Author(s): Sarbapriya Ray
This paper tries to assess relationship between for eign exchange reserves of India and BSE market capitalization on the basis of annual data from the year 1990-91 to2010-11. This study uses simple lin ear regression model, unit root test, granger causality test to measure the relationship between foreign e xchange reserves of India and BSE market capitalization. Th e results depicts that foreign exchange reserves of India has positive impact on BSE Stock Market capitalizat ion. The granger causality test suggests that stock market capitalization (SMC) does not Granger cause foreign exchange reserve (FOREXR) at all where as foreign exchange reserve (FOREXR) Granger causes stock mark et capitalization (SMC). That means the Granger Causality Test shows that causality is unidirection al and it runs from foreign exchange reserve to sto ck market capitalization but not vice versa. This stud y sheds lights and provides significant information that will guide the stock brokers, agents, planners, governme nt policy makers to make decision about the stocks and stock markets of India especially about BSE by look ing at the trend of foreign exchange reserves of India.