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

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.