Dynamic relationship between equity, bond, commodity, forex and foreign institutional investments: Evidence from India

  • Received June 16, 2022;
    Accepted October 11, 2022;
    Published October 20, 2022
  • Author(s)
  • DOI
    http://dx.doi.org/10.21511/imfi.19(4).2022.06
  • Article Info
    Volume 19 2022, Issue #4, pp. 65-82
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The interrelationship between equity, bond, commodity and forex movements can provide investors with abundant trading opportunities regardless of whether one market is trending upward or downward. Hence, to understand the interlinkage between markets, this study examines the long-run and causal linkage between forex, G-sec bonds, oil prices, gold rates, foreign institutional investment (FII) flows, and equity market and sectoral index returns. Daily time-series data from August 2012 to August 2021 were considered for empirical analysis. Johansen’s cointegration test revealed that foreign exchanges like USD, Euro, GBP and Yen, oil and gold rates, G-bond returns and FII flows were significantly cointegrated with the stock market and sectoral indices in the long run. Further, Granger causality found a uni-directional relationship between forex rates (i.e., USD, Euro, Yen) and the market, as well as sectoral indices, except Nifty 50 and Nifty IT indices. Oil price movements were found to effectively predict future price changes of Nifty consumer durables, auto, IT indices. Gold prices are useful to predict Nifty-Auto, Bank, Financial Services, Oil & Gas and PSU. The study also found a bi-directional relationship from FII inflows to the stock market and sectoral indices. The findings suggest that forex rates, oil prices and FII flows significantly affect India’s stock market and sectoral performance. The study contributes to the existing literature by comprehensively examining the interlinkage between commodities such as oil and gold, foreign exchanges like USD, Euro, GBP and Yen, G-bond, FII flows and the stock market, and fourteen sectoral indices in the Indian context.

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    • Table 1. Results of descriptive statistics
    • Table 2. Augmented Dickey-Fuller test results
    • Table 3. Results of Johansen’s cointegration test
    • Table 4. Summary of hypothesis testing results
    • Table A1. Granger causality test results of NIFTY-50, NIFTY – Consumer Durables, IT, Media indices
    • Table A2. Granger causality test results of NIFTY – Auto, Bank, Metal, Oil and Gas indices
    • Table A3. Granger causality test results of NIFTY – Financial services, FMCG, Pharma, PSU indices
    • Table A4. Granger causality test results of NIFTY – Private banks and Reality indices
    • Conceptualization
      Rajeev Matha, Geetha E., Satish Kumar, Raghavendra
    • Data curation
      Rajeev Matha, Raghavendra
    • Formal Analysis
      Rajeev Matha, Geetha E., Satish Kumar, Raghavendra
    • Funding acquisition
      Rajeev Matha, Geetha E., Satish Kumar, Raghavendra
    • Investigation
      Rajeev Matha, Geetha E., Satish Kumar, Raghavendra
    • Methodology
      Rajeev Matha, Satish Kumar, Raghavendra
    • Resources
      Rajeev Matha, Geetha E.
    • Software
      Rajeev Matha
    • Validation
      Rajeev Matha, Geetha E., Satish Kumar, Raghavendra
    • Writing – original draft
      Rajeev Matha, Geetha E., Satish Kumar, Raghavendra
    • Writing – review & editing
      Rajeev Matha, Geetha E., Satish Kumar, Raghavendra
    • Project administration
      Geetha E., Satish Kumar, Raghavendra
    • Supervision
      Geetha E., Satish Kumar, Raghavendra
    • Visualization
      Geetha E.