EXCHANGE RATES & STOCK PRICE:IT’S RELATIONSHIP IN INDIAN CONTEXT

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Introduction
Background
Traditionally the stock market and the exchange market have
been regarded as sensitive segments of the financial market, as the
impact of any policy changes get quickly reflected in these two
markets. Rampant fluctuations of exchange rates and stock prices
have attracted a great deal of interest from policy makers and domestic
as well as foreign investors. Stock markets as well as exchange
markets are considered as the barometers of the state and health of
the economy through which the country’s exposure towards outside
world is most readily felt.


Purpose of the Study
Theory says that exchange rates should have a direct impact on the
companies with heavy import or export activities and thus affecting the
profitability and hence the stock prices. The impact of fluctuation in
exchange rates on domestic companies, companies importing or
exporting and on multi national corporations with the degree of
exposure is increasing in each case respectively. The movements in
exchange rate indirectly affect the value and hence the stock prices of
these companies, to check for the relevance of this effect, the test has
been undertaken.


Problem statement
There are various studies have been done to study the relationship
between exchange rates and stock prices by taking various indices.
This study explores the evidence of relationship between exchange
rates and stock prices and also lead lag relationship between
exchange rates and stock prices.


Limitations of the study
· The study is limited to six indices and six Multi National
Companies
· The study is limited to Indian rupee versus US dollar only
· The study is limited to a period of five years
Theoretical Framework