Is the stock market impervious to monetary policy announcements: Evidence from emerging India

- We study impact of domestic and US monetary policy announcements on Indian stocks.
- No significant impact of monetary policy announcements on stock indices.
- However, there is some evidence that policy surprises matter.
- Few events of US unconventional monetary policy had an impact on Indian stocks.

This study uses “event study” and “identification through heteroscedasticity” methodology to study the impact of Indian monetary policy announcements on stock indices during 2004-14. Although stock indices decline after announcement of policy tightening, the results are statistically insignificant. Unanticipated policy announcements have weakly significant impact, particularly on banking stocks. Dominance of the banking channel and ineffectiveness of the asset price channel in monetary transmission could have contributed to this non-confirmative result. Finally, UMP announcements of the US Fed also do not impact Indian stock returns except for a few events of LSAP in 2008 and Operation Twist in 2011.