Relationship between Exchange Rate and Stock Price in India : An Empirical Study

The study investigates the relationships between exchange rate and stock price over the period January 2007 to March 2014. Index National Stock Exchange, namely, NIFTY is used as indicator of stock price. Johansen's co-integration and Granger causality test have been applied to explore the long-run and short-run equilibrium relationship between exchange rate and stock price. The analysis reveals that exchange rate and stock price are co-integrated and, hence, a long-run equilibrium relationship exists between them. It is observed that the exchange rate and NIFTY as indicators of stock price are positively related to each other. The exchange rate is found to be significant in determining stock price and stock price significantly affects exchange rate. In the Granger-causality sense, exchange rate Granger-causes stock price and stock price Granger-causes exchange rate, or there is bi-directional causality between exchange rate and stock price in both long run and short run