Stock Returns and Inflation in India : An Empirical Analysis

This paper investigates the relationship between stock returns and inflation in India during 1991:4 to 2009:3. Weekly, monthly and quarterly indexes of BSE Sensex and NSE Nifty are used. Weekly, monthly and quarterly Wholesale Price Index (WPI) and monthly Consumer Price Index (CPI) are used as measures of inflation. The analysis is also carried for the subperiod 2002:4-2009:3, and the pre-crisis and post-crisis analysis is conducted through the analysis of the subperiod 2005:1-2009:4. Unit root tests, Granger causality test and regressions are performed for examining the nexus between the variables. Vector Autoregression (VAR) methodology has been employed to investigate the causal link between stock returns and inflation. Impulse Response Functions (IRF) check the response to disturbance in the system. The results suggest that there is no significant relation between stock returns and inflation in post-reform period in India