In this paper we analyze relationships among selected macroeconomic variables and the Indian stock market. By employing a vector error correction model, we find that three long-term equilibrium relationships exist among these variables. Our results suggest that domestic inflation is the most severe deterrent to Indian stock market performance, and domestic output growth is its predominant driving force. After accounting for macroeconomic factors, the Indian market still appears to be drawn downward by a residual negative trend. We attribute this to economic mismanagement, since the size of the downward pull mitigates after 1990, coinciding with the beginning of Indian economic reforms.
Naka, Atsuyuki; Mukherjee, Tarun; and Tufte, David, "Macroeconomic variables and the performance of the Indian Stock Market;" (1998). Department of Economics and Finance Working Papers, 1991-2006. Paper 15.