Inflation, Interest and Exchange Rate Effect of the Stock Market Prices

Abstract

This study explores the intricate relationship between macroeconomic factors and stock markets, emphasizing their impact on economic growth. Stock markets are influenced by key variables such as interest rates, inflation, exchange rates, and money supply, though their effects vary across countries and economic conditions. Inflation can diminish stock prices, while interest rates affect corporate profitability. Exchange rate fluctuations influence competitiveness, impacting stock market performance. Through an analysis of specific companies within the Karachi Stock Exchange, the study demonstrates diverse effects of macroeconomic variables. For example, Shakarganj Mills Ltd. exhibited a positive correlation between inflation and stock prices but a negative relationship with interest and exchange rates. In contrast, Ghani Glass Ltd. showed negative correlations with all macroeconomic variables, underscoring the variability in stock market responses. Descriptive statistical analysis further enriches the understanding of these relationships, reinforcing the importance of firm-specific and sectoral analysis. The findings highlight the necessity of context-driven interpretations when evaluating stock market dynamics. Given the varying effects of macroeconomic factors, investors and policymakers must adopt a nuanced approach to financial decision-making. The study contributes to the broader discourse on financial markets by demonstrating how macroeconomic conditions interact with stock prices, influencing investment strategies and economic policy formulation. Understanding these interactions is crucial for navigating global financial markets and ensuring informed decision-making in an ever-evolving economic landscape.