Monetary Policy: The Impact and Incidence on Stock Prices

Abstract

“Dhanam Mulam Idam Jatath” is a Sanskrit proverb that means "Wealth is the root of this world." It is often used to emphasize the importance of wealth in achieving success in life. The word "dhanam" means wealth, "mulam" means root, and "jagat" means the world (Chanakya). The experience, knowledge, time, effort, sweat, and blood of people together earn money through various means and ways. To intuit and innovate, to solve and resolve, to create and recreate, to produce and promote, and to destroy and develop from beginning to end, we need money. The impact of monetary policy is there on every sector of an economy, and investments in the stock market are no exception to that. A liberal monetary policy boosts investments in markets and vice versa. The specified study is objectively focused on identifying and studying the impact of monetary policy on investments in general and on equities (selected) in particular. The monetary policy index has been constructed with help of the RBI by considering the weights given as per the above-mentioned values, and the MPI values were framed from 2012–13 to 2022–23. The VECM is used to conduct this study along with the Monetary Policy Index (MPI). The results of the study produced mixed inferences, i.e., on specific stocks, it has a positive relationship, and on others, it has a negative relationship. While acknowledging the persisting cyclical and long-term risks and challenges, the paper addresses dimensions of investment in markets and offers suggestions on ‘Economic Prosperity’ and ‘Sustainable Economic Development (SED)’ in the long run.