995 through till March 2009
for the BSE Sensex, IIP, WPI, along with the exchange rate (Rs/$) and used the
following correlation, in its data analysis such as the unit root stationarity tests, along
with the Granger causality tests. The study reveals that the stock market in India is
significantly moving towards informational efficiency with respect to two of the
macroeconomic variables, namely the exchange rate as well as the inflation (WPI),
while IIP on the other hand is the only variable that has a bilateral causal relationship
with the BSE Sensex, and WPI has a strong correlation but only a unilateral causality
with BSE Sensex. The findings suggest that more research is required to investigate
further into the relationship amidst the BSE Sensex as well as the macroeconomic
variables in India using more advanced techniques and more extended data sets.
31
Narayan, P. K. (2011). “On the relationship between stock prices and exchange rates
for India. Applied Economics Letters, 18(4), 405-409.”, examines the impact caused
by the depreciation of the Indian rupee INR upon the stock market returns in India.
The hypothesis is that depreciation of the INR negatively affects the stock market
returns and in turn increases its volatility. The study used the daily data take from
2002 through till 2006 on Indian stock market returns along with the exchange rates
and analysed it using the variants of the EGARCH model. The study found that there
is high volatility persistence as well as an asymmetric volatility, which meant that
negative shocks generate more volatility than those of the positive shocks. The
increase in the volatility is due to the depreciation of the Indian rupee, while on the
other hand the appreciation of the Indian rupee has generated more returns but less
volatility over the studied period. These findings suggest the importance as well as the
role that the exchange rates play in the Indian stock market and should be considered
in making investment decisions. Further research could investigate the fluctuations of
the exchange rate and its impact on specific sectors or companies within the Indian
stock market.
Zhao, H. (2009). “Dynamic relationship between exchange rate and stock price:
Evidence from China. International Journal of Economics and Finance, 1(3), 254-
259.”, aims to investigate the dynamic relationship amidst the RMB real effective
exchange rate along with the stock price in China using the monthly data taken from
January 1991 through till June 2009. The study employs VAR as well as the
multivariate GARCH models to analyse data. The study found that there was no stable
long-term equilibrium relationship amidst the RMB real effective exchange rate as
well as the stock price in China. In fact, there were no mean spillovers between the
foreign exchange as well as the stock markets. However, there are bidirectional
volatility spillovers effects that have been noted amidst the two markets, indicating
that past innovations in the stock market have had a great effect on future volatility in
the forex market, and vice versa. These findings suggest that future research could
investigate the causes and implications of these spill overs and their impact on
financial stability in China. Additionally, further research could explore the role of
other factors such as the rate of interest, the inflation, as well as the macroeconomic
32
policies on the relationship amidst the exchange rate along with the Chinese stock
price.
Mishra, A. K., Swain, N., & Malhotra, D. K. (2007). “Volatility spillover between
stock and foreign exchange markets: Indian evidence. Global finance journal, 18(2),
224-251.”, studied the "Volatility Spill over between Stock and Foreign Exchange
Markets: Indian Evidence" by Mishra, Swain, and Malhotra examines the relationship
amidst the Indian stock market along with the foreign exchange market with regards
to volatility spill overs. The study aimed to provide insights for financial managers to
manage their international portfolio. The hypothesis was that there is evidence of
bidirectional volatility spill over amidst the two markets. Investors can use
information from one market to predict the other. The data from the Indian stock as
well as the foreign exchange markets were used in this study, to analyse the impact of
past volatility on the current volatility of returns using ARCH models. The results not
only showed a high degree of persistence but also the predictability in both markets,
with the evidence of a bidirectional volatility spill over. The findings suggest that the
scope of portfolio management can be improved by considering both stock prices as
well as the exchange rates, particularly for hedging as well as diversifying the
portfolios. The article provides valuable insights for both domestic as well as
international investors, and future research could examine the impact of other factors
on the volatility spill over between these two markets.
Nath, G. C., & Samanta, G. P. (2005). “Dynamic Relation Between Exchange Rate
and Stock Prices – A Case for India. The ICFAI Journal of Applied Finance, 11(2),
23-32.”, studied the uses daily data of the S&P CNX NIFTY stock market index along
with the exchange rate (expressed in Indian Rupee per U.S. dollar) for India starting
from March 1993 through till December 2002. Multivariate cointegration test as well
as the linear Granger causality were employed to analyse the data during the studies.
The study also reveals that, generally returns in the foreign exchange as well as the
stock markets in India were not interrelated. However, results show that there is a
causal influence of stock market returns on exchange rate returns in the recent years,
with chances of a mild influence in the reverse direction. The study also notes that the
FII investment played a dominant role in the impact in the investment on the stock
33
market investment with the exchange rate movement. The authors suggest further
research to address the issue of the causal influence between stock market returns and
exchange rate returns, particularly considering the dominant role of FII investment in
the stock market. The authors suggest further research to address the issue of the
causal influence amidst of the stock market returns along with exchange rate returns,
particularly considering the dominant role of FII investment in the stock market.
Basabi Bhattacharya and Jaydeep Mukherjee. (2002). “Causal relationship

between stock market and exchange rate, foreign exchange reserves and value of trade
balance: a case study for India. *South Asian Journal of Management*, 9(4), 7-23.”,
This study investigates the causal relationship amidst the stock prices along with the
macroeconomic aggregates in the foreign sector in India. The study consists of
monthly data for the period between1990-91 as well as 2000-01, including the BSE
Sensitive Index along with three macroeconomic variables. Such as the rate of
exchange, forex reserves, as well as the value of trade balance. To analyse the data,
unit-root tests, cointegration, as well as the long-run Granger non-causality test were
used during the study. The study establishes that there was no causal relationship
amidst the stock prices along with the three macroeconomic variables taken into
consideration, suggesting that these variables weren’t interdependent. Further research
can explore the other potential factors that could influence the Indian stock prices.
Tabash, M.I., Sheikh, U.A., Matar, A., Ahmed, A., & Tran, D.K. (2003). “Do
Financial Crises Matter for Nonlinear Exchange Rate and Stock Market
Cointegration? A Heterogeneous Nonlinear Panel Data Model with PMG Approach.”,
aimed to examine the effect of the financial crises on the causality relationship amidst
exchange rates along with the stock market indexes in the ASEAN-5 region. The
authors used a panel data starting from January 2002 through till January 2008, then
from January 2010 through till January 2020, and finally from January 2002 till
January 2020. They employed a framework with PMG approach to analyse the data.
This panel-based non-linear autoregressive distributed lag (PNARDL) framework
with PMG approach to analyse the data. The conventional symmetrical panel ARDL
(PARDL) model was unable to establish a long-run cointegration amidst currency
value and its fluctuations along with the stock market indexes for both pre and post-
34
recessionary periods. However, with the help of the framework using the panel-based
NARDL framework (PNARDL). The study established asymmetrical cointegration
amidst the currency values along with the stock market indexes for the period prior to
the recession along with the overall sampling timeframe. The authors suggest that the
findings have paved way for the practical implications for both exporters as well as
the importers to consider both negative as well as with positive shocks in the
international dollar values while making forward contractual agreements. The study
also established evidence of nonlinearity as well as the heterogeneity in the
relationship amidst the exchange rates along with the stock market indices, potentially
influenced by the financial crisis during 2008. Additionally, the authors established
evidence of causality between the international dollar values, the local currencies, as
well as the stock indices.
Granger, C. W. J., Huang, B.-N., & Yang, C.-W. (2000). “A bivariate causality
between stock prices and exchange rates: Evidence from recent Asian flu. The
Quarterly Review of Economics and Finance, 40(3), 337-354.”, the study by Granger
et al. (2000) investigated the Granger causality between stock prices along with the
exchange rates in the context of the Asian financial crisis during1997. The study used
data from nine Asian economies, including Japan, South Korea, Philippines, Hong
Kong, Malaysia, Singapore, Thailand, and Indonesia, from 1986 through till the 1998.
To analyse the data, the authors applied advanced statistical techniques such as unit
root as well as the cointegration models. The study establishes that the causal
relationship amidst the stock prices as well as the rate of exchange that varied across
different countries. In most markets, changes in the prices of stock lead to the changes
in either the rate of exchange or result in a feedback interaction between the two. Past
information on variation of the exchange rate made stock price changes predictable in
five out of nine markets researched. The study not only established but emphasizes on
the importance of the stock market as the leader as well as the role of the portfolio
approach during the early 1990s these capital movement barriers were gradually
removed. Overall, this study provides potential avenues for future research on spill
over effects in Southeast Asia.
2.3. RESEARCH GAP
35
Existing literature has explored the relationship between the stock market and foreign
exchange rate from various country’s perspectives. Some studies have focused on the
causality between the two markets, while others have investigated the volatility
spillover effects between them. However, there is a research gap in terms of exploring
the long-run equilibrium relationship between the stock market and foreign exchange
rate in India.
Previous studies have mostly examined short-term dynamics between the stock
market and foreign exchange rate, with limited attention given to their long-run
relationship. This is a crucial research gap because understanding the long-run
relationship can provide insights into the fundamental factors that determine the
relationship between these two markets.
Moreover, there is lack of research on the effectiveness of using exchange rates and
the Nifty Index as a hedging tool. Additionally, there is insufficient studies on the
causal relationship between the Indian Stock Market and Exchange Rates. There is a
need to explore the relationship between the stock market and foreign exchange rate
using advanced econometric techniques such as Johansen cointegration models and
Granger’s causality tests. Finally, there is limited research on the implications of
exchange rate dynamics for policymakers and investors in India.
Therefore, this study aims to bridge this research gap by investigating the long-run
relationship between the stock market and foreign exchange rate in India using
advanced econometric techniques. The study will employ Johansen cointegration
models and grangers’ causality tests to capture the relationship between these two
markets. By doing so, this study will provide a more comprehensive understanding of
the relationship between the stock market and foreign exchange rate in India, which
can have implications for policymakers and investors.
*********************************************************************
36
CHAPTER 3
BACKGROUND OF THE STUDY
37
CHAPTER 3
3.1. An Overview of the Indian Financial Market and Economy:
India's financial markets have been evolving to keep up with the country's economic
expansion, making it one of the major economies growing at the fastest rate in the
world. Agriculture, manufacturing and services, all play an important and significant
role in the diverse Indian economy.
Subsectors that make the financial market are the commodity market, currency
market, the bond market, and the Indian stock market. The stock market of India is
one of India’s most important financial markets, the BSE Sensex and the NSE Nifty
represents the stock market. Over the past ten years, the Indian stock market has
grown significantly, making it a popular destination for both domestic and
international investors.
India has a significant bond market that is primarily dominated by government

