Dynamic Linkages, Long-Run Equilibrium, and Adjustment Mechanisms Between the Banking Sector and Indian Equity Market

Abstract

This study examines the dynamic relationship between the Banking sector index and the NSE Nifty 50 index by analysing weekly closing prices from April 2020 to March 2025. Employing Augmented Dickey-Fuller (ADF) tests, Johansen’s co-integration framework, and Granger causality analysis, the research investigates both long-run equilibrium and short-run causal dynamics. The ADF test results reveal that both indices are non-stationary at their levels but attain stationarity at first difference, confirming I(1) integration order. Johansen’s co-integration findings indicate the existence of at least one long-term equilibrium relationship between the two indices. Further, the Granger causality test establishes bidirectional causality, implying that movements in the Banking sector significantly influence Nifty 50 and vice versa. The results highlight strong interdependence between sectoral and market-wide indices, emphasising the systemic importance of the Banking sector in India’s stock market dynamics.