Journal Press India^®

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The study investigates the dynamic interplay between exchange rate returns and stock price volatility in the Indian financial markets using a two-stage methodology: the TARCH (1,1) model to estimate volatility in the stock market and the vector error correction methodology to infer the causal relationship. The findings highlight the presence of the leverage effect and volatility clustering in the Indian stock market. Additionally, the research reveals a unidirectional long-run negative causal impact of stock market volatility on exchange rate returns. The impulse response analysis underscores sector-specific sensitivities and emphasizes the importance of coordinated monetary and market policies, particularly in addressing how different sectors react to volatility and its subsequent effects on exchange rates. The results indicate that stock indices such as Nifty 50 and Nifty Bank exhibit a short-term negative effect of volatility on currency returns, potentially due to risk aversion or capital outflows, whereas Nifty IT and Nifty FMCG indices show a long-term positive association between stock market volatility and currency returns.

Keywords

Financial market; Exchange rate; Nifty indices; VECM

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