securities. To cover the government's deficit, the Reserve Bank that is RBI issues
government securities. The bond market in India, trades its corporate bonds,
municipal bonds, and debentures in addition to government securities.
Another significant part of the financial market represented in the Indian currency
market, is the market of the foreign exchange. The Reserve Bank (RBI) controls the
exchange rate of the Indian rupee which is not fully convertible. There has been an
increase within the Indian commodity market, which includes both agricultural and
non-agricultural commodities.
In general, the Indian economy and its financial market have a strong relationship, and
the growth of one is closely related to the growth of the other. A strong economy
fosters an inviting environment for financial market investment, and the financial
market provides the funds required for economic expansion and development. The
financial market in India has been liberalized and modernized by the Indian
government in a number of ways, which has resulted in an increase in foreign
investment and greater integration with global financial markets.
38
Indian Financial market is a business units have to raise short- term and long- term
funds to meet their working and fixed capital requirements from time to time. This
necessitates not only the ready availability of such funds but also a transmission
mechanism with the help of which the providers of investors can interact with the
business units and transfer the funds to them as and when required. This aspect is
taken care of by the financial markets which provide a place where or a system
through which, the transfer of funds by investors to the business units are adequately
facilitated.
Functions of Financial Market:
 It facilitates for interaction between the investors and the borrowers.

 It helps in pricing information resulting from the interaction between buyers
and sellers in the market when they trade the financial assets.
 It provides security to dealings in financial assets.
 It ensures liquidity by providing a mechanism for an investor to sell the
financial assets.
 It makes sure there is low cost of transactions and information.
Challenges in Financial Market:
 Updating with new marketing techniques

 Technology, trends and tactics are changing constantly.
 Approaching to the right customers and generating traffic
 Lack of resources.
3.2. Historical patterns in India's stock market and exchange rate:
The past decades have witnessed the significant transformation that Indian economy
has undergone which in turn has had an effect that has significantly impacted the
exchange rate as well as the Indian stock market.
In the past, foreign investments were restricted and the Indian economy was tightly
regulated. The Indian Rupee was fixed to the US Dollar until 1991 when the public
authority started monetary changes and started to change the economy. This prompted
39
the floatation of the Indian Rupee, bringing about a huge devaluation of the cash
against the US Dollar.
Over time, the stock market in India, which is represented by the BSE Sensex and the
NSE Nifty, has also undergone significant change. Since the BSE which is nothing
but Bombay Stock Exchange was established in 1875, the development of the stock
market can be traced back. Until then SEBI which is Securities & Exchange Board of
India was established in 1992, the stock market was largely unregulated.
The Indian financial exchange has seen critical development throughout the course of
recent many years, with the Sensex crossing the 50,000 imprints in January 2021.
This development can be credited to different factors like the advancement of the
Indian economy, the development of the working class, and expanded unfamiliar
speculations.
Due to a variety of factors, including geopolitical tensions, the slowdown in the global
economy, and changes in domestic policy, India's exchange rate as well as the stock
market has displayed a high degree of volatility in recent years. To stabilize the
exchange rate as well as the stock market, the Indian government has implemented
monetary policies, regulated foreign investments, and implemented currency controls.
3.3 Stock Market in India- Pre-Independence Period:
The stock market trading in India began in the year 1855. Bombay Stock Exchange,
now it is called as BSE. The first ever stock exchange in Asia was established in
1875. The Government of India officially recognised BSE under the securities
contract regulation Act in 1957.
3.4. Stock Market in India- Post Independence Period:
This year India is going to celebrate 79th Independence. It has come a long way since
its independence from British rule, and so have the country’s stock markets. The
Government of India officially recognised BSE under the securities contract
Regulation Act in 1957. It may be noted that India’s most valuable company, in terms
of market capitalisation, went public in 1970s.
40
National Stock Exchange was assimilated in the year 1992 to bring about clarity in the
Indian equity markets. NSE was situated at the requirement of the Government of
India, based on the guidance laid out by the Pherwani committee in 1991 and the
design was prepared by a team of five members
• Ravi Narain,
• Raghavan Puthran,
• K Kumar,
• Chitra Sankaran and
• Ashishkumar Chauhan in accompany with Dr. R H Patil and SS Nadkarni who

were deputed by IDBI in 1992. NSE commenced operations in 30 June 1994 starting
with the wholesale debt market (WDM) segment and equities segment in 03
November 1994. It was the first exchange in India to introduce an electronic trading
facility. Within one year of the start of its operations, the daily turnover on NSE
exceeded that of the BSE.
3.5. Discussion of the Indian economy's current state and its relevance to the
study:
The Indian economy will be the sixth-largest in the world and is considered as one of
those that is the fastest-growing economy in the world by 2021. The Indian economy
is different, with agribusiness, assembling, and administrations all assuming
significant parts. The COVID-19 pandemic, on the other hand, has had an effect on
the country's economic growth, and it has also faced difficulties like rising inflation,
high unemployment rates, and a slowdown in demand.
The impact of pandemic (Covid 19), which has disrupted global trade and caused
supply chain disruptions, is one of the major obstacles that the Indian economy has
faced. The Indian government took a number of steps to lessen the impact of the
pandemic, including offering individuals and businesses financial assistance,
establishing monetary policies, and implementing vaccination programs.
41
Rising inflation is another significant obstacle for the Indian economy. India's
inflation has been rising primarily as a result of rising food costs, supply chain
disruptions, and high fuel prices. The public authority has gone to lengths like
expanding the stock of fundamental items, directing costs, and acquainting money
related strategies with control expansion.
The Indian economy continues to be a desirable destination for foreign investors

despite the difficulties it faces. The Indian government has executed a few measures
to energize unfamiliar venture, for example, the presentation of the Make in India
drive, which expects to advance homegrown assembling, and the progression of
unfamiliar speculation strategies.
The study is relevant to the current state that our Indian economy lies in because it
sheds light on the challenges and opportunities that emerging economies face. The
expansion and development of the Indian economy shed light on the factors that
contribute to economic expansion, including investments in infrastructure,
technological advancements, and a liberalized economy. Insights into the dangers of
investing in emerging markets can be gained from the difficulties the Indian economy
faces, such as the COVID-19 pandemic and rising inflation. As a result, scholars
studying emerging markets, investors, and policymakers must comprehend the Indian
economy's current state.
3.6. Current overview of the stock market
The Indian economy has continued to expand in spite of the difficulties, and the stock
market as well as exchange rate have remained appealing locations for investors from
abroad. The exchange rate in addition to stock market are anticipated to continue
growing in the coming years due to the Indian government's continued focus on
economic growth and development.
The important component of the Indian economy is its stock market, with the National
Stock Exchange of India (NSE) and the Bombay Stock Exchange (BSE) serving as
major platforms for securities trading. Two widely used indices representing the stock
market in India are the Nifty 50 and the BSE Sensex.
42
Fig. 3.1. STRUCTURE OF INDIAN STOCK MARKET
Source: Gala, J. (n.d.). Guide to Indian stock market: Basics of stock market for
beginners. Mumbai, India: Buzzingstock Publishing House.
Fig. 3.2.: The Stock Market Participants
43
The Nifty 50 is a stock market index composed of the 50 largest and most liquid
companies listed on the NSE. The BSE Sensex, on the other hand, is the oldest and
most widely followed stock market index in India. It consists of 30 companies listed
on the BSE, selected based on a combination of market capitalization, liquidity and
industry affiliation. Like the Nifty 50, the Sensex is calculated using a market
capitalization weighted methodology.
The Nifty 50 and its performance with the Sensex is closely monitored by investors,
analysts and policy makers as they serve as important barometers of the Indian stock
market and its performance in turn. A rising index usually reflects a positive outlook
for the economy and growing investor confidence, while a falling index may indicate
negative sentiment and economic uncertainty.
Stock prices in India are influenced by a number of factors, including economic

indicators, corporate earnings, government policies, global events and investor
sentiment. As with other stock markets, stock prices in India can fluctuate, and
44
investors need to be aware of the potential risks associated with stock market
investments.
Overall, the Nifty 50 and the Sensex are important tools for measuring the Indian
stock market and its performance providing a representation to the trends and
movements in the country's economy.
Table 3.1: Table Depicting Timeline of the Growth of the Stock Market in India
1875 Bombay Stock Exchange
1935 Reserve Bank of India Established on 1st April.
1956 BSE under the securities contract’s regulation

Act
1986 BSE Sensex (Sensex= Sensitive Index)
1988 Securities and Exchange Board of India (SEBI)
1990 The GOI bond market
1992 National Stock Exchange was established
1994 The wholesale Debt Market (WDM) commenced

operations in June and the capital Market (CM
segment was opened at the end of the year
1995 BSE automated the systems but it never caught

up with NSE spot Market turnover
1996 The National Stock exchange of India launched

