Nenavath Sreenu, KS Sekhar Rao and Suresh Naik
Market returns are volatile in India which is caused by various factors. The present research inspects the impact of the currency exchange rate and rate of inflation on volatility in Indian share market returns. The current study used annual inflation and obtained data of currency exchange rate from RBI. The market returns were computed from January 2000 to June 2020 and the data was taken from the Indian stock index. The research used the autoregressive distributed lag (ARDL), co-integration technique and it also used the error correction parameterization of the ARDL model for the investigation of the effect on Indian stock market returns. The study is also used GARCH and the corresponding Error Correction Model (ECM) to explore the long- and short-run relationship between the India stock market returns and exchange rate similarly, the India stock market returns and rate of inflation. The outcome of the research shows that there exist significant long-term relationships only. The outcome also revealed that there is a considerable long-term relationship between NSE returns and the currency rate of exchange. For the short-run the variable is examined is shown the negative effects on the stock market returns. The variables were tested for long memory and it was observed that such property did exist in these variables, making it a desirable feature of which investors can take advantage. This is due to the establishment of the long-run effect of inflation and exchange rate on stock market returns in India.