THE IMPACT OF INFLATION, INTEREST RATES, AND GDP ON THE INDIAN STOCK MARKET

Abstract

Understanding the relationship between core macroeconomic variables and domestic capital market performance remains a vital requirement for portfolio managers, retail investors, institutional funds, and sovereign regulatory architectures. This article-based review paper provides a comprehensive, structured synthesis of academic literature exploring the specific impact of inflation, interest rates, and Gross Domestic Product (GDP) expansion metrics on the Indian stock market. Focusing primarily on indices such as the BSE Sensex and the NSE Nifty 50, this paper aggregates empirical observations from foundational econometric studies conducted over the post-liberalization era. The analysis explores how accelerations in inflation present a dual friction between nominal asset value adjustment (the Fisher effect) and cost-push margin contractions. Furthermore, the study tracks the monetary transmission channels managed by the Reserve Bank of India (RBI), demonstrating how shifts in the repo rate alter the corporate Weighted Average Cost of Capital (WACC), recalibrate the Present Value (PV) of future dividends, and drive asset reallocation cycles between equity options and fixed-income portfolios. Finally, the long-term cointegration between aggregate macroeconomic output (real GDP growth) and structural equity valuations is evaluated, detailing how corporate performance tracks fundamental economic development. By gathering these diverse academic frameworks, this review outlines systematic risks and provides strategic insights for stakeholders navigating the Indian macroeconomic landscape.