Relationship between Exchange Rates and Stock Market Index: Evidence from the Indian Stock Market

The debate as whether the development in the foreign exchange markets have ramifications for the stock markets have become one of the tenets in financial economics. This study tries to analyze the dynamic relationship between stock market index and exchange rate. Several statistical tests have been applied in order to study the relationship of both the series. The period for the study has been taken from 1-07-2014 to 29-07-2016 using daily closing indices. In this study, unit root test, for Exchange rate and Nifty returns, were found to be stationary at the first difference itself. Correlation between Exchange Rates and NIFTY returns were found to be negative. Further, investigation into the causal relationship between the two variables using Granger Causality test highlighted unidirectional relationship between Exchange Rates and NIFTY returns.