The objective of the study is to examine the relationship between foreign direct investment and stock market development in India. The study also includes domestic savings and inflation as other macroeconomic determinants of stock market development. The study covered the period 1991-2018 and employed econometric tools to analyse the time series data. The Augmented Dickey Fuller test was applied to determine the stationarity status of the time series variables, Johansen cointegration test was used to examine the long-run relationship among the variables and Granger causality test was performed to examine the short-run causality. The results of the Johansen cointegration test suggest that the variables are cointegrated, which implies a long-run equilibrium relationship exists among the variables. Further, Granger causality test indicates stock market development and gross domestic savings granger cause foregn direct investment, which suggests that stock market development and gross domestic savings are helpful in predicting foreign direct investment in the short-run.
Keywords: Foreign Direct Investment, gross domestic savings, Granger Causality test, inflation, Stock Market Development
Both developed and developing nations have witnessed major reforms in the form of easing restrictions of foreign direct investment (FDI), privatisation of state-owned enterprises and technological developments