The influence of macroeconomic indicators on the nepalese stock market

Abstract

This study investigates the influence of selected macroeconomic indicators namely inflation rate, broad money supply (M2), GDP growth rate, on the performance of the Nepalese stock market, as measured by the NEPSE index, over the period from 1993 to 2024. A descriptive and causal-comparative research design was employed, using secondary data collected from Nepal Rastra Bank and the Securities Board of Nepal. The study utilized EViews and Microsoft Excel for statistical analysis. The correlation analysis revealed a significant positive relationship between money supply and remittance inflows with the NEPSE index, while inflation and GDP growth exhibited weak and statistically insignificant correlations. The study reveals a significant positive correlation between broad money supply (LNM2) and the NEPSE index, indicating that higher liquidity supports stock market growth in Nepal. Inflation (LNINF) shows a significant negative correlation with NEPSE, while GDP growth (LNGDPG) has no significant relationship, suggesting a weaker or indirect impact. Regression and ARDL analyses further confirm that money supply is the most influential macroeconomic factor, positively affecting the NEPSE index in both the short run and long run. The lagged NEPSE index also has a significant effect, reflecting investor momentum. In contrast, inflation and GDP growth show negative or insignificant impacts. The models demonstrate strong explanatory power, emphasizing the critical role of liquidity in driving Nepal’s stock market performance. Keywords: Nepal Stock Exchange (NEPSE), Correlation, Macroeconomic Indicators, Money Supply, Inflation, GDP Growth, OLS Regression, ARDL Model, Capital Market