Article 27

An Empirical Study on the Impact of Exchange AAYAM

Rate and Inflation Rate on NSE Index Vol. 6 No. 2 Page 27-32
July-December, 2016 © AKGIM

Nitin Tanted *
Gulrukh Khan **

Abstract
The paper tries to examine the primary factors responsible for affecting national Stock Exchange (NSE) in India. Further this paper attempts to
investigate the relative influence of the factors affecting NSE and thereby categorizing them. It is a well known fact that dollar price or money
exchange rate and Inflation has a great influence on NSE Sensex therefore; this research identifies the level of influence of exchange rate and
rate of inflation on NSE index. For establishing the relationship Regression Analysis has been used by using Excel.A Stock Exchange forms
an integral part of any nation. 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. Stock exchanges are places through which the public at large
take part as investors. In India, the NSE has been attracting thousands. The movement of stock indices is highly sensitive to the changes in
fundamentals of the economy and to the changes in expectations about future prospects. Expectations are influenced by the micro and macro
fundamentals which may be formed either rationally or adaptively on economic fundamentals, as well as by many subjective factors which are
unpredictable and also non quantifiable. It is assumed that domestic economic fundamentals play determining role in the performance of stock
market. However, in the globally integrated economy, domestic economic variables are also subject to change due to the policies adopted and
expected to be adopted by other countries or some global events of investors each year.

Keywords
Exchange Rate, Inflation, NSE.

INTRODUCTION by the micro and macro fundamentals which may be formed

A Stock Exchange forms an integral part of any nation. 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.
Stock exchanges are places through which the public at large
take part as investors. In India, the NSE has been attracting
thousands of investors each year. Worldwide, there are millions
of transactions that take place every day.
Stock market is one of the major economic reflectors. Indian
economy is currently emerging as a global super power. Due
to low labor cost and skillful manpower sectors like textile,
garments, manufacturing, banking and insurance has made
a significant contribution to foster the growth potentials of
the economy but there are several factors which directly or
indirectly affect the performance of NSE Sensex such as
inflation, exchange rate, IIP, crude oil, interest rate structure,
gold price etc.
The movement of stock indices is highly sensitive to the
changes in fundamentals of the economy and to the changes in
expectations about future prospects. Expectations are influenced
either rationally or adaptively on economic fundamentals, as
well as by many subjective factors which are unpredictable
and also non quantifiable.
It is assumed that domestic economic fundamentals play
determining role in the performance of stock market. However,
in the globally integrated economy, domestic economic
variables are also subject to change due to the policies adopted
and expected to be adopted by other countries or some global
events.
The common external factors influencing the stock return
would be stock prices in global economy, the interest rate and
the exchange rate. For instance, capital inflows and outflows
are not determined by domestic interest rate only but also by
changes in the interest rate by major economies in the world.
Conceptual framework
• Nifty
The National Stock Exchange of India Limited (NSE) is the
leading stock exchange of India, located in Mumbai. NSE
was established in 1992 as the first demutualized electronic

