Testing for Granger Causality between BSE Sensex and Forex Reserves: an Empirical Study

The investors carefully watch the performance of stock markets by observing the composite market index in general and BSE Sensex in particular before their investment. The Sensex (market index) acts as a yardstick to influence foreign investors to secure investments in the form of Forex Reserves. It provides a base for investors in forecasting future trends in the market. Hence, It is essential to understand whether Sensex causes Forex Reserves or otherwise to formulate suitable policies. The objective of the study is to investigate the casual relationship between Sensex and Forex Reserves. The empirical investigation was carried out based on monthly data ranging from July 1997 to Sept. 2015 covering 219 observations. The study has selected BSE Sensex of Indian stock market which may have influence on the Forex Reserves. Data for variables are collected from the database of the Indian economy maintained by Reserve Bank of India. Sensex data is obtained from the official website of the BSE India.com, yahoo finance .com. and other official websites. E-Views is used to analyze the data. Statistical tools used for the study is Descriptive statistic, Unit root test, Johansen Cointegration test and Granger causality test. The results of the study reveal that the BSE Sensex and Forex Reserves are cointegrated at first difference level. The BSE Sensex does Granger Cause Forex Reserves. The Granger causality study reveals that there is unidirectional causality between the BSE Sensex and Forex Reserves.