Impact of U.S. Federal Interest Rate and Movement of MSCI on Indian Capital Markets

The relationship between Indian macro-economic factors and economic growth has been analyzed by a number of empirical studies. This paper re-examines the sources of variability in the Indian economy for January 2000 to September 2006. The paper empirically investigates the relationship of global factors such as U.S. federal interest rate and Morgan Stanley Capital Index (All country) with the Indian economy. It examines the following hypothesis: i) Whether Indian capital market is affected by a shock in U.S federal interest rate; ii) whether Indian capital market is affected by a shock in the world capital markets; iii) and if Indian economy is affected by a shock in the world capital markets. VAR is constructed and impulse response functions as well as variation decomposition method are employed to deduce these shocks.