* Associate Professor, Symbiosis University of Applied Science, Indore

** Alumini, Prestige Institute of Management and Research, Indore

AAYAM, Vol. 6 No. 2, July-December, 2016

28
exchange in the country. NSE was the first exchange in the
country to provide a modern, fully automated screen-based
electronic trading system which offered easy trading facility to
the investors spread across the length and breadth of the country.
The CNX Nifty is a well diversified 50 stock index accounting
for 22 sectors of the economy. It is used for a variety of purposes
such as benchmarking fund portfolios, index based derivatives
and index funds.
CNX Nifty has shaped up as a largest single financial product
in India, with an ecosystem comprising: exchange traded funds
(onshore and offshore), exchange-traded futures and options
(at NSE in India and at SGX and CME abroad), other index
funds and OTC derivatives (mostly offshore).
• Exchange rate
The price of a country’s currency in terms of another country’s
currency. An exchange rate thus has two components, the
domestic currency and a foreign currency, and can be quoted
either directly or indirectly. In a direct quotation, the price of a
unit of foreign currency is expressed in terms of the domestic
currency. In an indirect quotation, the price of a unit of domestic
currency is expressed in terms of the foreign currency. An
exchange rate that does not have the domestic currency as one
of the two currency components is known as a cross currency,
or cross rate.
• Inflation
Inflation is a sustained increase in the general price level of
goods and services in an economy over a period of time. When
the price level rises, each unit of currency buys fewer goods
and services. Consequently, inflation reflects a reduction in
the purchasing power per unit of money – a loss of real value
in the medium of exchange and unit of account within the
economy.A chief measure of price inflation is the inflation
rate, the annualized percentage change in a general price index
(normally the consumer price index) over time.The opposite
of inflation is deflation.
Inflation affects an economy in various ways, both positive and
negative. Negative effects of inflation include an increase in
the opportunity cost of holding money, uncertainty over future
inflation which may discourage investment and savings, and if
inflation were rapid enough, shortages of goods as consumers
begin hoarding out of concern that prices will increase in the
future.
Review of literature
Aliyu Shehu Usman Rano(2010) assessed stock market returns
and volatility by using GARCH model in Nigeria and Ghana.
Inflation rate and its three month average were found that there
is a significant effect on stock market volatility in the two
countries. The study also concluded that the inflation rate is
one of the most important predicting variable.It was concluded
AAYAM, Vol. 6 No. 2, July-December, 2016
Nitin Tanted and Gulrukh Khan
that Measures employed towards restraining inflation in the
two countries, therefore, would certainly reduce stock market
volatility, improve stock market returns and boost investor
confidence.
Ma and Kao (1990) find that a currency appreciation negatively
affects the domestic stock market for an export-dominant
country and positively affects the domestic stock market for an
import-dominant country, which seems to be consistent with
the goods market theory.
Bahmani and Sohrabian (1992) found a bi-directional causality
between stock prices measured by the Standard & Poor’s 500
index and the effective exchange rate of the dollar, at least in
the short run. The co-integration analysis revealed no long run
relationship between the two variables.
Abdalla and Murinde (1996) investigate interactions between
exchange rates and stock prices in the emerging financial
markets of India, Korea, Pakistan and the Philippines. The
results of the granger causality tests results show unidirectional
causality from exchange rates to stock prices in all the sample
countries, except the Philippines.
Mohammed Omran, John Pointon(2000) examine the impact
of the inflation rate on the performance of the egytian stock
market. Market activity and Market liquidity are considered as
stock market performance variables. The study found out that
there is short and long run relationship exists between the stock
market performance variables and inflation rate. According to
the research, inflation rate is having more short term impact.
Pan, Fok & Lui (1999) used daily market data to study the
causal relationship between stock prices and exchange rates
and found that the exchange rates Granger-cause stock prices
with less significant causal relations from stock prices to
exchange rate. They also find that the causal relationship have
been stronger after the Asian crisis.
Bernanke and Kuttner (2005) argue that the price of a stock
is a function of its monetary value and the perceived risk in
holding the stock. A stock is attractive if the monetary value
it bears is high. On the other hand, a stock is unattractive if
the perceived risk is high. The authors argue that the money
supply affects the stock market through its effect on both the
monetary value and the perceived risk. Money supply affects
the monetary value of a stock through its effect on the interest
rate. The authors believe that tightening the money supply raises
the real interest rate. An increase in the interest rate would in
turn raise the discount rate, which would decrease the value of
the stock as argued by the real activity theorists. The impact of
real sector macro variables on equity returns has been much
more difficult to establish.
An Empirical Study on the Impact of Exchange Rate and Inflation Rate on NSE Index 29

