CHAPTER-1

INTRODUCTION

In the era of globalization and stabilization, one of the macroeconomic

variables that have come into greater focus is the interest rate. This is
consequent upon a strengthened integration of the domestic financial sector with
the external sector. In India, the financial sector has undergone many changes
since the stabilization program initiated in the early 1990s. With financial
liberalization in the economy, flexibility has been imparted to the movement of
interest rates. The relationships between stock market returns and interest rate
has been examined by researchers as it plays important role in influencing a
country’s economic development. Interest rates are determined by monetary
policy of a country according to its economic situation. High interest rate will
prevent capital outflows, hinder economic growth and, consequently, hurt the
economy as interest rates is one of the most important factors affecting directly
the growth of an economy. The rational for the relationship between interest rate
and stock market return are that stock prices and interest rates are said to be
negatively correlated. Higher interest rate resulting from adverse monetary
policy negatively affects stock market returns because higher interest rate
reduces the value of equity and makes fixed income securities more attractive.
On the contrary, lower interest rates resulting from expansionary monetary
policy boosts stock market.
This is supposed to be a good sign for the economy as it is expected to enhance
the efficiency in the financial system and thereby leading to the achievement of
a higher growth rate. This policy stance is mostly backed up by the position of
the monetarist and the financial liberalization school as opposed to the
Keynesian school. According to the Monetarists, ‘a flexible interest rate policy
responds to the changes in the market conditions (demand and supply of credit),
thereby enabling the economy to withstand and control the macroeconomic
instabilities as an inflexible interest rate policy is prone to macroeconomic
fluctuations. A rise in the interest rates affects the valuation of the stocks. The
rise in the interest rates raises the expectations of the markets participants, which
demand better returns that commensurate with the increased returns on bonds. In
a low interest rate regime, corporate are able to increase profitability by
reducing their interest expenses. However in a rising interest rate regime, as
interest expenses rise, profitability is affected. When interest rates rise, investors
move from equities to bonds. Whereas when interest rates fall, returns on bonds
fall while the returns on equities tends to look relatively more attractive and the
migration of fund from bonds to equities takes place, and increasing the prices
of equities. Though financial economists, policy makers and investors have
long-attempted to understand dynamic interactions between interest rate and
stock prices, the exact patterns of the interactions remain unclear, the nature and
strength of the dynamic interactions between them is of high interest and need to
be evaluated empirically. Therefore, the researcher examines the dynamic
relationship between interest rate and stock prices in order to identify the impact
of interest rate changes on stock prices with special reference to Indian Stock
Exchange.

OBJECTIVE OF THE STUDY

The present research is intended to accommodate the following objective:

To examine the impact of the interest rate on stock market in India.
 To examine the effect of economic variables on stock return, gold return
and silver return
 To analyze whether stock, gold and silver returns form hedge against the
economic variables to effect the volatility levels
SCOPE OF STUDY

The Bombay Stock Exchange (BSE) and National Stock Exchange (NSE)
are two leading stock exchanges of India. The foreign institutional investors are
investing in these markets. So both of these markets have been taken to study
the determinants of the foreign institutional investment in India. The National
Stock Exchange was launched in 1992 and FIIs were also permitted to invest in
Indian market in September 1992. Because of this the reference period for the
study to investigate the impact of FIIs on stock market in India has been taken
from January 1986 to December 2007. However, due to its nonexistence the
data on NSE prior to 1994 was not available. Hence, it was not appropriate to
take National Stock Exchange data to ensure the impact of foreign institutional
investors on stock market return and volatility. Therefore, to determine the
impact of FIIs on Indian stock market (i.e. on return and volatility) Bombay
Stock Exchange has been considered. The time period of the study varies with
the various objectives of the study.

RESEARCH METHODOLOGY

The data used for the present research work is secondary data. The data
were collected from the official website of Bombay Stock Exchange and
monthly bulletin of Reserve Bank of India (RBI). The relevant literature was
gleaned from books, journals and magazines. The impact of Interest rate and
Stock market in India is studied, by using daily data from 1 st January, 2015 to
31st December,2015. This period is not only the economic growth period but
also depicted a great deal of volatility.
LIMITATION OF THE STUDY

 The Limit in accessing the population for collecting data.

