The study investigates the relationships between exchange rate and stock price over the period January 2007 to March 2014. Index National Stock Exchange, namely, NIFTY is used as indicator of stock price. Johansen’s co-integration and Granger causality test have been applied to explore the long-run and short-run equilibrium relationship between exchange rate and stock price. The analysis reveals that exchange rate and stock price are co-integrated and, hence, a long-run equilibrium relationship exists between them. It is observed that the exchange rate and NIFTY as indicators of stock price are positively related to each other. The exchange rate is found to be significant in determining stock price and stock price significantly affects exchange rate. In the Granger-causality sense, exchange rate Granger-causes stock price and stock price Granger-causes exchange rate, or there is bi-directional causality between exchange rate and stock price in both long run and short run.

The stock exchanges of a country form an integral part of its financial system. In many ways, it is the barometer through which the economy of a country is perceived by many people even though there are other economic tools to judge the actual health of the economy. The Asian Crisis of 1997-98 has made a strong pitch for dynamic linkage between stock prices and exchange rates. During the crisis period, the world has noticed that the emerging markets collapsed due to substantial depreciation of exchange rates (in terms of US$) as well as dramatic fall in the stock prices. This has become important again from the viewpoint of large cross-border movement of funds due to portfolio investment and not due to actual trade flows, though trade flows have some impact on stock prices of the companies whose main sources of revenue come from foreign exchange. Recently, it is observed that contagion from the US subprime crisis has played significant movement in the capital markets across the world as foreign hedge funds unwind their positions in various markets. Other burning example in India is the appreciation of currency due to higher inflow of foreign exchange. Rupee appreciation has declined stock prices of major export-oriented companies. Information technology and textile sector are the examples of falling stock prices due to rupee appreciation.

Financial Risk Management Journal, Relationship, Exchange Rate, NIFTY, ARDL, Stock Price in India: An Empirical Study.