Document Type

Working Paper

Publication Date

1998

Abstract

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.

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