 The lack of time to carry out a survey.
 The lack of funding necessary to carry out a survey.
 The lower priority for carrying out a survey because of competing urgent
tasks.
.
 CHAPTER-2
REVIEW OF LITERATURE
There has been a lot of discussion on the effect of macroeconomic variables on
Stock market.

 Ajit Singh (1997), Levine and Zervos (1998) reveal that being a part of the
financial system, stock markets play a crucial role to the economic growth
of a country.
 Madhusudan Karmakar and Malay K. Roy (1996) in their article titled
“Stock Price Volatility and Development Implications: Indian Experiences”
discussed the level of stock market volatility, has it increased over time, the
steps to be taken to improve stock market efficiency, etc. The study
surveyed the academic evidence of different facts of current stock market
volatility in order to generate information helpful for decision making. But
the study ignored the impact of stock market volatility on the investment
activity in India.
 Campbell et al (2001) found that stock market volatility has significant
forecasting power for real gross domestic product growth.
 GolakaNath and Samanta (2003) identified a strong causal influence from
stock market return to forex market return in India. However, they
expressed a need for further in depth research to identify the causes and
consequences of the findings.
 Paritosh Kumar (2008) validated the long term relationship of stock prices
with exchange rate and inflation in Indian context.
  Aspi Contractor (1998) in his article says as far as the stock market is
concerned, it is not so worried about inflation as interest rates. In the US,
the Federal Reserve has given signals that key interest rates should come
down. The RBI, in its busy-season credit policy, will make an effort to cap
interest rates by easing liquidity.
 Raj Kumar and Bhartendu Singh (1998) observed that the joint impact of
trading volume, rate of exchange and the rate of gold standard was highly
significant on Sensex. The individual effect of rate of exchange and rate of
gold standard on Sensex were also found highly significant but the individual
effect of trading volume was not found significant.
 Mayya M R (2000) in his article observed that FII operations are confined to
scrips of about 100 to 150 leading companies which are liquid. He opined
that it is this large percentage of deliveries which gives them the muscle
power to influence the market greatly.
 Gupta et al (2000) examined the relationship between interest rate, exchange
rate and stock price in Jakarta stock exchange and identified sporadic
unidirectional causality from closing stock prices to interest rates and weak
unidirectional causality from exchange rate to stock prices. They felt that the
Jakarta market is efficiently incorporated much of the interest rate and
exchange rate information in its price changes at closing stock market index.
 Campbell et al (2001) found that stock market volatility has significant
forecasting power for real gross domestic product growth.
 CHAPTER-3

COMPANY PROFILE

The data used for the present research work is secondary data. The data were collected from
the official website of Bombay Stock Exchange and monthly bulletin of Reserve Bank of
India (RBI). The relevant literature was gleaned from books, journals and magazines. The
impact of Interest rate and Stock market in India is studied, by using daily data from 1st
January, 2015 to 31st December ,2015. This period is not only the economic growth period but
also depicted a great deal of volatility.
A. Variable Justification
i) Dependent Variable
Stock market: Stock market has been calculated by using following equation
Rt = In (It / I t-1)
Where,
Rt = Return for month‘t’
It and I t-1 = daily BSE-Sensex Index for months‘t’ and t-1 respectively.
BSE SENSEX is taken as a proxy for equity returns, also-called the BSE 30 or simply the SENSEX,
is a free-floatmarket-weightedstockmarketindexof 30 well-established and financially sound
companies listed on BombayStockExchange. The 30 component companies which are some of the
largest and most actively traded stocks are representative of various industrialsectorsof the Indian
economy. Published since 1 January 1986, the S&P BSE sensex is regarded as the pulse of the
domestic stock markets in India. The base value of the S&P BSE sensex is taken as 100 on 1 April
1979, and its base year as 1978–79. On 25 July 2001 BSE launched DOLLEX-30, a dollar-linked
version of S&P BSE sensex. As of 21 April 2011, the market capitalisation of S&P BSE sensex was
about 29733 billion (US$442 billion) (47.68% of market capitalisation of BSE), while its free-float
market capitalisation was Rs15690 billion (US$233 billion). During 2008-12, Sensex 30 Index share
of BSE market capitalisation fell from 49% to 25% due to the rise of sectoral indices like BSE PSU,
Bankex, BSE-Teck, etc. The sensex is the benchmark index of the Indian Capital Markets with wide
recognition among individual investors, institutional investors, foreign investors and fund managers.
The BSE sensex is not only systematically designed but also based on globally accepted construction
and review methodology. First compiled in 1986, sensex is a basket of 30 constituent stocks
representing a sample of large, liquid and representative companies.
ii) Independent Variables
Interest rate: When reference is made to the Indian interest rate this often refers to the repo rate, also
called the key short term lending rate. If banks are short of funds they can borrow rupees from the
Reserve Bank of India (RBI) at the repo rate, the interest rate with a 1 day maturity. If the central bank
of India wants to put more money into circulation, then the RBI will lower the repo rate. The reverse
repo rate is the interest rate that banks receive if they deposit money with the central bank. This
reverse repo rate is always lower than the repo rate. Increases or decreases in the repo and reverse repo
rate have an effect on the interest rate on banking products such as loans, mortgages and savings.
Lending Rates of Daily call money rates have been used as proxy of interest rate.

