Impact of Macroeconomic Variables on Stock Market Returns: An ARDL Analysis of the Indian Market

Abstract

This paper explores how the key macroeconomic variables affect stock market returns on investment (ROI) in the Indian setting with special focus to inflation, exchange rates movement, and foreign direct investment (FDI). Using time-series data related to the Indian economy and its capital markets, the study explores both short and long run processes that correspond to macroeconomic variables and market returns. Augmented DickeyFuller (ADF) test is used to determine the stationarity, and an Autoregressive Distributed Lag (ARDL) error-correction model is applied to determine the relationship among the variables. The results affirm the presence of the long-run equilibrium relationship between stock markets returns and the macroeconomic factors under study. Inflation did not have a statistically significant impact on returns either in the long or short term whereas exchange rate movements have a significant impact on returns especially in the short term where currency depreciation adversely impacts market performance. The approximate error -correction value is negative and high, which signifies a prompt adaptation to long-run equilibrium after short-run shocks. These findings highlight the significance of exchange rate stability in the performance of the market and provide valuable information to the policy makers and investors, particularly younger and long-term market participants on the macroeconomic risks that determine investment returns in India.