S&P CNX Nifty= (National Fifty)
1998 NSE of India launched its web-site and was the

first exchange in India that started trading stock
on the internet in 2000
45
NIFTY 50
The Nifty 50 index is used for the stock price variable. The Nifty 50 is a market index
of the National Stock Exchange of India (NSE) that tracks the performance of 50
large and established companies listed on the NSE. The stock prices for these
companies are obtained from the NSE.
The Nifty 50 is an Indian stock market index composed of the 50 largest and most
liquid companies listed on the National Stock Exchange (NSE). The index is
calculated using a free float market capitalization weighted method, which means that
the weight of each stock in the index is determined by its market capitalization, and in
turn adjusted the free float of the company's shares.
The Nifty 50 is considered the benchmark index for the Indian equity market as it
represents the total market capitalization (approximately 65% of) of companies that
are listed on the NSE. The index covers a wide range of sectors, including financials,
energy, technology, healthcare and consumer goods.
The Nifty 50 was launched by the NSE in 1996 with a base value of 1,000. Since
then, the index has grown significantly and its value has increased to more than
15,000 by April 2023. The index is updated regularly to reflect changes in the market
capitalization of the companies and are included in the index.
The movements of the Nifty 50 are closely monitored by investors, it is an important

indicator of the performance of the Indian stock market and is closely followed by
analysts and policy makers. A rising index usually reflects a positive outlook for the
economy and growing investor confidence, while a falling index may indicate
negative sentiment and economic uncertainty.
The Nifty 50 Index has also become an important tool for investment products such as
exchange-traded funds (ETFs), index funds and other passive investment strategies.
These products, which aim to track the performance of the Nifty 50 index, allow
investors to participate in the Indian equity market.
46
Overall, the Nifty 50 is an important tool the Indian equity market and its performance
and to provide its investors with a benchmark for their investment decisions.
3.7. Current overview of the forex market
In India, trading of currency is permitted only in a limited number of pairs such as

USD/INR, EUR/INR, JPY/INR, GBP/INR, EUR/USD, GBP/USD, and USD/JPY.
The National Stock Exchange (NSE), Bombay Stock Exchange (BSE), and
Metropolitan Stock Exchange of India Ltd. are the platforms where forex trading is
facilitated. The regulatory bodies responsible for overseeing the currency market are
the Securities and Exchange Board of India (SEBI) and the Reserve Bank of India
(RBI) jointly.
In this study, four currency pairs, including USD/INR, GBP/INR, JPY/INR and
EUR/INR, are used as exchange rate variables. These currency pairs represent the
value of the U.S. dollar, the British pound, the Yen, and the Euro in relation to the
Indian rupee, respectively. The exchange rates for these currency pairs are determined
on the foreign exchange market.
1. USD/INR
The USD/INR currency pair is an important component of the global foreign

exchange market. It represents the rate of exchange between the US dollar and the
Indian rupee, against the US dollar as the base currency and the Indian rupee as the
quote currency.
The USD/INR exchange rate is influenced by a variety of factors, including economic

indicators such as GDP growth, inflation, and employment rates in the United States
and India. In addition, geopolitical events such as trade agreements and political
instability can impact on the exchange rate significantly.
47
Central bank policy is also an important determinant of the USD/INR exchange rate.
The Federal Reserve's monetary policy decisions, such as interest rate changes and
quantitative easing measures, can affect the US dollar and its value. Similarly, the
Reserve Bank of India's monetary policy decisions, such as interest rate changes and
currency intervention, can affect the value of the Indian rupee.
The USD/INR exchange rate has impacted the international trade significantly and the
investments between the United States and India. A weaker Indian rupee against the
U.S. dollar can make Indian exports more competitive, while a stronger Indian rupee
can make imports cheaper for Indian consumers.
Overall, the USD/INR exchange rate is an important variable for researchers and
analysts interested in understanding the dynamics of the foreign exchange and the
global market with the relationship between the United States and India.
2. GBP/INR
The GBP/INR currency pair represents the exchange rate between the British pound
sterling and the Indian rupee. The GBP is the base currency and the INR is the quote
currency.
The GBP/INR exchange rate is influenced by a number of factors, including economic

indicators such as inflation, GDP growth and employment rates in the UK and India.
Political developments such as changes in government policy, trade agreements, and
political instability may also affect the exchange rate.
The Bank of England's monetary policy decisions, such as interest rate changes and
quantitative easing measures, can significantly affect the value of the British pound.
Similarly, the Reserve Bank of India's monetary policy decisions, such as changes in
interest rates and currency intervention, may affect the value of the Indian rupee.
The GBP/INR exchange rate has important implications for trade and investment
between the United Kingdom and India. A weaker pound against the Indian rupee can
make British exports more competitive, while a stronger pound can make imports
cheaper for British consumers.
48
In recent years, the GBP/INR exchange rate has been subject to significant
fluctuations, particularly as a result of the Brexit vote in 2016. The uncertainty
surrounding the Brexit negotiations has had a significant impact on the value of the
pound, which in turn has affected the GBP/INR exchange rate.
Overall, the GBP/INR and its rate of exchange is an important variable for researchers
and analysts interested in understanding the dynamics of the foreign exchange market
globally and its relationship between the UK and India.
3. EUR/INR
The EUR/INR currency pair represents the exchange rate between the Euro and the
Indian Rupee. The EUR is the base currency and the INR is the quote currency.
The EUR/INR exchange rate is influenced by a number of factors, including

economic indicators such as inflation, GDP growth, and employment rates in the
Eurozone and India. Political developments such as changes in government policy,
trade agreements, and political instability can also affect the exchange rate.
The European Central Bank's monetary policy decisions, such as interest rate changes
and quantitative easing measures, can impact on the value of the euro significantly.
Similarly, the Reserve Bank of India's monetary policy decisions, such as interest rate
changes and currency intervention, may affect the value of the Indian rupee.
The EUR/INR exchange rate has important implications for trade and investment
between the Eurozone and India. A weaker euro against the Indian rupee can increase
the competitiveness of eurozone exports, while a stronger euro can make imports
cheaper for eurozone consumers.
In recent years, the EUR/INR exchange rate has been subject to significant
fluctuations, due in particular to the economic impact of the COVID -19 pandemic.
The pandemic has led to an unprecedented level of monetary and fiscal stimulus by
central banks and governments, which has impacted on exchange rates significantly.
49
Overall, the EUR/INR exchange rate is an important variable for researchers and
analysts interested in understanding the dynamics of the foreign exchange market
globally and the relationship between the Eurozone and India.
4. JPY/INR
The JPY/INR currency pair represents the exchange rate between the Japanese yen
and the Indian rupee. The JPY is the base currency and the INR is the quote currency.
The JPY/INR exchange rate is influenced by a number of factors, including economic

indicators such as inflation, GDP growth, and employment rates in Japan and India.
Political developments such as changes in government policy, trade agreements, and
political instability may also affect the exchange rate.
The Bank of Japan's monetary policy decisions, such as interest rate changes and
quantitative easing measures, can significantly affect the value of the Japanese yen.
Similarly, the Reserve Bank of India's monetary policy decisions, such as changes in
interest rates and currency intervention, can affect the value of the Indian rupee.
The JPY/INR exchange rate has important implications for trade and investment
between Japan and India. A weaker yen against the Indian rupee can make Japanese
exports more competitive, while a stronger yen can make imports cheaper for
Japanese consumers.
In recent years, the JPY/INR exchange rate has been subject to significant
fluctuations, particularly due to the pandemic COVID -19 impacting the economic
situation. The pandemic has led to unprecedented levels of monetary and fiscal
stimulus by central banks and governments, that has impacted on exchange rates
significantly.
Overall, the JPY/INR exchange rate is an important variable for researchers and
analysts interested in understanding the dynamics of the global foreign exchange
market and the relationship between Japan and India.
50
3.8. An understanding of the role of the interaction of stock market and forex
market
The interaction between financial markets and the economy requires an understanding
with an in-depth study of the relationship that lies between the stock market and its
exchange rates. The securities exchange and trade rates are basic factors which
influences the financial exhibition of a nation, and they are interlinked in more than
one way.
The cost of imports and exports, a country's competitiveness on international markets,

and the balance of payments are all impacted by exchange rates in international trade.
Trade rates likewise influence the inflow and surge of unfamiliar capital, which can
affect a country's monetary business sectors, including the financial exchange.
The financial exchange, then again, is a basic mark of a country's monetary exhibition
and gives experiences into the economy's future heading. The country's economic
growth, political stability, corporate profits, and interest rates all impacted the
performance of the Indian stock market.
The connection between the financial exchange as well as the trade rates is
perplexing, and the changes in one can essentially affect the other. Changes observed
in the exchange rates, for instance, can affect the stock market and the profitability of
businesses that import or export goods. In a similar vein, changes observed with the
stock market can influence the rate of exchange because foreign investors may buy or
sell domestic stocks, which affects both the supply of domestic currency and the
demand for it.
Policymakers, investors, and academics can gain insight into the impact of economic
policies, market conditions, and global events on financial markets and the economy
by studying the relationship between the stock market as well as the exchange rates.
Additionally, the stock market as well as the exchange rates are essential variables to
investigate because they are frequently used as measures of a nation's economic
performance.
51
However, it is essential to keep in mind that the analysis of financial markets as well
as the economy as a whole encompasses more than just the relationship of the stock
market as well as exchange rates. Interest rates, or the inflation, and fiscal policies are
just a few of the other variables that influence the economy's performance and should
be studied as well.
*********************************************************************
52
CHAPTER 4
DATA ANALYSIS AND

INTERPRETATION
53
CHAPTER 4
4.1 INTRODUCTION
The chapter focuses on data analysis, results, and discussion. Various statistical tests
were employed to examine the data and its results, stationarity to remove shocks from
time series data, and tests which investigate the long-run relationship in addition to
the causality between the variables. The results of these tests were used to verify the
research objectives and hypotheses.
4.2 ECONOMETRIC MODELS
For this study the nature of the long term, short term and causal relationships of the
Nifty 50 Index and USD/INR, GBP/INR, EUR/INR AND JPY/INR, have to be tested.
Hence, the econometric models that will be used include:
 The Augmented Dicky-Fuller Model

