Understanding the Sectoral Impact of Credit Growth in India: A Macro-financial Analysis

Abstract

This study examines the relationship between private-sector credit growth and sectoral stock market performance in India, with particular emphasis on the moderating role of sectoral financial leverage. Using quarterly data for 13 National Stock Exchange sectoral indices over 2014–2024, the study employs inter-temporal correlations and a panel autoregressive distributed lag (ARDL) model to distinguish short- and long-run effects. The results indicate that credit growth is positively associated with sectoral stock market performance in the long run, with the strongest association emerging at a lag of three quarters. The interaction between credit growth and the debt–equity ratio is positive and statistically significant, suggesting that leverage conditions the transmission of credit to equity markets. Short-run effects are heterogeneous across sectors, with the interaction between credit conditions and leverage providing a stronger explanation of sectoral responses than credit growth alone. JEL Classification: E44, E51, G12, G32