This paper asks whether interest rates matter for stock markets in the Indian context. It uses the monthly averages of the sensex and nifty to measure stock prices in April 1996-June 2006. For the same period, the month-end yields on 10-year government security and treasury bills (15-91 days) are used to measure long-term and short-term interest rates, respectively. The paper finds that there is a long-run relationship between interest rates and stock prices. Both long-term and short-term interest rates affect stock prices. The long-term interest rates are found to affect stock prices negatively, whereas short-term interest rates affect stock prices positively. In addition, the sensex is found to be more responsive to changes in interest rates than the nifty.