 The Johansen’s Cointegration Model
 Granger’s Causality Model
For each of these models their hypotheses and formulae will be discussed in this
chapter to get clear understanding regarding the analysis and interpretation of the data,
to fulfil the objectives of the study.
4.3 THE DATA
Nifty, USD/INR, GBP/INR, EUR/INR, and JPY/INR are time series data that are
commonly used in financial analysis. In finance, a random walk is a model for the
behaviour of stock prices and other financial variables that assumes that they follow a
path that is entirely random and unpredictable (as we can see in Fig. 4.1: Graphs
depicting the price movement of the Nifty index and exchange rate prices). This
means that the future movements of the variable cannot be predicted based on past
performance, making it difficult to use historical data to forecast future trends.
54
On the other hand, trends in financial data refer to the overall direction that the
variable is moving over time. A trend can be either upward, downward, or flat. In
finance, identifying and understanding trends is essential for making informed
investment decisions.
Fig. 4.1: Graphs Depicting the Price Movement of the Nifty Index and Exchange
Rate Prices
Source: e-views; Secondary data- equitypandit.com/m.rbi.org.com
When analysing time series data for financial variables like Nifty, USD/INR,
GBP/INR, EUR/INR, and JPY/INR, it is important to distinguish between random
fluctuations and underlying trends. A random walk model may be appropriate for
describing the short-term behaviour of financial variables, as they are often subject to
short-term fluctuations that are difficult to predict. However, over the long term,
55
financial variables are often influenced by underlying economic and financial factors,
such as interest rates, inflation, and geopolitical events. In such cases, trends may be
more meaningful and relevant than short-term fluctuations. Thus, it is important to
distinguish between random fluctuations and underlying trends.
4.4 DESCRIPTIVE STATISTICS
Descriptive statistics are used to provide a clear and concise description of the basic
features of a data set, such as the statistical mean, median, mode, as well as the
standard deviation. Statistical analysis of the mean, median, mode, and standard
deviation are considered as fundamental that measures the central tendency and
dispersion. The mean on the other hand is the average, and is calculated by adding all
the values in a data set and is divided by the total number of observations. The median
is the middle value in a data set when arranged in order of magnitude. The mode is the
occurrence of the value most frequently in the data set. The standard deviation is a
measure of the spread of the data set, indicating how much the observations deviate
from the mean. Descriptive statistics also help in understanding the normality of the
data by understanding the skewness and kurtosis. Where skewness helps asses the
normality of the data while kurtosis helps to understand the degree of peakedness of
the data. These basic features of a data set are used to describe and summarize the
data in a clear and concise manner, making it easier to understand and interpret the
findings. Descriptive statistics provide a way to explore and analyse data, identify
patterns, and draw meaningful insights that can be used to make informed decisions.
Table 4.4.1: Descriptive Statistics of the Data Collected
NIFTY USD GBP EUR JPY

Mean 12047.47 71.11483 92.84559 80.30894 0.633197
Median 11069.53 71.14000 92.92850 79.93225 0.636900
Maximum 18812.50 83.06000 105.0500 90.70500 0.719600
Minimum 6970.600 63.27000 79.52500 68.06200 0.550500
Std. Dev. 3226.505 4.733783 6.119770 5.253752 0.043359
Skewness 0.606397 0.349286 -0.075589 -0.012748 0.082686
Kurtosis 2.125996 2.457537 2.022524 2.113060 1.958897
56
Source: e-views output; Secondary data- equitypandit.com/m.rbi.org.com
**and* indicate significance at 1% and 5% level of significance respectively.
The table displays descriptive statistics for a set of financial time series data,
including NIFTY, USD, GBP, EUR, and JPY. The mean, median, maximum,
minimum, and standard deviation are provided for each variable, along with measures
of skewness and kurtosis.
For NIFTY, the mean and median are both around 12,047.47, with a maximum value
of 18,812.50 and a minimum value of 6,970.60. The standard deviation is 3,226.505,
indicating a relatively high level of volatility in the variable. The skewness value of
0.606397 suggests a slightly right-skewed distribution, while the kurtosis value of
2.125996 indicates that this distribution is slightly peaked when compared to the
normal distribution.
For the foreign exchange rates, the mean values range from 71.11483 for USD to
0.633197 for JPY. The maximum and minimum values vary widely between the
different currencies, with the highest maximum value of 105.0500 for GBP and the
lowest minimum value of 0.550500 for JPY. The standard deviations for the foreign
exchange rates are relatively low, ranging from 4.733783 for USD to 0.043359 for
JPY. The skewness values are all relatively small, with the largest value of 0.349286
for USD, indicating a relatively symmetrical distribution. The kurtosis values are all
around 2, indicating that the distributions are slightly more peaked than a normal
distribution.
Overall, these descriptive statistics provide a useful summary of the basic features of
the financial time series data, giving researchers and analysts a starting point for
further analysis and interpretation.
Log
In financial markets, the returns of stock prices or exchange rates are usually not
normally distributed and may have different variances at different points in time.
Taking the logarithm of such data can help stabilize the variance and make it more
symmetric, which can improve the reliability of statistical analysis.
57
The formula for taking the natural logarithm of a variable Y is:
ln(Y)
…(1)
Where, "ln" represents the natural logarithm function.
Table 4.4.2: Log values of Nifty 50 Index and USD/INR, GBP/INR, EUR/INR
AND JPY/INR
INNIFTY INUSD INGBP INEUR INJPY

Mean 9.362267 4.262105 4.528750 4.383731 -0.459318
Median 9.311951 4.264650 4.531830 4.381179 -0.451143
Maximum 9.842277 4.419563 4.654436 4.507612 -0.329060
Minimum 8.849457 4.147411 4.376071 4.220419 -0.596928
Std. Dev. 0.259911 0.066068 0.066311 0.065687 0.068528
Skewness 0.268329 0.222406 -0.177237 -0.124864 -0.013941
Kurtosis 2.037703 2.294149 2.058870 2.173958 1.933461
Source: e-views output;
The descriptive statistics of the data at log values is depicted above, but for the
purposes of the study only the log return values will be used.
Log returns
Log returns of the data are often used in financial analysis because they provide a
more accurate representation of the percentage change in a variable over time. The log
return of a variable is defined as the natural logarithm of the ratio of the variable's
value at time t to its value at time t-1. Mathematically, the formula for log return is:
58
ln (Pt/Pt-1)
…(2)
where,
 Pt is the value of the variable at time t;

 and Pt-1 is the value of the variable at time t-1.
Using log returns instead of simple returns has several advantages. First, log returns
are additive, meaning that the log return over a given time period can be calculated as
the sum of the log returns over smaller time intervals. This property is not true for
simple returns, which are multiplicative. Second, log returns are symmetric, meaning
that positive and negative returns are treated the same way. This is not the case with
simple returns, where negative returns have a different interpretation than positive
returns.
On converting the data to its log returns value, at first difference, the data becomes
much more stationary and stable making it feasible to conduct necessary tests. The
figure below gives us a pictorial representation of the data at log returns.
Fig. 4.2: Graphical Depiction of the Collected Data at Log Returns
59
Source: e-views
The graphs depict the data calculated at first difference at log of the closing price. Log
returns data is often preferred over simple returns because it has desirable statistical
properties, including stationarity.
Table 4.4.4.: Log Return Values of Nifty 50 Index and USD/INR, GBP/INR,
EUR/INR AND JPY/INR
NIFTYRETURNS USDRETURNS GBP/INR EURRETURNS JPYRETURNS

Mean 0.047506 0.012897 0.001207 0.011760 0.007295
Median 0.070709 0.000000 0.003596 0.012109 -0.017704
Maximum 8.400291 1.632474 3.058630 2.437589 4.654870
Minimum -13.90375 -1.970051 -7.505127 -2.275897 -4.167568
Std. Dev. 1.124866 0.356428 0.645525 0.506057 0.649477
Skewness -1.450538 0.081496 -0.996310 0.063787 0.408032
Kurtosis 24.18054 5.131443 15.79995 4.355670 7.576737
60
The table shows the descriptive statistics for five different financial instruments,
represented by their log returns. The mean log return for NIFTYRETURNS is
0.047506, indicating that on average, the NIFTY index returns a positive rate of
return. The median log return is 0.070709, which is higher than the mean, indicating
that the data is positively skewed, with some large positive returns. The maximum log
return for NIFTYRETURNS is 8.400291, which is an extreme value and suggests the
presence of outliers in the data. The minimum log return for NIFTYRETURNS is -
13.90375, indicating a large negative return. The standard deviation for
NIFTYRETURNS is 1.124866, indicating a high degree of volatility in the data.
Similarly, for USDRETURNS, the mean log return is 0.012897, indicating a positive
rate of return on average, while the standard deviation is 0.356428, indicating
relatively low volatility. The data for GBP/INR shows a positive mean log return of
0.001207, with a relatively low standard deviation of 0.645525, suggesting the data is
less volatile than NIFTYRETURNS. For EURRETURNS, the mean log return is
0.011760, and the standard deviation is 0.506057, indicating moderate volatility.
Finally, the mean log return for JPYRETURNS is 0.007295, amidst a standard
deviation 0.649477, that indicates a relatively high volatility.
The skewness and kurtosis values show that the data for all the financial instruments
are not normally distributed, with some significant deviations from a normal
distribution. The positive skewness for NIFTYRETURNS and negative skewness for
JPYRETURNS suggest that there are more positive returns for NIFTY and more
negative returns for JPY, respectively, than a normal distribution. The high kurtosis
values for all the instruments indicate that the data has heavy tails and a higher
probability of extreme values than a normal distribution.
4.5 TESTS OF CORRELATION
The strength as well as direction of the linear relationship is measured by the

correlation coefficient. A perfect positive correlation is indicated by the value 1 (i.e.,
when one variable goes up, the other also goes up), while a perfect negative
61
correlation is indicated by a value of -1 (i.e., when one variable goes up, the other
goes down). No correlation is indicated by the value of 0.
The table below, shows the correlation coefficients between the different variables:
NIFTY, USD, GBP, EUR, and JPY.
Table 4.5.1: Correlation Level of the Collected Data
NIFTY USD GBP EUR JPY