The present study tried to expose the relationship between interest rate and Stock market, to focus on
‘causality’ among the variables using the method developed by Granger. Statistical and econometric
tools have been used to test and verify the results of the study for their accuracy. The tools namely
Augmented Dickey Fuller Test (for checking the stationarity of the data and finding unit roots in time
series) and Granger causality test for verifying the causal nexus between the Interest rate and Bombay
Stock Exchange) have been used for examining the short-run interdependence between variables.
 CHAPTER-4
ANALYSIS AND INTERPRETATION
 REASONS FOR INTEREST RATE CHANGES
 Political short-term gain: Lowering interest rates can give the economy a short-run boost. Under
normal conditions, most economists think a cut in interest rates will only give a short term gain in
economic activity that will soon be offset by inflation. The quick boost can influence elections.
Most economists advocate independent central banks to limit the influence of politics on interest
rates.
 Deferred consumption: When money is loaned the lender delays spending the money on
consumption goods. Since according to timepreference theory people prefer goods now to goods
later, in a free market there will be a positive interest rate.
 Inflationary expectations: Most economies generally exhibit Inflation, meaning a given amount
of money buys fewer goods in the future than it will now. The borrower needs to compensate the
lender for this.
 Alternative investments: The lender has a choice between using his money in different
investments. If he chooses one, he forgoes the returns from all the others. Different investments
effectively compete for funds.
 Risks of investment: There is always a risk that the borrower will go bankrupt, abscond, die, or
otherwise default on the loan. This means that a lender generally charges a riskpremium to ensure
that, across his investments, he is compensated for those that fail.
 Liquidity preference: People prefer to have their resources available in a form that can
immediately be exchanged, rather than a form that takes time to realize.
 Taxes: Because some of the gains from interest may be subject to taxes, the lender may insist on
a higher rate to make up for this loss.
 Banks: Banks can tend to change the interest rate to either slow down or speed up economy
growth. This involves either raising interest rates to slow the economy down, or lowering interest
rates to promote economic growth.
 Economy: Interest rates can fluctuate according to the status of the economy. It will generally be
found that if the economy is strong then the interest rates will be high, if the economy is weak the
interest rates will be low.

