The Effect of Macroeconomic Factors on Indian Stock Market Performance: A Factor Analysis Approach

Abstract

This paper, based on the average monthly data (January, 2001 to May, 2013) of 12 macroeconomic variables, uses the data reduction technique-factor analysis to derive the factors which determine the performance of stock market in India. The Principal Component Technique after using orthogonal rotation extracted three factors labeled intuitively as Macro Environment, Industrial Performance and Policy Rates. It has been established that industrial performance play significant role in influencing the stock market. Though some impact of policy rates cannot be denied but it does not seem sustainable. Market rely more on optimistic macroeconomic environment call for state's prudent efforts to maintain macro stability. Besides, stock market responds to performance of the firm specific factors and unforeseen events in the economy.