NIFTY 1.000000 0.761801 0.640767 0.668129 0.121545
USD 0.761801 1.000000 0.650641 0.694478 0.337998
GBP 0.640767 0.650641 1.000000 0.830127 0.494073
EUR 0.668129 0.694478 0.830127 1.000000 0.669633
JPY 0.121545 0.337998 0.494073 0.669633 1.000000
In this case, we can see a correlation that is strong positive between NIFTY and USD
(0.761801), as well as between NIFTY and EUR (0.668129). There is also a moderate
positive correlation between NIFTY and GBP (0.640767), while the correlation
between NIFTY and JPY is weak (0.121545). We can also see that there is a moderate
positive correlation between USD and EUR (0.694478), as well as between GBP and
EUR (0.830127). The correlation between USD and GBP is relatively weak
(0.650641), while the correlation between USD and JPY, as well as between GBP and
JPY, is weak (0.337998 and 0.494073, respectively).
CORRELATION OF DATA AT LOG RETURNS
At log returns the analysis will differ. The analysis with collected data was performed
to make comparisons on how much change is there in the level of association.
Table 4.5.2: The Table Depicting Correlation Between the Different Variables
with Log Returns
USDRETURN EURRETURN
NIFTYRETURNS S GBPRETURNS S JPYRETURNS
62
NIFTYRETURNS 1.000000 -0.272699 0.009731 -0.138027 -0.235901
USDRETURNS -0.272699 1.000000 0.194363 0.326463 0.415896
GBPRETURNS 0.009731 0.194363 1.000000 0.617440 0.294237
EURRETURNS -0.138027 0.326463 0.617440 1.000000 0.526857
JPYRETURNS -0.235901 0.415896 0.294237 0.526857 1.000000
Looking at the Correlation Matrix, we can see that:
NIFTYRETURNS has a negative correlation with USDRETURNS (-0.27), meaning

that on days when the Nifty 50 index had a positive return, the USD/INR exchange
rate tended to have a negative return.
GBPRETURNS has a weak positive correlation with both USDRETURNS (0.19) and
EURRETURNS (0.62), indicating that there is a weak tendency for the GBP/INR
exchange rate to move in the same direction as the USD/INR and EUR/INR exchange
rates.
EURRETURNS has a weak positive correlation with USDRETURNS (0.33) and a

moderate positive correlation with JPYRETURNS (0.53), suggesting that there is a
tendency for the EUR/INR exchange rate to move in the same direction as the
USD/INR and JPY/INR exchange rates.
JPYRETURNS has a moderate positive correlation with USDRETURNS (0.42) and a

weak positive correlation with GBPRETURNS (0.29) and EURRETURNS (0.53),
implying that there is a tendency for the JPY/INR exchange rate to move in the same
direction as the USD/INR, GBP/INR, and EUR/INR exchange rates.
Overall, the correlation matrix at log returns suggests that there are some weak to
moderate inter-relationships between the daily log returns of the Nifty 50 index as
well as the foreign exchange rates of EUR/INR, GBP/INR, JPY/INR and USD/INR.
However, it is important to note that correlation does not imply causation, and other
factors beyond the scope of this analysis may also affect these assets
63
4.6 TEST OF STATIONARITY
In time series analysis, stationarity is a crucial property that enables meaningful

modelling and accurate forecasting. Stationary time series remains constant over a
period of time along with its statistical properties such as the mean, variance, and
autocorrelation. In contrast, a non-stationary time series exhibits trends, seasonality,
and erratic variations that make it challenging to model and forecast accurately. The
Augmented Dickey-Fuller (ADF) test that is a popular statistical test checks the
stationarity in a time series. The test is based on the null hypothesis where the series
under study has a unit root present, indicating of non-stationarity.
H01 : The series has a unit root.
Ha1 : The series does not have a unit root
The ADF test checks if the time series can be transformed into a stationary series
through differencing. The test is based on a regression equation based on a random
walk with an intercept which is defined as follows:
∆yt = φ + ∂yt−1 + ∑αiyt-j + µt …(3)
Where, µt is a disturbance with white noise.
The results by the ADF test are essential in determining the appropriate models and
forecasting methods to use for the time series data.
Table 4.6.1: Result of Unit Root Test at First Difference

Variable Statistic Significance value Remark
Nifty -14.71335 0.0000 Stationary
USD -44.08298 0.0001 Stationary
GBP -40.88566 0.0000 Stationary
EUR -44.20186 0.0001 Stationary
JPY -44.38701 0.0001 Stationary
Source: e-views output
**and* indicates significance at 1% and 5%
64
The test result for Nifty returns series shows that the ADF test statistic of -14.71335 is
much lower than values that are critical at the 1% and 5% levels. The p-value from the
test is 0.0000, which when compared is lesser than the significance level of 0.05,
indicating strong evidence against the null hypothesis. The null hypothesis can be
rejected and one in turn could conclude that the NIFTY returns time series is
stationary, which means that it does not have a unit root and can be used for
meaningful modelling.
The results for USD returns, suggest that the null hypothesis can be rejected of USD
returns based on a unit root which is at a very high significance level. The test statistic
value of -44.08298 is much lower than its critical values at the 1% and 5% levels, and
the one-sided p-value is essentially zero. Overall, the results indicate that the first
difference of USD returns is stationary and mean-reverting, and can be used for
meaningful modelling.
Based on the results for GBP returns series, the null hypothesis can be rejected that
GBP returns has recorded a unit root. The test statistic value of -40.88566 is much
lower than the values critically at the 1% and 5% significance levels. This suggests
that GBP returns is stationary. Overall, these results suggest that GBP/INR is
stationary and does not have a unit root.
In the case of EUR returns series, the ADF test statistic is -44.20186, which is much
lower than the critical values at the 1% and 5% levels. The p-value is also less than
0.01, and this indicates the rejection of the null hypothesis since it is at a high level of
significance. Therefore, we can conclude that EUR returns is stationary, which means
that it does not exhibit a random walk behaviour and its statistical properties are
constant over time.
The ADF test statistic for JPY returns series is -44.38701, which is much smaller than
the critical value at the 1% and 5%levels. The p-value from the test is also very small,
indicating strong evidence against the null hypothesis. In this case, the null hypothesis
is that JPY/INR has a unit root, which implies that it is non-stationary. Therefore, we
can conclude that JPY/INR is stationary by the rejection of the null hypothesis.
65
Overall, based on the outcome of the Augmented Dickey-Fuller tests, it appears that
all four currency returns series (EUR/INR, GBP/INR, JPY/INR, and USD/INR,) and
Nifty are stationary, as the test statistics are much lower than the critical values when
compared at all common levels of significance (1% and 5 % levels) this suggests that
the null hypothesis of a unit root is rejected for all three series. Overall, the results
suggest that the NIFTY returns and currency returns series are suitable for use in
econometric models that assume stationary time series data.
4.7. JOHANSEN’S COINTEGRATION ANAYSIS
Johansen's cointegration analysis is a statistical technique used to test in checking for

the presence of long-term relationships are between two or more non-stationary time
series variables. This method is based on the Vector Autoregression (VAR) model and
estimates the rank of the cointegration matrix, which provides information about the
number of cointegrating vectors or long-term relationships between the variables.
Johansen's cointegration analysis is a populus method in the field of economics and
the finance, especially in studies involving multiple time series variables. It is a
powerful tool for identifying relationships that may not be apparent in simple
correlation or regression analyses and can provide valuable insights into the
underlying economic or financial processes.
To investigate the long-run relationship between exchange rates and stock prices, the
Johansen co-integration test will be used. The Johansen cointegration test is a
statistical test used to determine if two or more time series are cointegrated.
The formula for the Johansen cointegration test involves estimating the following
vector error correction model (VECM):
Δyt = Πyt-1 + Γ1Δyt-1 + Γ2Δyt-2 + ... + ΓpΔyt-p + εt …(4)
Where,
 Δyt is the first difference of the time series;

 Π is a matrix of cointegrating vectors;
 Γ1, Γ2, ..., Γp are matrices of coefficients on the lagged difference terms;
66
 and εt is the error term. p is the number of lagged difference terms included in
the model.
The null hypothesis of the Johansen cointegration test is that Π = 0, indicating that
there is no cointegrating relationship between the time series. The alternative
hypothesis is that Π has a rank less than or equal to r, where r is the number of
cointegrating vectors. Therefore, the hypothesis of the Johansen’s Cointegration Test
is:
H01 : There is no cointegration between the variables
Ha1 : There is cointegration between the variables
The null hypothesis of no cointegration is rejected if the calculated test statistic is

greater than the critical value at a given significance level.
The outcome of Johansen’s’ cointegration test are available and is presented in the
Table 4.7. Eigen value, Trace statistic and Max Eigen value are analysed
simultaneously.
Table 4.7.1: Results of Cointegration Test
Currency Cointegration Eigen Trace P- Value Max-eigen P-Value

