This paper investigates the effect of bilateral exchange rates on stock market returns in the Botswana Stock Exchange (BSE) measured by the domestic company index (DCI). To examine whether this effect exists or not, Johansen cointegration test, Vector Error Correction model (VECM), Granger causality test, Impulse Response Function and Variance Decomposition are employed. The paper employs monthly data from 2001:M1-20014:M11. The empirical results indicate that there exists a long run equilibrium relationship between the stock market returns and exchange rates in Botswana. These findings corroborate those found by Mishra (2004), Phylaktis and Ravazzo (2005), Sohail and Hussain (2009) who explored the relationship in developed and emerging markets. In this paper, a negative relationship was found to exist between the stock market returns and the US dollar, British Pound and South African Rand. The Euro and the Japanese Yen showed a positive relationship. The findings of the paper also revealed that the speed of adjustment in the VECM is significant and relatively slow. The causality test indicated a unidirectional causality running from exchange rates to the stock market returns. The significant causality relationship was established between the British Pound, US Dollar, Japanese Yen and the Domestic Company Index. The causality results are consistent with those found by Alagidede et.al (2010) and Granger et.al (1998). Therefore, the evidence from this study implies that bilateral exchange rates have a significant effect on the performance of stock prices.