New Delhi [India], June 23 (ANI): The Indian equity market maintains a strong, direct relationship with foreign capital inflows and the domestic currency, according to a study report by Bank of Baroda.

The study revealed that the Sensex and Foreign Institutional Investor (FII) flows share a positive correlation, signalling that an increase in the Sensex moves hand-in-hand with rising foreign capital. A similar positive relationship exists between the Sensex and the Rupee.

Data from the report showed that this economic relationship strengthened considerably between April 2022 and March 2026. During this specific phase, the positive correlation coefficient between the Sensex and the Rupee reached 0.6, while the correlation between the Sensex and FIIs stood even higher at 0.7.

The report noted that a positive correlation indicates a mirror relationship where a change in one variable, whether an increase or a decrease, moves the other variable in the exact same direction. Conversely, a negative correlation means the variables move in opposite directions.

The research, which analysed macroeconomic indicators from fiscal year 2000 to fiscal year 2026, established a firm causal relationship between the Sensex and the Rupee, as well as between the stock index and FII flows.

'Additionally, INR and FII flows also reflect a positive correlation. Notably, a higher level of positive correlation has been noted in the post covid series between each of the variables,' the report said.

This study highlighted a clear spillover effect across Indian financial markets, where past market movements directly shape future market behaviour.

The report mentioned, 'given the presence of volatility clustering, it has been observed that there is a spillover effect between the changes in the past Sensex returns to their future outcome.'

'The same can also be said for FIIs, but might not be true for INR as one of the coefficients in the mean equation for INR was not significant,' the report added.

This interconnectedness extends directly to international capital behaviour. The study examined and found that fluctuations in the equity market benchmark alter the broader investment environment for foreign players.

'Furthermore, the spillover effect has been noted with changes in Sensex return, which can sometimes lead to changes in exchange rate, since one model validates this result,' the study report added. 'Change in Sensex return also has a volatility spillover effect on FIIs. Therefore, changes in the Sensex returns do actually influence the volatility of FIIs' (ANI)