HOME > MARKETS > ECONOMY NEWS
  ECONOMY NEWS
ECONOMY
Future monetary policy expectations impact stock markets more than rate announcements: RBI paper
Apr-29-2024

The Reserve Bank of India in its latest working paper titled ‘Equity Markets and Monetary Policy Surprises’ has said that equity markets are impacted more by the expectations of future monetary policy than the policy rate surprises on the day of announcement of the policy by the Reserve Bank. 

This paper studies the impact of monetary policy announcements on the returns and volatility in the BSE Sensex by decomposing changes in Overnight Indexed Swap (OIS) rates on policy announcement days into target and path factors. The target factor captures the surprise component in central bank policy rate action, while the path factor captures the impact of central bank communication on market expectations regarding the future path of monetary policy.

The empirical analysis using daily data suggests that equity returns are impacted only by the path factor (i.e., market’s expectations of future monetary policy trajectory), while both target and path factors (both of which capture the unanticipated component of monetary policy) impact the volatility in equity prices. Further, an event study analysis undertaken by constructing short duration windows around the monetary policy announcements using intraday data also indicates that the path factor helps explain changes in equity returns.

According to the working paper, while the short duration windows are aimed at controlling for other potential drivers of equity prices, it may be noted that the monetary policy announcements are accompanied by regulatory and developmental measures which can also impact markets. The sparse trading on occasions in the OIS markets as well as other domestic and global developments during the narrow window can also impact the analysis.


  RELATED NEWS >>