Dynamics of the Indian Stock Market

The Indian stock market is considered to be one of the earliest in Asia, which has been in operation since 1875. However, it remained largely outside the global integration process until 1991. A number of developing countries in association with the International Finance Corporation and the World Bank took steps to establish and revitalize their stock markets as an effective way of mobilizing and allocating funds. In line with the global trend, reform of the Indian stock market also started with the establishment of Securities and Exchange Board of India (SEBI), although it became more effective after the stock market scam in 1991. With the establishment of SEBI and technological advancement, the Indian stock market has now reached the global standard. The major indicators of stock market development show that significant development has taken place in the Indian stock market during the post-reform period. This chapter seeks to examine in this context whether reform in the Indian stock market has led to integration with the developed stock markets in the world. The study finds that contrary to general belief, the Indian stock market is not cointegrated with the developed market as yet. Of course, some short-term impact does exist, although it is found to be unidirectional for obvious reasons. That is to say, the developed stock markets, viz., the US, UK and Hong Kong stock markets, Granger cause the Indian stock market but not vice versa. However, the study does not find any causality between the Japanese stock market and the Indian stock market. It is derived from the study that although some positive steps have been taken up, which are responsible for the substantial improvement of the Indian stock market, these are perhaps not sufficient enough to become a matured one, hence not integrated with the developed stock markets so far.