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Impact of monetary policy on the Indian stock market: Does the devil lie in the detail?

Author

Listed:
  • A. Edwin Prabu

    (Reserve Bank of India)

  • Indranil Bhattacharyya

    (Reserve Bank of India)

  • Partha Ray

    (Indian Institute of Management Calcutta)

Abstract

Although the link between the stock market and monetary policy is nebulous in the Indian context, it is perceived to be significant in popular perception. Towards explaining this disconnect, we probe the impact of Indian and US monetary policy announcements on disaggregated sectoral stock indices using the identification through heteroscedasticity approach. Our findings suggest differential impact of monetary policy on stocks across sectors. Illustratively, in terms of monetary policy surprises, the impact on the stocks of banking and financial services as well as the realty sector turns out to be significant. In contrast, sectors like media, metal, pharmaceuticals, information technology or fast moving consumer goods are found to be unresponsive. Interestingly, US unconventional monetary policy (quantitative easing) measures are found to have an impact on fast moving consumer goods and the media sector. These findings are attributed to: (1) dominance of the bank lending channel; (2) predominance of public sector vis-a-vis private banks; (3) significant influence of monetary policy on demand for housing and automobiles; (4) relative ineffectiveness of the asset-price channel of monetary transmission; and (5) sector-specific affects arising out of financial liberalisation.

Suggested Citation

  • A. Edwin Prabu & Indranil Bhattacharyya & Partha Ray, 2020. "Impact of monetary policy on the Indian stock market: Does the devil lie in the detail?," Indian Economic Review, Springer, vol. 55(1), pages 27-50, June.
    • Handle: RePEc:spr:inecre:v:55:y:2020:i:1:d:10.1007_s41775-020-00078-2
    DOI: 10.1007/s41775-020-00078-2
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    Cited by:

    1. Oguzhan Cepni & Rangan Gupta & Jacobus Nel & Joshua Nielsen, 2023. "Monetary Policy Shocks and Multi-Scale Positive and Negative Bubbles in an Emerging Country: The Case of India," Working Papers 202305, University of Pretoria, Department of Economics.
    2. Indrajit Banerjee & Atul Kumar & Rupam Bhattacharyya, 2020. "Examining the Effect of COVID-19 on Foreign Exchange Rate and Stock Market -- An Applied Insight into the Variable Effects of Lockdown on Indian Economy," Papers 2006.14499, arXiv.org, revised Sep 2020.

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    More about this item

    Keywords

    India; Stock market; Monetary policy; Event study; SVAR; Heteroscedasticity;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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