 THEORETICAL RATIONAL
Stock exchange and interest rate are two decisive factors of economic expansion of a country. The
impacts of interest rate on stock exchange endow with imperative implications for monitory policy
and government policy towards financial markets.Interest rates are determined by monetary policy of a
country according to its economic state of affairs. High interest rate will put off capital outflows,
hamper economic growth and, consequently, upset the economy as interest rates is one of the most
vital factors affecting directly the development of an economy. The rational for the relationship
between interest rate and stock market return are that stock prices and interest rates are said to be
negatively correlated. Higher interest rate resulting from monetary policy negatively affects stock
market returns because higher interest rate reduces the value of equity and makes fixed income
securities more eye-catching. On the contrary, lower interest rates resulting from expansionary
monetary policy boosts stock market. Financial theory states that movements in interest rates affect
both the firm’s expectations about future corporate cash flows and the discount rate employed to value
these cash flows and, hence, the value of the firm. The impact of interest rate fluctuations on the
market value of companies has received a great deal of attention in the literature, although much of the
empirical research has focused on financial institutions because of the particularly interest rate
sensitive nature of the banking business. Amongst this line of thought, fundamentalists’ approach is
theory of Efficient Market Hypothesis (EMH) which has been put forward by Fama (1971) who
further categorizes these markets on the basis of their reaction to the information fed to them in weak,
semi-strong, or strong form of markets. But the Popular Model Theory shares a different view point
altogether, it is nothing but the qualitative explanation of price which suggests that people act
incongruously to the information that they receive and freely available information is not necessarily
already incorporated into a stock price as EMH attests, which we can say is quite similar to Keynes
view point. A country’s financial sector consists of its money market and capital market. Both of them
are not only highly correlated but also interdependent. Since the investors for both are same thus they
look for the best opportunity wherever available, thus rates in one market do affect investments in
another. An important rate which further acts as a barometer for determining other rates in the market
is bank rate, the rate at which RBI lends to other banks.
 Figure 1: Trend of sensex and the interest rate for a year

The above figure depicts the trend of sensex and the interest rate in India for a year i.e. January 2015
to December 2015.

 HYPOTHESIS DEVELOPMENT

In order to shed some light on the continual debate on the interrelationship between the Interest rate
and stock market, the present study aims to explore whether the changes in the Interest rates cause any
dynamic effects on the Stock Market Returns or not. Accordingly, the null hypothesis that is to be
tested by using the granger causality test is as follows:
H0 : there is no significant impact of changes in the interest rate on Indian Stock Market.
H1 : there is significant impact of changes in the Interest rate on Indian Stock Market.
In case of accepting the above null hypothesis, it means that there is not any significant effect of the
changes in the interest rate on the Indian Stock Market during the examined period of time.
Alternatively, in case of rejecting the null hypothesis and accepting the alternate, it means statistically
significant relationship exists between the variables during the same period of time.
 EMPIRICAL RESULTS
At first, Augmented Dickey Fuller test is used to find out the stationarity of the data set. The results of
the test are given in the Table 01 below. The data on Stock market i.e BSE Sensex and interest rate are
stationary at first difference which rejects the null hypothesis that data has a unit root.

TABLE 1
UNIT ROOT TEST RESULTS
Variables Augmented Dickey Fuller Test
At First Difference (P-Value)

Stock market 0.0000*

Interest Rate 0.0000*

*At 5% level of significance

After determining the stationary of the data set, Granger Causality test developed by Granger which
are generally adopted for examining the short-run inter-dependence between variables, the same have
been applied in the present study too. to answer whether changes in interest rate cause changes in
Stock market or changes in Stock market cause changes in interest rate, applying order one i.e. I (1).
Table 02 represents the empirical results of Granger causality test between interest rate and Stock
market.
TABLE 2
TEST OF HYPOTHESIS
Null Hypothesis Lags F-statistics Probability Results
Interest rate does not cause Stock market 2 2.25346 0.0973 ACCEPTED

Stock market does not cause Interest rate 2 2.40676 0.0924 ACCEPTED
The test results depicts that, the study fails to reject the null hypothesis of interest rate does not cause
Stock market as well as the null hypothesis of Stock market does not cause interest rate. This implies
that the interest rate neither affects Stock market nor Stock market affect the interest rate. The study
indicates that the interest rate does not cause the Stock market. It is consistent with the results of
Gjerde and Saettem, Mukherjee and Naka and Humpe and Macmillan . The results was also consistent
with the findings of many researcher is India like Bhattacharya and Mukherjee . The Stock market
does not cause interest rate. It is consistent with the results of Bhattacharya and Mukherjee and the
result is contrary to Ratanapakorn and Sharma. Thus, it is observed that, stock market has no relation
with the growth of Interest rate in India and vice versa for the selected period of time.
Inflation:

Inflation is a rise in the general level of prices of goods and services in an economy
over a period of time. When the general price level rises, each unit of currency buys fewer
goods and services; consequently, inflation is also erosion in the purchasing power of money –
a loss of real value in the internal medium of exchange and unit of account in 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.
Inflation's effects on an economy are manifold and can be simultaneously positive and
negative. Negative effects of inflation include a decrease in the real value of money and other
monetary items over time, uncertainty over future inflation may discourage investment and
savings, and high inflation may lead to shortages of goods if consumers begin hoarding out of
concern that prices will increase in the future. Positive effects include a mitigation of
economic recessions, and debt relief by reducing the real level of debt.
Economists generally agree that high rates of inflation and hyperinflation are caused
by an excessive growth of the money supply. Views on which factors determine low to
moderate rates of inflation are more varied. Low or moderate inflation may be attributed to
fluctuations in real demand for goods and services, or changes in available supplies such as
during scarcities, as well as to growth in the money supply. However, the consensus view is
that a long sustained period of inflation is caused by money supply growing faster than the
rate of economic growth.
Today, most mainstream economists favor a low steady rate of inflation. Low (as
opposed to zero or negative) inflation may reduce the severity of economic recessions by
enabling the labor market to adjust more quickly in a downturn, and reduce the risk that a
liquidity trap prevents monetary policy from stabilizing the economy. The task of keeping the
rate of inflation low and stable is usually given to monetary authorities. Generally, these
monetary authorities are the central banks that control the size of the money supply through
the setting of interest rates, through open market operations, and through the setting of
banking reserve requirements.
Gross Domestic Product

Gross domestic product (GDP) is the market value of all officially recognized final
goods and services produced within a country in a given period of time. GDP per capita is
often considered an indicator of a country's standard of living. "Gross" means that GDP
measures production regardless of the various uses to which that production can be put.
Production can be used for immediate consumption, for investment in new fixed assets or
inventories, or for replacing depreciated fixed assets. "Domestic" means that GDP measures
production that takes place within the country's borders. In the expenditure-method equation
given above, the exportsminus- imports term is necessary in order to null out expenditures on
things not produced in the country (imports) and add in things produced but not sold in the
country (exports).
GDP per capita is not a measurement of the standard of living in an economy;
however, it is often used as such an indicator, on the rationale that all citizens would benefit
from their country's increased economic production. Similarly, GDP per capita is not a
measure of personal income. GDP may increase while real incomes for the majority decline.
The major advantage of GDP per capita as an indicator of standard of living is that it is
measured frequently, widely, and consistently. It is measured frequently in that most countries
provide information on GDP on a quarterly basis, allowing trends to be seen quickly. It is
measured widely in that some measure of GDP is available for almost every country in the
world, allowing inter-country comparisons. It is measured consistently in that the technical
definition of GDP is relatively consistent among countries.
Money Supply

The money supply or money stock is the total amount of monetary assets available in an
economy at a specific time. There are several ways to define "money," but standard measures
usually include currency in circulation and demand deposits (depositors' easily accessed assets
on the books of financial institutions). Money supply data are recorded and published, usually
by the government or the central bank of the country. Public and private sector analysts have
long monitored changes in money supply because of its effects on the price level, inflation,
the exchange rate and the business cycle. That relation between money and prices is
historically associated with the quantity theory of money. There is strong empirical evidence
of a direct relation between money-supply growth and long-term price inflation, at least for
rapid increases in the amount of money in the economy. That is, a country such as Zimbabwe
which saw rapid increases in its money supply also saw rapid increases in prices
(hyperinflation). This is one reason for the reliance on monetary policy as a means of
controlling inflation.
Those economists seeing the central bank's control over the money supply as feeble
say that there are two weak links between the growth of the money supply and the inflation
rate. First, in the aftermath of a recession, when many resources are underutilized, an increase
in the money supply can cause a sustained increase in real production instead of inflation.
Second, if the velocity of money, i.e., the ratio between nominal GDP and money supply,
changes, an increase in the money supply could have either no effect, an exaggerated effect, or
an unpredictable effect on the growth of nominal GDP.
Gold
Gold is a chemical element with the symbol Au and atomic number 79. It is a dense,
soft, malleable, and ductile metal with a bright yellow color and luster that is considered
attractive, which is maintained without tarnishing in air or water. This metal has been a
valuable and highly sought-after precious metal for coinage, jewelry, and other arts since long
before the beginning of recorded history. Gold standards have sometimes been monetary
policies, but were widely supplanted by fiat currency starting in the 1930s. The last gold
certificate and gold coin currencies were issued in the U.S. in 1932. In Europe, most countries
left the gold standard with the start of World War I in 1914 and, with huge war debts, did not
return to gold as a medium of exchange. The world consumption of new gold produced is
about 50% in jewelry, 40% in investments, and 10% in industry.
Silver
Silver, a soft, white, lustrous transition metal, it possesses the highest electrical
conductivity of any element and the highest thermal conductivity of any metal. The metal
occurs naturally in its pure, free form (native silver), as an alloy with gold and other metals,
and in minerals such as argentite and chlorargyrite. Most silver is produced as a byproduct of
copper, gold, lead, and zinc refining. Silver has long been valued as a precious metal, used in
currency coins, to make ornaments, jewelry, high-value tableware and utensils (hence the term
silverware) and as an investment in the forms of coins and bullion

