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Impact of GDP Growth Rate, Inflation Rate & Lending Interest Rate on Sensex Returns

"The stock market is filled with individuals who know the price of everything, but the value of nothing." - Phillip Arthur Fisher
(Author Common Stock and Uncommon Profit )

Another testament to the fact that investing without an

education and research will ultimately lead to regrettable


investment decisions. Research is much more than just listening to popular opinion.

Objectives
The study aims to find the relationship between Gross Domestic

Product Growth Rate, Inflation Rate and Lending Interest Rate on


Sensex Performance & the Level of Significance between them. Tool to understand the behaviour of Stock Market

Research Design
Nature of the Study Analytical Vector Auto Regression Model - Significance Level between variables Collection of Data

Annual Data - 13 Years


Sources - Websites of Ministry of Finance, Economic Survey of India, BSE India, World Bank and RBI.

Methodology
Data about 3 Macro Variables were collected for the period of 19972011. The study was conducted on BSE SENSEX. The Model represents SENSEX Returns, Percentage change in the GDP Growth Rate, change in Inflation Rate, and Percentage change in Interest Rate.

Dickey-Fuller Unit Root Test


Out to check for the stationarity /non-stationarity

Based on the model: Yt = Yt-1+ut


Reject the null hypothesis, if is significant and negative
Variable SENSEX GDP Inflation Inflation (-1) Interest Rate Interest Rate (-1) t-stat P-value -1.38 -4.855 0.001 -1.231 -4.286 0.001 -0.611 -2.295 0.042 -1.102 -3.441 0.006 -0.56 -2.011 0.069 -0.998 -3.149 0.01

Two-Year lags for Inflation Rate & Interest Rate, One-Year lags for
GDP Growth Rate, as determined from the auto-correlation functions.

Vector Auto Regressive (VAR) Model to test for the impact of the
Macro Economic Variables on Sensex Returns. The unrestricted VAR model is given as follows:

St = +

1j.GDPt-j+

2jWPIt-j+

3j IRt-j+t

The F-Test of the VAR output was performed to determine the significance of the impact of each macroeconomic variable on SENSEX Returns.

Results of Auto Correlation GDP Growth Rate

Results of Auto Correlation Inflation Rate

Results of Auto Correlation Interest Rate

Results of VAR Model Sensex Returns

VAR Model Summary


Mode l 1 R .445a Model Summary Adjusted R Std. Error of Square the Estimate R Square .198 -.069 43.28445 ANOVAb Sum of Mean Squares Square Model df F Sig. 1 Regression 4172.474 3 1390.825 .742 .553a Residual 16861.890 9 1873.543 Total Coefficientsa 21034.364 12

Unstandardized Coefficients 1 Model (Constant) GDP growth DIFF(Inflation,1) DIFF(InterestRate,1) B .651 2.707 -.943 11.690 Std. Error 45.824 6.020 3.520 8.167

Standardized Coefficients Beta .142 -.081 .453 t .014 .450 -.268 1.431 Sig. .989 .664 .795 .186

Results of F-Test Of VAR Model


Variable GDP Inflation Interest Rate F-Stat 0.202186 0.071801 2.048872 P-Value 0.663596 0.794772 0.186114 Significance 0.370a 0.344a 0.923a

Conclusion
Shallow Men believe in Luck, Wise & Strong Men in Cause & Effect

The study revealed that there is no significant relationship


between the GDP Growth Rate, Inflation Rate & Lending Interest Rate on Sensex Returns.

The results of the same study may vary if Weekly or Monthly


data is considered. Scope for further study in examining the impact of other Macro Economic variables.