Does interest rate changes have an impact on Nifty returns in long run? A Cointegration perspective

Abstract

Government is constantly taking steps to revive the economy and make India a 5 trillion dollar which was held back due to various factors like pandemic, bond yield, poor consumerism. This research paper intends to provide inputs to the Government and other institution like RBI etc to take major decision in terms of changes in interest rates prevalent in India. The objective of the paper is to examine whether there is an impact of interest rate on Nifty returns on long run. Various econometric tools were used to explain the long run and forecasting of interest rate impact on Nifty returns. The period of study istaken fromJanuary 2008 - July 2021.The interest rate taken is G-sec10-year yield and Nifty return from RBI and NSE website respectively. The paper studies the long run cointegration relationship between interest rate and G sec yield. Before conducting the cointegration analysis, data was made as continuous time series, normality test conducted and unit root test was applied to test the stability of the data. Lagged length was determined by VAR model and long run relationship was tested by the Johansen - JuseliusCointegration test. It is observed that there is no relationship between the G-sec yield and Nifty in long run. This inference from the research can be used by as an input to the white papers used by institutions and RBI to take some vital decisions.