Relationship Between Stock Market and Manufacturing Sector in India: An Empirical Study

The study examines the empirical relationship between stock market and manufacturing sector in India using monthly time-series data for the period January 1991 to June 2016. The study uses index of manufacturing production to represent the movements in the manufacturing sector and BSE sensex to represent stock market movement. The study finds that there is positive correlation (0.94) between stock market and manufacturing sector and the null of no bi-directional causality is rejected by Granger causality test at 10 percent level of significance in India. The study emphasises on the lead/lag relationship between stock market and manufacturing sector growth. The both Engle-Granger and Phillips-Ouliaris cointegration tests suggest that, at 10 percent level of significance, there is long run relationship between stock market and manufacturing sector in India with lag 2 over the study period. However, by and large, as we infer the positive relationship between stock market development and manufacturing sector growth, we may recommend that the capital market regulators should implement effective policy frameworks towards the development of Indian stock market in order to substantially enhance the size, depth and liquidity of the Indian stock market which in turn leads to increased economic activities.