Relationship between Interest Rate and Stock Prices: Empirical Evidence from National Stock Exchange, India

Abstract:  In the economic policy of a country, the key role is played by interest rate. It is instrumental in achieving the objective of a monetary policy. Generally, the central bank is responsible for ensuring price stability, maintaining a low level of inflation, and growth of the economy. An attempt was made in this paper to study the impact of interest rate on stock prices resulting in changes in the sectoral indices of the National Stock Exchange, India. Five sectoral indices of NSE namely, Nifty Banks, Financial Services, Auto, IT, and FMCG were taken, and then the Karl Pearson correlation was computed between interest rate and average closing prices of sector indices to understand the significant relationship between the former and the latter. The data relating to interest rate and prices of indices were considered from January 2007 to December 2019, collected from the NSE website and RBI. From the data analysis, it was found that the interest rate did not have any significant relationship with the stock prices of firms included in Nifty FMCG and Nifty IT indices of NSE but other three listed above had a relationship. So investors are advised to consider other macro variables while investing.

Keywords: Interest Rate, Stock Price, Economics Variables, NSE