The liberalization of the Indian economy and consequent strengthening of the relationship between the Indian financial system and the rest of the world has made India more vulnerable to macro issues. This book provides a comprehensive analysis of the dynamic relationship between macroeconomic variables and stock prices in India. A wide range of Vector auto regression models including Johansen co-integration test, vector error correction model, Granger causality test, impulse response analysis, and variance decomposition analysis are used to estimate and interpret the long-run, short-run, and causal relationships between Indian stock prices and eleven macroeconomic variables during the liberalized period. The estimated results indicate that the Indian stock market is sensitive to changes in macroeconomic fundamentals in the long run. However, in the short run only a few macroeconomic variables (such as consumer price index, foreign trade and exchange rate) affect stock prices. The study also observes that the Indian stock market is approaching informational inefficiency in the long run. The research findings and policy implications discussed here may be relevant for other emerging economies as well.
