AN EMPIRICAL ANALYSIS ON RATIONAL RESPONSE OF INDIAN STOCK MARKET

In the present study, the rationality of Indian stock market is analyzed in terms of the macroeconomic predictability. The three proxy variables are chosen in regard to represent the dynamics of Indian stock market which are Nifty50 return (NIFTY, Turnover (TR) and Volatility Index (VIX). The main objective of our study is to forecast of these individual three proxy variables in term of selected macroeconomic indicators which are used as independent variables in regard to linear regression analysis. The macroeconomic indicators which have taken for this study, are Foreign institutional investment in equity segment(FII), Index of industrial production(IIP), Consumer price index(CPI), Exchange Rate(ER), Trade Deficit(TD) ,Risk free rate i.e. 91 day treasury bill rate(RF),Foreign Currency Assets(FCA), Aggregate Bank Deposits(ABD), Aggregate Bank Credit(ABC), Crude Oil Price(COP). The present study shows that although there is a linear trend exists in long run but macroeconomic indicators cannot explain the stock market movement completely. Therefore it would be said that there is some kind of irrationality exists in Indian stock market which cannot be defined by only fundamental macroeconomic indicators which may be assumed as rational information for the specific region in the particular time period.