Daferighe, Emmanuel E, Charlie, Samuel Sunday, (2012) rate and returns of NSE index was collected of the specified
investigated the impact of inflation on stock market performance period.
in Nigeria using time series data for twenty years from 1991-
2010.Regression analysis was used to evaluate the influence TOOLS FOR DATA COLLECTION
of inflation on various measures of stock market performance. As the data required was secondary in nature. The data was
Market capitalization, Total value traded ratio, Percentage collected from the official website of RBI http://www.rbi.org.
change in all-share index and turnover ratio.It was found out inand NSE www.nse.org and www.nseindia.com ,
that there is negative relationship exists between inflation
and the stock market performance measures but inflation had TOOLS FOR DATA ANALYSIS
a positive relationship with the turnover ratio. Low level of Suitable statistical tools such as regression and correlation are
inflation revealed that stock market investment is a good hedge used for analyzing the data.
against inflation in Nigeria.
FORMULATION OF HYPOTHESIS
Kate Phylaktis, Fabiola Ravazzolo (2005) studied the short The parameter that, there has been a substantial difference
and long run dynamics between stock prices and exchange rate in the performance of the NSE needs to be tested in order to
by using cointegration methodology and multivariate granger test the hypothesis. (For this the null hypothesis H0: is ‘The
casuality test. They applied it to pacific basic countries over stock performance of NSE is not dependent on inflation
the period 1980-1998.There is impact of Exchange rate on and exchange rate.’)
stock market. It is concluded that stock and foreign exchange
markets are positively related. HYPOTHESIS
1. H0: Stock performance is not dependent on inflation and
RATIONALE OF STUDY exchange rate.
In the highly dynamic era the fluctuation in dollar rupee 2. H1: Stock performance has significant dependence on
exchange rate seems to be very volatile, the fluctuation in inflation and exchange rate.
exchange rate affects the fluctuation of dollar in the country
there has been found heavy effect of exchange rate on the stocks Result and analysis
listed on NSE, thus the investor and analyst should know how
The movement of stocks is affected when the exchange rate Summary output
changes.
Regression Statistics

The price of stock is a function of its monetary value and the Multiple R 0.933099228
perceived risk in holding the stock, the movement of inflation R Square 0.87067417
affects the values of stock in a country, there has been a heavy Adjusted R Square 0.841935097
effect of inflation in a country on the demand of its stocks and Standard Error 322.104323
thus its prices. Thus the investors and analyst should know how
Observations 12
the movement of stock is affected with the rate of inflation.
This study will help to analyze the impact of movement of
stock listed on NSE. Multiple R
Multiple R is 0.93 shows that there is a positive corelation
OBJECTIVE OF THE STUDY between NSE tracks exchange rate & regression rate.
• To study the impact of exchange rate on the performance
of NSE R Square
• To study the impact of inflation on the performance of NSE R Square equals  0.87, which is a very good fit. 87% of the
variation in NSE is explained by the independent variables
METHODOLOGY INFLATION and EXCHANGE RATE. The closer to 1, the
better the regression line fits the data.
THE STUDY
The study was empirical in nature. ANOVA
df SS MS F Significance F
THE SAMPLE Regression 2 6286458 3143229 30.29583318 0.000100597
For conducting the study the Data used is secondary in nature.
Residual 9 933760.8 103751.2
The data collected was from 1stjan 2014 till 31st December
2015. The data related to inflation rate, dollar rupee exchange Total 11 7220219

AAYAM, Vol. 6 No. 2, July-December, 2016

30 Nitin Tanted and Gulrukh Khan

Results are reliable (statistically significant), look at Significance F (0.0001) as this value is less than 0.05.

Coefficients Standard t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Error
Intercept 27303.0078 6424.34786 4.24992 0.0021427 12770.1233 41835.892 12770.1233 41835.89235
Exchange Rate -324.988150 105.2518 -3.0877 0.0129771 -563.084353 -86.8919469 -563.084353 -86.89194691
Inflation Rate 215186.322 27660.5269 7.77954 0.0027713 152613.863 277758.781 152613.863 277758.7812

P value
P value gives the probability value for test the null hypothesis that the coefficient is equal to zero (no effect). A low p-value (<
0.05) indicates that the null hypothesis can be rejected.

