Exploring the relationship between macroeconomic indicators and sectoral indices of Indian stock market

The influence of macroeconomic indicators makes it important to study the relationship between macroeconomic indicators and stock market return. On further analysis it can be observed that different sectors respond differently to change in the macroeconomic indicator that is important for investors, researchers and policy makers.

The autoregressive distributed lag (ARDL) model is applied to study influence of macroeconomic indicators on sectoral return of NSE from April 2012 to August 2024.

Findings of the study show that macroeconomic indicators influence sectoral return in the short run as well as long run and the influence is differential. The analysis of long run relationship shows that Foreign Institutional Investment (FII) significantly affects all the sectoral indices except IT. Index of industrial production (IIP) have significant relationship with Auto, IT, Media, Metal and Pharma. Money supply (MS) significantly affects Bank, FMCG and IT in the long run. Wholesale Price Index (WPI) has significant relationship with Auto, FMCG and Media in the long run. Economic Policy Uncertainty Index (EPU) affects Auto, FMCG and Pharma in the long run. Crude oil price (COP) has significant effect only on Media in the long run. Exchange rate (ER) does not have significant effect on any of the sectoral index.

In the long run FII, IIP, EPU, MS and WIP are major determinants of stock market return. In the short run FII, ER and COP are major determinants of stock market return.