The Sensitivity of Stock Prices to Money Supply Changes in India: An Empirical Analysis

The relationship between monetary variable changes and stock market returns have been one of the most widespread research areas for a long time. The existing studies have found that these variables positively or negatively impact the stock market returns. Thus, the relationship between the money supply and the stock market instead remain at odds. In this context, the present study investigates the impact of money supply (M3) on the Indian stock markets from January 1992 to December 2019. The study attempts to estimate the money supply's impulse response and the Indian stock market and the direction of their causality. The findings indicate that the money supply changes have a long-term and short-term impact on the Indian stock market. It also confirms the presence of unidirectional causality from money supply to both the stock indices.