THE DYNAMIC RELATIONSHIP BETWEEN THE STOCK PRICE AND EXCHANGE RATE IN INDIA

The paper examines the dynamic relationship between stock price and exchange rate expressed in terms of long run, short run and causal relationships in the context of India, using monthly data for the period 1990-2004 to 2004-08. The well-known cointegration tests, error correction mechanism and Granger Causality tests have been applied for the purpose of empirical investigations. The study finds one cointegrating vector between exchange rate and stock price, which is necessary for cointegration to exit, and hence, the variables are cointegrated. The error correction result reveals that, though both the variables are in disequilibrium in the short run, they follow an equilibrium relationship in the long run. The unidirectional Granger Causality from exchange rate to stock price is found through the Granger Causality tests in the long run.