Euro
The euro (sign: €; code: EUR) is the currency used by the Institutions of the European Union and is the
official currency of the euro zone, which consists of 17 of the 28 member states of the European
Union. The currency is also used in a further five
European countries and consequently used daily by some 332 million Europeans. Additionally, more
than 175 million people worldwide, including 150 million people in Africa, use currencies pegged to
the euro.

The euro is the second largest reserve currency as well as the second most traded currency in the world
after the United States dollar. As of March 2013, with almost €920 billion in circulation, the euro has
the highest combined value of banknotes and coins in circulation in the world, having surpassed the US
dollar. Based on International Monetary Fund estimates of 2008 GDP and purchasing power parity
among the various currencies, the euro zone is the second largest economy in the world.
Indian Rupee
The Indian rupee (sign: ' '; code: INR) is the official currency of the Republic of India. The issuance
of the currency is controlled by the Reserve Bank of India. The modern rupee is subdivided into 100
paise (singular paisa), though as of 2011 only 50-paise coins are legal tender.
The Indian rupee symbol ' ' (officially adopted in 2010) is derived from the Devanagari consonant "'
'" (Ra) with an added horizontal bar. The symbol can also be derived from the Latin consonant "R" by
removing the vertical line, and adding two horizontal bars (like the symbols for the Japanese yen and
the euro). The first series of coins with the rupee symbol was launched on 8 July 2011.

The Reserve Bank manages currency in India. The Reserve Bank derives its role in currency
management on the basis of the Reserve Bank of India Act, 1934. Recently RBI launched a website
Paisa-Bolta-Hai to raise awareness of counterfeit currency among users of the INR.

Stock Market
A stock market or equity market is a public entity (a loose network of economic transactions, not a
physical facility or discrete entity) for the trading of company stock (shares) and derivatives at an
agreed price; these are securities listed on a stock exchange as well as those only traded privately.

The size of the world stock market was estimated at about $36.6 trillion at the beginning of October
2008. The total world derivatives market has been estimated at about $791 trillion face or nominal
value, 11 times the size of the entire world economy. The value of the derivatives market, because it is
stated in terms of notional values, cannot be directly compared to a stock or a fixed income security,
which traditionally refers to an actual value. Moreover, the vast majority of derivatives 'cancel' each
other out (i.e., a derivative 'bet' on an event occurring is offset by a comparable derivative 'bet' on the
event not occurring). Many such relatively illiquid securities are valued as marked to model, rather
than an actual market price.
The stocks are listed and traded on stock exchanges which are entities of a corporation or mutual
organization specialized in the business of bringing buyers and sellers of the organizations to a listing
of stocks and securities together.
 The short run causality between Interest rate and Equity returns is analyzed as below:
Table - 1
Descriptive Statistics
Levels First Difference
Stock market Interest Rate Stock market Interest Rate
Variables
Mean 8.932 1.881 0.009 -0.002
Maximum 9.916 2.542 0.193 0.294
Minimum 7.961 1.168 -0.279 -0.374
Std. Dev. 0.692 0.292 0.066 0.074
Skewness 0.076 -0.438 -0.615 -1.071
Kurtosis 1.356 2.702 4.465 9.243
Jarque-Bera 21.799 6.857 29.138 347
Probability 0.000 0.032 0.000 0.000
Sum 1715 361 1.632 -0.343
192 192 191 191
Observations
Table provides the summary statistics on the levels of the variables and first difference.
Summary statistics include the mean and the standard deviation, minimum maximum, skewness and
Kurtosis value for the period 1997-98 to 2012-13.The mean, median, maximum, minimum and
standard deviation can determine the statistical behavior of the variables. It is observed from the table
that Stock market over the period of study is maximum at 9.916 with a minimum of 7.961, averaging at
8.932 with a standard deviation of 0.692 which clearly shows that there is no much fluctuations in the
Stock market over the period of study at levels. As far as interest rate is concerned the maximum stood
at 2.542 and the minimum accounted for 1.168 with an average of
1.881 over the period of study. The standard deviation worked out to 0.292, thus indicating low
fluctuations as for as interest rate is concerned. The table also shows that average monthly Stock
market as 0.9 per cent and the interest rate as 0.2 per cent. However, the standard deviations of the
differences in these variables indicate that interest rate is more than Stock market. For a normal
distribution, the skewness must be zero and kurtosis at three. The results show that the frequency
distributions of the variables are not normal. Jarque-Bera statistics also indicates that the frequency
distribution of the underlying series does not fit normal distribution.
 CHAPTER-5
FINDING

