Business and Stock Market Cycle Dynamics in India: A Monthly Analysis Using Turning Point and SVAR

The study examines the cyclical relationship between the stock market and business cycles in India, utilizing monthly data from April 1996 to March 2024. It incorporates the combined market capitalization of the BSE and NSE, broad money supply (M3), the S&P 500 and the Index of Industrial Production (IIP) as a proxy for the business cycle. The cycles were computed using the Hodrick-Prescott filter and the Bry-Boschan algorithm to identify the turning points. This study integrates turning-point analysis with the Structural Vector Autoregression (SVAR) framework for high-frequency data, providing evidence on the transmission of financial shocks to real activity. The findings reveal that the stock market exhibited more pronounced fluctuations and shorter durations compared to business cycles. A bidirectional relationship was observed between M3 and business cycles. Interestingly, the global S&P 500 exhibited some alignment with business cycles only during the crisis period. There is growing recognition that financial variables are procyclical and share a close relationship with macroeconomic indicators. Consistent with this view, the lead-lag analysis revealed that the stock market led business cycles by 1 to 3 months, highlighting its role as a leading indicator. Moreover, SVAR analysis confirmed a long-run positive relationship among the BSE, NSE, M3, and business cycles. The findings underscore the need for financial deepening and stabilizing the capital market to ensure long-term economic growth. JEL Classification : E32, E52, G2, O1