equations Value Statistic
Statistics
USD/INR None 0.161718 560.4806 0.0001 304.1144 0.0001
At most one 0.138176 256.3662 0.0000 256.3662 0.0000
GBP/INR None 0.178280 590.0171 0.0001 338.5178 0.0001
At most one 0.135740 251.4993 0.0000 251.4993 0.0000
EUR/INR None 0.154518 535.9731 0.0001 289.3713 0.0001
At most one 0.133281 246.6018 0.0000 246.6018 0.0000
67
JPY/INR None 0.162419 554.2281 0.0001 305.5575 0.0001
At most one 0.134320 248.6707 0.0000 248.6707 0.0000
The table reflects results of the Johansen cointegration test of four different currency
pairs (USD/INR, GBP/INR, EUR/INR, and JPY/INR) with respect to the stock
market of India which is represented by the Nifty index.
The test was conducted to examine relationship between the exchange rates of these
currency pairs and the Nifty index. For each currency pair, there are two sets of
results. The first set of results assumes that there are no cointegration equations, while
the second set of results assumes at most one cointegration equation.
The eigenvalue and trace statistics were used to test for cointegration. The eigenvalue
statistic measures the magnitude of cointegration, and the trace statistic is used to test
the null hypothesis to indicate that there are no cointegration equations against the
alternatives that there is the presence of at least one.
In all cases, both the eigenvalue and trace statistics were statistically significant, with
p-values less than 0.0001, indicating strong evidence of cointegration between the
currency pairs and the Nifty index.
The results suggest that there is a long-term relationship with the exchange rates of
the currency pairs as well as the Nifty index. This information could be useful for
interested investors to diversify their portfolios as well as in hedging against currency
risks.
Overall, the outcome of the Johansen cointegration test provide evidence that the
exchange rates of these currency pairs and the Nifty index move together in tangent in
the long run, which could have implications for further studies.
4.8. GRANGER’S CAUSALITY TEST
68
Granger causality tests are used to determine whether one time series is a useful
predictor of another time series. In terms of hypotheses, the Granger causality test
assumes that there are two hypotheses:
H01: Nifty Index does not granger cause the selected four foreign currency pair.
Ha1: Nifty Index does granger cause the selected four foreign currency pair.
H02: The selected four foreign currency pairs does not granger cause the Nifty Index.
Ha2: the selected four foreign currency pairs does granger cause the Nifty Index.
The formula for the Granger causality test involves estimating two regression models.
The first model includes lagged values of the predictor variable (X) and the dependent
variable (Y), while the second model includes only lagged values of the dependent
variable (Y):
Model 1: Yt = α + β1Yt-1 + β2Yt-2 + ... + βpYt-p + γ1Xt-1 + γ2Xt-2 + ... + γqXt-q +

εt (5)
Model 2: Yt = α' + β'1Yt-1 + β'2Yt-2 + ... + β'pYt-p + ε't

..(8)
Where,
 Yt and Xt are the time series;

 α, β1, β2, ..., βp, γ1, γ2, ..., γq are the coefficients to be estimated;
 εt and ε't are the error terms, and p and q are the number of lags included in
the models.
The null hypothesis of the Granger causality test is that the lagged values of X do not
help predict Y, which can be tested by comparing the sum of squared residuals from
Model 1 (RSS1) to the sum of squared residuals from Model 2 (RSS2). The test
statistic is calculated as:
F = [(RSS2 - RSS1)/q] / [RSS1/(n - p - q)] (9)
Where,
69
 n is the sample size;
 F is distributed as an F-distribution with q degrees of freedom in the numerator
and (n - p - q) degrees of freedom in the denominator.
In summary, the Granger causality test is used to determine whether one time series is
a useful predictor of another time series. The test involves estimating two regression
models and comparing the sum of squared residuals to a distribution to test the null
hypothesis that the lagged values of one time series do not help predict the other time
series.
Table 4.8.1: Results Showing Pairwise Granger Causality Tests of NIFTY AND
USD returns
Pairwise Granger Causality Tests
Lags: 4
Null Hypothesis: Obs F-Statistic Prob.
0.000000
USD/INR does not Granger Cause NIFTY 1728 10.5556 02
NIFTY does not Granger Cause USD/INR 3.16008 0.0134

The Pairwise Granger Causality Test results show that there is evidence of Granger
causality in both directions between USD/INR and NIFTY. Specifically, the first test
reveals that USD/INR Granger Causes NIFTY with a very small p-value of
0.00000002, indicating that the past values of USD/INR help predict the future values
of NIFTY. Similarly, the second test shows that NIFTY also Granger Causes
USD/INR with a p-value smaller than 0.01, providing evidence that the past values of
NIFTY help predict the future values of USD/INR.
70
In conclusion, the Pairwise Granger Causality Test results suggest that there is a
causal relationship between USD/INR and NIFTY in both directions, and the past
values of each variable contain information that helps predict the future values of the
other variable.
GBP Returns

Lags: 5
GBP/INR does not Granger Cause NIFTY 1728 2.33500 0.0400

NIFTY does not Granger Cause GBP/INR 4.81885 0.0002
**and* indicates significance at 1% and 5
The Pairwise Granger Causality Tests were conducted using a sample period from
1/01/2016 to 12/30/2022 and a lag of 5. The level of significance was set at 1%.
The first test results indicate that there is evidence of Granger causality in one
direction between GBP/INR and NIFTY, with GBP/INR Granger Causing NIFTY.
The null hypothesis of GBP/INR not causing NIFTY is rejected with a p-value of
0.04, which is below the significance level of 1%. This implies that the past values of
GBP/INR contain information that helps predict the future values of NIFTY.
The second test results suggest that there is a causal relationship in the other direction,
with NIFTY Granger Causing GBP/INR. The null hypothesis of NIFTY not causing
GBP/INR is rejected with a very small p-value of 0.0002, which is well below the
significance level of 1%. This implies that the past values of NIFTY contain
information that helps predict the future values of GBP/INR.
71
In conclusion, the Pairwise Granger Causality Tests suggest that there is a bi-
directional causal relationship between GBP/INR and NIFTY, with GBP/INR
Granger Causing NIFTY and NIFTY Granger Causing GBP/INR. This means that the
past values of GBP/INR and NIFTY contain information that helps predict the future
values of each other.
EUR Returns

Lags: 4
EUR/INR does not Granger Cause NIFTY 1728 0.88269 0.4735

NIFTY does not Granger Cause EUR/INR 5.46641 0.0002
For the pairwise Granger causality tests conducted between EUR/INR and NIFTY, at
a significance level of 1%, the null hypothesis that EUR/INR does not Granger cause
NIFTY cannot be rejected, as the F-statistic is not significant (p-value > 0.05).
However, the null hypothesis that NIFTY does not Granger cause EUR/INR can be
rejected, as the F-statistic is significant (p-value < 0.01). This suggests that past values
of NIFTY can be used to predict future values of EUR/INR, while past values of
EUR/INR are not useful in predicting future values of NIFTY.
JPY Returns
Lags: 4
72
JPY/INR does not Granger Cause NIFTY 1728 2.77385 0.0258

NIFTY does not Granger Cause JPY/INR 3.86021 0.0040
The test was conducted with a sample period from January 1st, 2016 to December
30th, 2022, with 4 lags.
The F-statistic for JPY/INR Granger causing NIFTY was 2.77385, and the associated
p-value was 0.0258. Since the p-value is less than the significance level of 1%, it can
be concluded that the null hypothesis is rejected, and there is evidence to suggest that
JPY/INR Granger causes NIFTY.
Similarly, the F-statistic for NIFTY Granger causing JPY/INR was 3.86021, and the
associated p-value was 0.0040. Again, since the p-value is less than the significance
level of 1%, the null hypothesis is rejected, and there is evidence to suggest that
NIFTY Granger causes JPY/INR.
There is evidence of a bi-directional Granger causality relationship between JPY/INR

and NIFTY. This means that there is evidence to suggest that both JPY/INR and
NIFTY Granger cause each other.
73
Table 4.8.5: Combined Results Showing Pairwise Granger Causality Tests
Currency Null F- Significance Conclusion Remark

Hypothesis statistic
USD/INR USD/INR Reject H0 Bidirectional
does not Causality
Granger Cause
NIFTY
10.5556 0.0000
NIFTY does Reject H0
not Granger
Cause
USD/INR
3.16008 0.0134
GBP/INR GBP/INR Reject H0 Bidirectional
does not Causality
Granger Cause
NIFTY
2.33500 0.0400
not Granger
Cause
GBP/INR
4.81885 0.0002
EUR/INR EUR/INR 0.88269 0.4735 Accept H0 Unidirectional
does not Causality
Granger Cause
NIFTY
74
not Granger
Cause
EUR/INR
5.46641 0.0002
JYP/INR JPY/INR does Reject H0 Bidirectional
not Granger Causality
Cause NIFTY
2.77385 0.0258
not Granger
Cause
JPY/INR
3.86021 0.0040
Overall, the statistical analysis shows that at a significance level of 1% and 5%, there
is bidirectional causality between USD/INR, GBP/INR, and JPY/INR and NIFTY, as
evidenced by the rejection of the null hypothesis that one variable does not Granger
cause the other. On the other hand, there is a unidirectional causality between
JYP/INR and NIFTY.
75
CHAPTER 5
FINDINGS, SUGGESTIONS AND

