AN IMPACT OF INFLATION AND EXCHANGE RATE ON STOCK RETURNS: EVIDENCE FROM INDIA

The study investigates the existence of relationship between Indian stock market and two macro economic variables namely, inflation and exchange rate. It covers a data period from April 2011 to March 2017. Multivariate Regression Model has been employed to investigate the relationship between BSE Sensex returns as dependent variable, and macro economic variables namely inflation (CPI) and exchange rate (USD- INR) as independent variables. Multicollinearity between independent variables has been tested by calculating Variance Inflation Factor and Tolerance statistics. Both the tests paved the way for application of multivariate regression as multicollinearity among independent variables is not found. The Results of multivariate regression show evidence of positive significant relationship between inflation and stock returns and insignificant relationship between exchange rate and stock returns in India. The findings suggest that Indian Stock Market is driven by inflation.