RESIDUAL OUTPUT      

Observation Predicted NSE Residuals
1 6553.659507 -330.4964637
2 6300.317767 -201.5730307
3 6099.106525 408.8744274
4 6983.156414 -228.4203026
5 7275.560105 -192.4029624
6 7495.202884 47.63997346
7 7869.65163 -192.8902668
8 7888.103882 -100.7512509
9 7365.969699 687.5553007
10 7902.23793 50.87595844
11 8416.261412 0.796921132
12 8259.076486 50.79169569

TESTING OF HYPOTHESIS
Significance value is 0.000100 which is less than the 0.05 level of significance which means the hypothesis (H0) is rejected
i.e.Stock performance is not dependent on inflation and exchange rate.
Alternate hypothesis (H1) is accepted .i.e. stock performance has significant dependence on inflation and exchange rate.

RESULTS AND ANALYSIS OF CORRELATION

NSE Exchange Rate inflation rate
NSE 1
Exchange Rate -0.0317 1
inflation rate 0.8565 0.36516 1

The correlation coefficient (a value between -1 and +1) tells how strongly two variables are related to each other. A correlation
coefficient of +1 indicates a perfect positive correlation. As variable X increases, variable Y increases. As variable X decreases,
variable Y decreases
Thus, the correlation coefficient is closer to 1, the performance of NSE has significant dependence on inflation and exchange rate.

SUGGESTIONS
Exchange rate and inflation rate are most important factor for predicting the movement of NSE index. Thus should be studied and
analyzed before taking any investment decision. As the data on inflation is available on fortnight basis, thus the analysis should
be done on fortnight basis (15 Days) also which can give accurate results. As exchange rate covers the international factor, the

