Do Monetary Policy Announcements Affect Stock Market Performance: Evidence from Emerging Economy

Abstract

This study aims to examine the effect of monetary policy announcements on returns in the Indian stock market. An event study methodology is employed to evaluate the influence of such announcements. The research utilises daily time series data from broad market indices like the Nifty 50, Nifty 100, Nifty 200, and Nifty 500 to represent the Indian stock market, alongside sectoral indices including Nifty Auto, Nifty Bank, Nifty Financial Services, Nifty FMCG, Nifty IT, Nifty Media, Nifty Metal, Nifty Pharma, Nifty Private Bank, Nifty PSU Bank, and Nifty Realty. The results reveal that a reduction in the repo rate announcement leads to a negative effect on broad market indices on the announcement day. Similarly, an announcement of an unchanged repo rate also causes a negative impact, while an increase in the repo rate initially has a positive effect, although this impact diminishes as the stock composition of the indices grows. Overall, the study suggests that stock market returns are largely unaffected by changes in monetary policy rates or reserve requirements.

Keywords: Monetary Policy, NSE, Broad Market and Sectoral Indices, Repo Rate

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