CONCLUSION.
76
CHAPTER 5
5.1. INTRODUCTION
Chapter 5 of this dissertation presents a conclusion to the research study, offering a

comprehensive analysis of the relationship between the stock market and exchange
rate in India. In this chapter the conclusions have been drawn from the empirical
analysis of the daily data of Nifty 50 index and currency exchange prices of
USD/INR, GBP/INR, EUR/INR, and JPY/INR spanning from January 2016 to
December 2022.
The study aimed to investigate the relationship between the stock market and
exchange rate in India. The chapter provides a review of the research question,
objectives, research methodology, and results of the study. Through various statistical
test, such as Descriptive Statistics and Correlation of the data set, and econometric
models, such as- i) Augmented dickey-fuller Test; ii) Johansen’s Cointegration Test
and; iii) Granger’s Causality Test, the study analysed the patterns and dynamics of the
data, and evaluated the significance of the relationship between the two variables.
The dissertation aims to contribute to the existing literature on the topic by presenting
an analysis of the relationship between the stock market and exchange rate in India.
The findings are expected to be of interest to policymakers, investors, and academics
who seek to understand the dynamics of the Indian stock market and exchange rate.
The chapter provides a summary of the key findings, highlights the implications of the
study, and presents the recommendations for future research in the field.
5.2. FINDINGS
5.2.1. FINDINGS OF NIFTY
a) Descriptive Statistics
The findings suggest that the NIFTY data from 1st January 2016 to 30th December
2022, exhibited a generally positive trend with some level of volatility. The high mean
and median values indicate that the index performed well during the period under
77
study, with a few extreme values that may have caused some fluctuations. The
positive skewness suggests that the data were slightly skewed to the right, indicating a
slightly asymmetric distribution. The high kurtosis value suggests that the distribution
was more peaked than a normal distribution, indicating that extreme values were more
likely to occur.
b) Correlation Test:
The correlation test shows that the NIFTY returns had a negative correlation with the
USD returns and the JPY returns respectively. This suggests that there was a tendency
for the NIFTY index to decrease when the USD and JPY depreciated against the INR.
On the other hand, there was a positive correlation between the NIFTY returns and the
GBP returns. This suggests a weak positive relationship between the NIFTY index
and the GBP. Finally, there was also a negative correlation between the NIFTY
returns and the EUR returns suggesting that there was a tendency for the NIFTY
index to decrease when the EUR depreciated against the INR.
c) Augmented Dickey- Fuller Test
The findings suggest that the NIFTY data had a unit root and were non-stationary
before taking the logarithmic returns. However, after taking the logarithmic returns,
the data became stationary.
5.2.2. RELATIONSHIP BETWEEN NIFTY AND USD/INR
a) Descriptive Statistics:
The USD/INR exchange rate from Jan 2016 to Dec 2022 was roughly symmetrical
with a slightly right-skewed distribution. The data was more peaked than a normal
distribution with a high kurtosis value. The exchange rate exhibited a stable trend with
volatility and the possibility of sudden extreme movements.
The test suggests that USD returns are negatively correlated with NIFTY returns and
positively correlated with the returns of other currencies. However, the correlations
78
are not very strong, indicating that the relationships between USD returns and NIFTY
returns, GBP returns, EUR returns, and JPY returns. are not very strong.
c) Augmented Dickey- Fuller Test:
The findings suggest that the USD/INR data had a unit root and were non-stationary
d) Cointegration Test:
The cointegration test suggests that there is no long-term relationship between USD
and INR, and they are not cointegrated. However, the test also indicates that at most
one cointegration equation is present. This implies that there may be a short-term
relationship between USD and INR, but not a long-term one. Overall, the findings
suggest that USD and INR are not strongly related in the long run, but they may have
some short-term dependence.
e) Pairwise Granger Causality Test:
The Granger causality test for USD/INR and NIFTY indicates that there is
bidirectional causality between the two variables, as the null hypothesis of no
causality is rejected for both directions. This suggests that changes in the USD/INR
exchange rate and NIFTY index values can be used to predict each other.
5.2.3. RELATIONSHIP BETWEEN NIFTY AND GBP/INR
The descriptive statistics for GBP/INR from January 2016 to December 2022 indicate
that the currency pair exhibited a generally positive trend with some level of
volatility. The high mean and median values suggest that the GBP/INR pair
performed well during the period under study, with a few extreme values causing
some fluctuations. The negative skewness indicates that the data were slightly skewed
to the left, indicating a slightly asymmetric distribution. The high kurtosis value
79
suggests that the distribution was more peaked than a normal distribution, indicating
that extreme values were more likely to occur.
The results show a weak positive correlation between GBP returns and NIFTY
returns, indicating that the two variables have a small degree of linear relationship.
There is a moderate positive correlation between GBP returns and EUR returns, which
indicates that the two variables have a more pronounced linear relationship. Finally,
there is a weak positive correlation between GBP returns and JPY returns, suggesting
that there is a small degree of linear relationship between these variables.
The findings suggest that the GBP/INR data had a unit root and were non-stationary
The cointegration test results for GBP/INR show that there is cointegration between
the two variables, as evidenced by the fact that both the trace statistic and the max-
eigen statistic are greater than their respective critical values at the 1% significance
level. This suggests a long-run relationship between GBP and INR, meaning that
changes in one variable will have a lasting impact on the other variable.
The Granger causality test results for GBP/INR and NIFTY suggest bidirectional
causality, as both the null hypotheses that GBP/INR does not Granger cause NIFTY
and that NIFTY does not Granger cause GBP/INR were rejected with low p-values.
This means that changes in GBP/INR can be used to predict future changes in NIFTY,
and vice versa.
80
5.2.4. RELATIONSHIP BETWEEN NIFTY AND EUR/INR
Based on the descriptive statistics, the EUR/INR currency exchange rates from
January 2016 to December 2022 exhibited a generally positive trend with some level
of volatility. The mean and median values were high, indicating that the currency pair
performed well during the period under study, with a few extreme values that may
have caused some fluctuations. The negative skewness suggests that the data were
slightly skewed to the left, indicating a slightly asymmetric distribution. The positive
kurtosis value suggests that the distribution was more peaked than a normal
distribution, indicating that extreme values were more likely to occur. Overall, the
descriptive statistics provide valuable insights into the nature of the EUR/INR
exchange rates during the period under study.
The findings for EUR returns show a weak negative correlation with nifty returns and
a moderate positive correlation with GBP returns and JPY returns a weaker positive
correlation with USD.
The findings suggest that the EUR/INR data had a unit root and were non-stationary
The cointegration test results indicate that there is evidence of cointegration between
EUR and INR. The eigenvalue and trace statistics are both significant at a 0.01 level,
suggesting that the series are not spurious and there is a long-term relationship
between them. Additionally, the at most one cointegrating equation test shows that
there is at most one cointegrating relationship between EUR and INR. The findings
suggest that there is a stable long-term relationship between EUR and INR.
81
The Granger causality test results for EUR/INR and NIFTY indicated that there was
unidirectional causality between the two variables, with EUR/INR Granger causing
NIFTY but not vice versa. This suggests that changes in the EUR/INR exchange rate
can provide useful information in predicting future movements in the NIFTY index.
82
5.2.5. RELATIONSHIP BETWEEN NIFTY AND JPY/INR
The descriptive statistics for JPY/INR from January 2016 to December 2022, suggest
that the currency pair exhibited a generally positive trend with some level of
volatility. The low mean and median values indicate that the JPY/INR pair did not
perform as well as the other currency pairs during the period under study. The positive
skewness indicates that the data were slightly skewed to the right, indicating a slightly
asymmetric distribution. The high kurtosis value suggests that the distribution was
more peaked than a normal distribution, indicating that extreme values were more
likely to occur.
The findings for JPY returns show that there is a negative correlation with NIFTY
returns, indicating that as one variable increases, the other variable tends to decrease.
There is also a positive correlation with USD returns and EUR returns and a weak
positive correlation with GBP returns.
The findings suggest that the JPY/INR data had a unit root and were non-stationary
The cointegration test results for JPY/INR showed that there is no cointegration
equation between the two variables and suggests that there is no long-term
relationship between JPY and INR. However, the test also suggests that there may be
a short-term relationship between the two variables.
83
According to the Granger causality test results, there was bidirectional causality
between JPY/INR and NIFTY, meaning that the JPY/INR exchange rate and NIFTY
index both influenced each other.
84
5.3. DISCUSSION
The findings of this study suggest that there is a relationship between the NIFTY
index and currency exchange rates, particularly the USD/INR and GBP/INR exchange
rates. The NIFTY index exhibited a generally positive trend with some level of
volatility during the study period, with high mean and median values indicating good
performance overall. The correlation test suggests that the NIFTY index had a
negative correlation with the USD and JPY returns and a weak positive correlation
with the GBP returns. These findings suggest that changes in the USD and JPY
exchange rates can have a negative impact on the NIFTY index, while changes in the
GBP exchange rate can have a positive impact.
The USD/INR exchange rate exhibited a stable trend with volatility and the possibility
of sudden extreme movements. The correlation test suggests that the USD returns are
negatively correlated with NIFTY returns and positively correlated with the returns of
other currencies. The cointegration test suggests that there may be a short-term
relationship between USD and INR, but not a long-term one. The pairwise Granger
causality test indicates that changes in the USD/INR exchange rate and NIFTY index
values can be used to predict each other, suggesting bidirectional causality.
The GBP/INR pair exhibited a generally positive trend with some level of volatility
during the study period. The correlation test suggests a weak positive correlation
between GBP returns and NIFTY returns, indicating a small degree of linear
relationship between the two variables. The cointegration test results suggest a long-
run relationship between GBP and INR, meaning that changes in one variable will
have a lasting impact on the other variable. The pairwise Granger causality test results
suggest bidirectional causality between GBP/INR and NIFTY, meaning that changes
in GBP/INR can be used to predict future changes in NIFTY, and vice versa.
Overall, the findings of this study suggest that changes in currency exchange rates can
have a significant impact on the performance of the NIFTY index. Therefore,
investors and analysts should take into account the potential impact of currency
fluctuations when making investment decisions related to the NIFTY index.
85
Additionally, the findings suggest that there may be short-term and long-term
relationships between the NIFTY index and currency exchange rates, which could
provide opportunities for investors to capitalize on these relationships through
appropriate trading strategies.
5.4. SUGGESTIONS
The findings from the analysis of the Nifty Index and exchange rate markets may
provide valuable insights for various stakeholders, including government
policymakers, financial institutions, investors and traders.
5.4.1. FOR INVESTORS AND TRADERS
The bidirectional causality exists between USD/INR, GBP/INR, and JPY/INR