AAYAM, Vol. 6 No. 2, July-December, 2016

An Empirical Study on the Impact of Exchange Rate and Inflation Rate on NSE Index
movement of FII (International Factors) can also be captured
using this analysis and inflation rate can capture the mood of
internal economy(National Factors) ,thus using inflation rate
the movement of economy can be captured.
Thus both the factor should be closely monitored for analyzing
the movement in NSE.
CONCLUSION
This research tries to find out the relationship between NSE and
Exchange, Inflation rate. Regression analysis has been used to
do the analysis based on monthly basis database of different
economical factors. It was concluded that the movement of
stock indices is highly sensitive to the changes in fundamentals
of the economy.
It is observed from the analysis that inflation is negatively
influencing the price return of NSE NIFTY. It implies that
inflation hike has a negative impact on the price return of
India. Another factor taken for the study is exchange rate which
indicates that if exchange rate appreciates against US dollar,
the return on NSE NIFTY will also increase.
IMPLICATION
Considering the investor’s point of view what can be suggested
is that they should be very careful while investing in the Stock
Market. The market is fluctuating and unpredictable. The prices
i.e. returns from stock are dependent on the forces of demand
and supply thus making it unpredictable .One should do a proper
and detailed analysis before investing.
Inflation hike has a negative impact on the price return of India.
Another factor taken for the study is exchange rate which
indicates that if exchange rate appreciates against US dollar,
the return on NSE NIFTY in India is getting increased.
This report is of great help to the company and investors. The
analysis can be used as base for future analysis. They can use
various tools and techniques to take decision and play safe in
the market. The report can be utilized by the investors in making
decision regarding developing a safe and balanced portfolio.
LIMITATION
The research only considers inflation rate and exchange rate
we can also include other macroeconomic factors such as IIP,
interest rate, money supply, central government policies etc.
Statistical tools such as granger causality test could also be
used and the data collected could be of more number of years
rather than just one year data. Stock market varies on daily basis
and in fact exchange rate is a very active variable, so the data
used could have been on daily basis rather than monthly data.
31
FUTURE SCOPE
The main objective for investing is to maximize the wealth i.e.
to get increased returns. Stock returns depend on the forces of
demand and supply thus making it unpredictable. One should
do a proper and detailed analysis before investing;the study will
help the investors by providing empirical evidence of interest
rate, exchange rate and inflation effect on stock of NSE.
Investors must closely analyse the exchange rate patterns and
forecast the future exchange rate before investing in NSE
NIFTY and based on those forecasted exchange rates they can
maximise profits.
REFERENCES
Abdalla, I. S. A. and V. Murinde (1996), “Exchange rate and stock
prices interactions in emerging financial markets: Evidence
on India, Korea, Pakistan and Philippines”. Applied Financial
Economics, 7, pp- 25-35.
Ajayi, R. A. and M. Mougoue (1996), “On the Dynamic Relation
between Stock Prices and Exchange Rates,” Journal of Financial
Research 19, pp-193-207.
Bahmani-Oskooee, M. and A. Sohrabian (1992). “Stock Prices and the
Effective Exchange Rate of the Dollar”, Applied Economics,
24, 4, pp-459-464.
Baumol, W. (1965), Stock Market and Economic Efficiency, Fordham
University Press, New York.
WEBLIOGRAPHY
www.nseindia.com
www.nse.org
www.rbi.org.in
www.moneycontrol.com
ABOUT THE AUTHOR
Dr. Nitin Tanted is continuously engaged in training in the areas
of Mutual funds; Capital Market, Derivatives Market and financial
modeling using excel and is selected as a CPE Resource Person
(Mutual Fund) by National Institute of Securities Market (NISM) for
conducting ARN Renewal Training Program. He has also conducted
training programs under the aegis of Armed Police Training
Academy, Indra Securuties Pvt. Ltd., National Stock Exchange,
Union Bank, Axis Bank, CIEL Mumbai, ITM Institute of financial
market, Mumbai to name a few. He has conducted an International
Training Program for a week in Bangladesh on Advanced
Commodity Derivatives. Dr. Nitin Tejkumar Tanted is working as
Associate Professor at the School of Banking, Finance services and
Insurance (BFSI), Symbiosis university of Applied Science, Indore
(SUAS) and having rich experience of 14 years.
Ms. Gulrukh is an Aluminous of Prestige Institute of Management
and Research, Indore and working as a Freelance trainer in finance
area.
AAYAM, Vol. 6 No. 2, July-December, 2016
32 Nitin Tanted and Gulrukh Khan

ANNEXURE

MONTHS INDEX INFLATON RATE First order difference

JAN 233.916 1.6 0.003698
FEB 234.781 1.1 0.00644
MARCH 236.293 1.5 0.003297
APRIL 237.072 2 0.003493
MAY 237.9 2.1 0.001862
JUNE 238.343 2.1 -0.00039
JULY 238.25 2 -0.00167
AUGUST 237.852 1.7 0.000753
SEPT 238.031 1.7 -0.00251
OCT 237.433 1.7 -0.0054
NOV 236.151 1.3 -0.00567
DEC 234.812 0.8 -1

MONTHS NSE EXCHANGE RATE INFLATION RATE

JAN 6223.163 62.059 -0.0027

FEB 6098.745 62.178 -0.0037
MARCH 6507.981 60.981 -0.00644
APRIL 6754.736 60.342 -0.0033
MAY 7083.157 59.313 -0.00349
JUNE 7542.843 59.716 -0.00186
JULY 7676.761 60.055 0.00039
AUGUST 7787.353 60.846 0.001671
SEPT 8053.525 60.849 -0.00075
OCT 7953.114 61.360 0.002512
NOV 8417.058 61.690 0.005399
DEC 8309.868 62.353 0.00567

AAYAM, Vol. 6 No. 2, July-December, 2016

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