Foreign Exchange Reserve and its Impact on Stock Market Capitalization: Evidence from India

Abstract

This paper tries to assess relationship between foreign exchange reserves of India and BSE market capitalization on the basis of annual data from the year 1990-91 to2010-11. This study uses simple linear regression model, unit root test, granger causality test to measure the relationship between foreign exchange reserves of India and BSE market capitalization. The results depicts that foreign exchange reserves of India has positive impact on BSE Stock Market capitalization. The granger causality test suggests that stock market capitalization (SMC) does not Granger cause foreign exchange reserve (FOREXR) at all where as foreign exchange reserve (FOREXR) Granger causes stock market capitalization (SMC). That means the Granger Causality Test shows that causality is unidirectional and it runs from foreign exchange reserve to stock market capitalization but not vice versa. This study sheds lights and provides significant information that will guide the stock brokers, agents, planners, government policy makers to make decision about the stocks and stock markets of India especially about BSE by looking at the trend of foreign exchange reserves of India.

Keywords: Foreign exchange reserve, stock market, capitalization, India, BSE.