Financial Sector Development and Real Sector Growth – Association, Spillover and Causality During Pre Covid and Covid Regimes

Abstract

In this paper, we propose an alternative approach to understanding the relationship between financial sector development and real sector growth in India. We use stock market sectoral indices available on National Stock Exchange (NSE) like Capital Goods Index, FMCG Index, Energy Index, Infra Index, Metal Index, Realty Index, and Auto Index to represent the real sector. To represent the financial sector, we consider Bank Index and Financial Services Index separately. The proposed framework examines the relationships at a granular level to understand the extent of association, spillover, and causality. We also analyze the relationship between the financial sector and the real sector in Pre COVID and COVID periods separately. Our research methodology includes the use of Detrended Cross-Correlation Analysis (DCCA), Wavelet Multiple Correlation (WMC), Wavelet Multiple Cross Correlation (WMCC), Diebold-Yilmaz spillover Framework, and Non-Linear Causality Test. Our granular approach has enabled us to examine the relationships in different periods and we observe that the results change. The intensity of the relationships also is different during the COVID period as compared to Pre COVID period.