exchange rates and the NIFTY index, which implies that changes in these exchange
rates can cause changes in the NIFTY index and vice versa. Therefore, investors and
traders should consider this information when making trading decisions and be aware
of the impact of these exchange rates on the NIFTY index.
Given that bidirectional causality exists between USD/INR, GBP/INR, and JPY/INR
exchange rates and the NIFTY index, investors and traders may consider trading these
currency pairs in conjunction with the NIFTY index to potentially increase their
returns or manage their risks.
Secondly, evidence of cointegration exists for all four currency pairs, which suggests
the presence of a long-run equilibrium relationship between exchange rates and the
NIFTY index. Hence, investors and traders can use this information to develop
trading strategies based on mean reversion. They can take advantage of the deviation
of exchange rates from their long-run equilibrium relationship with the NIFTY index
to make profitable trades.
Thirdly, unidirectional causality exists from the NIFTY index to the EUR/INR
exchange rate, implying that changes in the NIFTY index can affect the EUR/INR
exchange rate, but not the other way around. Therefore, investors and traders should
86
consider this unidirectional causality when making trading decisions involving the
EUR/INR exchange rate.
Investors and traders should not solely rely on these results but also consider other
factors such as market trends, economic indicators, and geopolitical events. Investors
can also use this information as a hedging tool to manage their risks. For instance, if
an investor has a long position in the stock market and is concerned about potential
losses due to fluctuations in currency prices, they can consider hedging their position
by simultaneously opening a short position in the currency that is significantly
Granger-causal with the stock market index.
5.5. CONCLUSION
The purpose of this study was to investigate the relationship between foreign currency
exchange rates and the Indian stock market, the impact of exchange rates on the Nifty
index, the existence of a causal relationship between the stock market and foreign
exchange rates, the effectiveness of investing in a combination of exchange rates and
the Nifty index as a hedging tool, and the implications of the findings for
policymakers and investors in managing risk and making informed decisions
regarding the stock market and exchange rate dynamics in India.
The study found evidence of a level of association between the Nifty index and the
selected foreign currency pairs, with the level of association being positive or negative
depending on the currency pairs considered. The study also found evidence of
cointegration between the Nifty index and the selected foreign currency pairs,
indicating the existence of a long-term relationship between these variables.
Additionally, the study found evidence of a lead-lag relationship between the Nifty
index and the selected foreign currency pairs, suggesting that the Nifty index granger
causes the selected foreign currency pairs and vice versa.
The findings of this study have significant implications for policymakers and
investors in India. Understanding the relationship between the Nifty index and foreign
currency exchange rates is crucial for developing effective investment strategies and
managing risk. Policymakers can use the findings to formulate policies aimed at
87
stabilizing the stock market and the foreign exchange market in India. Investors can
use the information gathered in this study to make informed decisions about whether
to invest in a combination of exchange rates and the Nifty index as a hedging tool.
However, the study suggests that investing in both the NIFTY index and foreign
currency exchange rates may not provide diversification benefits due to the strong
relationship between these variables. Therefore, investors would need to carefully
consider the risks and potential returns of each asset and determine whether investing
in both still makes sense for their portfolio. Moreover, the study highlights the
importance of understanding the risks associated with investing in foreign currency
exchange rates and the stock market.
Future research may delve deeper into the causal mechanisms underlying the
relationship between the Nifty index and foreign currency exchange rates to provide a
more comprehensive understanding of these variables' dynamics. For instance,
researchers could investigate the role of macroeconomic factors such as inflation,
interest rates, and GDP growth rates in shaping the relationship between the stock
market and foreign exchange rates in India.
In conclusion, this study has provided valuable insights into the relationship between
the Nifty index and foreign currency exchange rates in India. The findings suggest
that there is a level of association between the two, a long-term relationship exists,
and a lead-lag relationship is present. The study's results have implications for
investors and policymakers in India and highlight the need for careful consideration of
the risks and potential returns associated with investing in both the stock market and
foreign exchange rates. The study also highlights the importance of policymakers'
roles in stabilizing the stock market and the foreign exchange market in India.
Overall, this study contributes to a better understanding of the dynamics between the
Nifty index and foreign currency exchange rates in India and provides avenues for
future research in this field.
5.6. SCOPE FOR FURTHER STUDIES
88
The present study contributes to the understanding of the relationship between foreign
currency exchange rates and the Nifty index in India. However, there are several areas
where further research could expand on this study's findings and add more depth to
the existing literature. Some possible areas for future studies include:
 Examining the impact of global events, such as political or economic events,

on the relationship between exchange rates and stock prices in India. This
could provide a more comprehensive understanding of the factors that
influence this relationship.
 Using multiple stock market indices to capture the performance of a wider
range of companies listed on the stock market. This could provide a more
accurate representation of the overall performance of the stock market.
 Accounting for other variables that may have an impact on stock prices and
exchange rates, such as interest rates, inflation, and economic growth. This
could provide a more nuanced understanding of the factors that drive stock
market and exchange rate dynamics.
 Examining the causal mechanisms underlying the relationship between the
Nifty index and foreign currency exchange rates. This could provide a more
detailed understanding of the dynamics between these variables and inform
more effective investment strategies.
These areas of further research could enhance our understanding of the relationship
between exchange rates and stock prices in India and contribute to the development of
more effective investment strategies and policies for managing risk in the Indian stock
market.
*********************************************************************
89
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APPENDIX
Date NIFTY USD GBP EUR JPY
31-01-2022 17339.85 74.55 100.204 83.718 0.6483
28-01-2022 17101.95 75.05 100.576 83.611 0.6513
27-01-2022 17110.15 75.21 100.639 83.782 0.6518
25-01-2022 17277.95 74.79 100.94 84.483 0.6567
24-01-2022 17149.1 74.62 100.619 84.487 0.6548
21-01-2022 17617.15 74.41 100.818 84.35 0.6545
20-01-2022 17757 74.45 101.209 84.198 0.6533
19-01-2022 17938.4 74.45 101.267 84.409 0.6511
18-01-2022 18113.05 74.62 101.357 84.439 0.6509
17-01-2022 18308.1 74.25 101.298 84.683 0.648
14-01-2022 18255.75 74.23 101.387 84.636 0.6495
13-01-2022 18257.8 73.97 101.356 84.701 0.6482
12-01-2022 18212.35 73.79 101.08 84.414 0.6434
11-01-2022 18055.75 73.8 100.599 83.863 0.64
10-01-2022 18003.3 74.02 100.497 83.82 0.6424
07-01-2022 17812.7 74.47 100.897 84.364 0.643
06-01-2022 17745.9 74.4 100.621 83.982 0.642
05-01-2022 17925.25 74.43 100.679 84.033 0.6396
04-01-2022 17805.25 74.54 100.785 84.074 0.6417
03-01-2022 17625.7 74.4 100.188 83.997 0.6452
96
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A STUDY ON THE RELATIONSHIP BETWEEN THE STOCK MARKET AND

FOREIGN EXCHANGE RATES IN INDIA

Dissertation submitted in partial fulfilment of the requirement

For the degree of

Under the guidance of

DEPARTMENT OF COMMERCE AND MANAGEMENT

Lalbagh Road, Bangalore-560 027

I, Steve prince (21MCOM43) declare that this dissertation entitled “A STUDY ON

Date: Steve Prince

Lalbagh Road, Bangalore-560 027

This is to certify that the dissertation titled “A STUDY ON THE RELATIONSHIP

SL. CONTENTS PAGE

2 CHAPTER 2- REVIEW OF LITERATURE 15

3 CHAPTER 3- BACKGROUND OF THE STUDY 34

3.1 An Overview of the Indian Financial Market and 35

3.2 Historical Patterns in India's Stock Market and Exchange 36

3.3 Stock Market in India- Pre-Independence Period 37

3.5 Discussion of the Indian Economy's Current State and Its 38

3.6 Current Overview of the Stock Market 39

3.7 Current Overview of the Forex Market 43

3.8 Understanding of the Role of the Interaction of Stock 47

4 CHAPTER 4- DATA ANALYSIS AND 49

4.4 Descriptive Statistics 52

4.5 Tests of Association 57

4.6 Test of Stationarity 59

4.7 Johansen’s Cointegration Analysis 61

4.8 Granger’s Causality Test 64

5 CHAPTER 5- FINDINGS, SUGGESTIONS, CONCLUSION 7.1

Table 1:1 Specification and Parameter of the Study 7

Table 1.2 Details of the Sample for the Study 10

Table 1.3 Table Depicting an Overview of the Chapter Design 14

Table 3.1 Table Depicting Timeline of the Growth of the Stock

Table Log Return Values of Nifty 50 Index and USD/INR,

Table Descriptive Statistics of the Data Collected

Table Log Values of Nifty 50 and USD/ INR, GBP/INR,

Table Association Level of the Collected Data

Table The Table Depicting Association Between the Different

Table Results of cointegration Test

Table Results showing Pairwise Granger Causality Tests of

Table Results showing Pairwise Granger Causality Tests of

Table Results showing Pairwise Granger Causality Tests of

Table Combined Results Showing Pairwise Granger Causality

SL.NO TITLE PAGE NO

Fig. 3.1 Structure of the Indian Stock Market

Fig 3.2 The Stock Market Participants

Fig 4.2 Graphical Depiction of the Collected Data at Log Returns

India has a fast-growing economy with a variety of industries, including manufacturing,

1.3. SCOPE OF THE STUDY

Overall, the study aims to provide an in-depth comprehensive understanding of the

1.4. RESEARCH QUESTIONS

 What is the level of influence of foreign currency exchanges on Indian Stock

1.5. RESEARCH OBJECTIVES:

A variable is a characteristics, property, or attribute that can be measured or observed.

Table 1.1: Specification and Parameter of the Study

Sl. No. Concept Specification Parameter

1. Stock Market Nifty Index Prices corresponding

2. Exchange Rates Selected Currency Exchange Prices corresponding

3. Price Behaviour Unexpected Price behaviour Unexpected

Dependent variable: Price of the Nifty Index

1.7. RESEARCH HYPOTHESES

1.8.1. SOURCES OF DATA:

Equitypandit.com is a financial information website that provides investment advice,