The Co-relation Between Rupee,Bonds And Shares

On a point-to-point basis up to August 22, the rupee (RBI reference rate) had fallen by 17.5%, the 10-year yield had gone up by around 90 bps and the Sensex had declined 9.5%. In terms of the linkage between the two, statistical analysis shows that the coefficient of correlation between the rupee and Sensex at absolute levels was -0.58 which is quite high with an inverse sign, indicating that the market does not like a declining rupee. At the incremental level, i.e. daily changes in both of them, the coefficient was -0.37. In case of the rupee and the 10-year bond, it was as high as 0.70 at the absolute level and -0.07 at the incremental level. This shows that high rupee rates go hand-in hand with high bond yields. However, the exact changes in levels are not correlated. Last, higher bond yields are negatively correlated with sensex at 0.29 (for absolute levels) and 0.35 (for changes).

While such correlations do have somewhere an inbuilt assumption of causation, the causality tests do not support such a relation between any of these variables. This  makes sense as bond yields are  driven mainly by liquidity conditions and regulatory conditions. The Sensex reacts also to political actions and global developments. Therefore, while there is a tendency to move in a pre-determined direction — the stock market does not quite like a weak rupee or high interest rates and  a weak rupee should go along with higher interest rates.