 As gold returns are significantly influenced by money supply, all the four currencies’
exchange rates, gold returns may be used to hedge against these variables.

 As silver returns are significantly influenced by money supply and EUR-INR, silver
returns may be used to hedge only against these variables.
 Returns from stocks, gold and silver have an inverse relationship with inflation, IIP and
money supply.
 GDP shows a direct relation with stock return and an inverse relation with gold and silver
returns.

SUGGESTION
If you should go back to the olden days, you would realize that trading was never such
a complicated and difficult-to-grasp business as it is today! Terminology like stocks and
securities, stock market day trading, currency trading and so on, did not even exist in those
days! In fact, your generation would term the people of those days as totally impractical by
nature!

 What exactly is meant by "stock market"? It refers to trading inside a company's stocks,
plus the derivation of the same (listing on the stock exchange's securities and the private
trading).
 If you opt to venture into day trading (takes place within 24 hours), you will have to
learn to plan out strategies that will minimize risks. After all, it is a gamble that you are
taking, day after day! Keeping track of current market trends and going along with the
flow will ensure more gains and less losses.
 Stock market day trading can "make" you or "break" you within just one day! So it
demands a lot of self-discipline. Impulsive actions are a strict "no no"!
 Regarding the amount required for stock market day trading, the bank allots an amount
between $5000.00 up to $50,000.00 for a particular stock day. But if you wish to go for a
smaller number of trades, you will not need to invest a large amount of money. It would
be advisable to get some idea of the "position sizing" beforehand
CONCLUSIONS

Based on various alternative specifications, I have arrived on a parsimonious specification

which is based on macroeconomic theories as well as is useful for generating forecasts. The current
study attempted to assess the causality association between Interest rate and Sensex. The findings
reveal that no causality is noticed between Interest rate and share returns for the selected period of the
time. In fact, econometric models were applied to get more accuracy to the analyse and thereby the
results bring to the fore that there is no such causality association between them. Therefore, the
ultimate conclusion is that the Interest rate never influences share returns and vice versa. Thus, the
study pragmatically proves that the Interest rate has no inducement on the Stock market and in turn
Stock market has no influence over the interest rate for the selected period of time for one year.
However, the study can be more refined by analysing the impact of interest rate on stock market for
longer period of time . Moreover, the changes in the stock market can be further analysed by
investigating some other macroeconomic variables too with regard to Indian Stock Market.
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BOOKS
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Finance Economics.
 Fama, E. F.(1981). Stock Return, real activity, inflation, and money. American Economic Review,
 King, R. G., & Lin, M.T. (2005). Re-examining the Monetarist critique of interest rate rules. Federal
Reserve Bank of St.Louis Review, 87(4), 513–530. Cambridge: Cambridge University.
 Fisher, I. (1930). The theory of interest. New York: Macmillan.
 Flannery, M.J. & James, C.M. (1984). The Effect of Interest Rate Changes on the Common S. Common
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