Impact of Macroeconomic Variables on Stock Returns: Evidence from Bombay Stock Exchange (BSE)

Numerous empirical studies have examined the relationship between macroeconomic variables and stock returns across different stock markets and time horizons by either outlining the influence of only domestic variables or a few global factors. The aim of this paper is to combine both global and domestic factors and extend this presumed relationship between stock returns and macroeconomic variables to the emerging market of India. Using time-series analysis, this paper employs Vector Autoregression (VAR) to determine the impact of macroeconomic variables on the stock returns of Bombay Stock Exchange (BSE). Findings of this paper indicate that a considerable impact of interest rate, gold price, exchange rate and money supply is observed for the stock returns of BSE. Additionally, a strong influence of the global macroeconomic factor of the world price index is also observed, which implies a gradual integration of BSE towards the global financial markets. Finally, the study highlights the managerial and policy implications, future research directions and limitations from the perspective of India.