Boom or bust? A Comparative Analysis of Monetary Policy and Stock Market Performance in India Across Economic Cycles

Abstract

This study delves into the intricate relationship between monetary policy instruments and various sectors of the Indian stock market from 2011 to 2022. By Analyzing data encompassing significant policy shifts and economic events, including the Reserve Bank of India's (RBI) transition towards inflation targeting and flexible exchange rates, the study aims to uncover the nuanced impacts of monetary policy on sectoral indices. Utilizing a Vector Autoregression (VAR) model, the study examines the dynamic interplay between key monetary policy instruments—Cash Reserve Ratio (CRR), Marginal Standing Facility Rate (MSF), Repo Rate, Reverse Repo Rate, and Treasury Bills—and ten diverse sectors represented in the Bombay Stock Exchange (BSE) indices. The findings reveal intricate sector-specific responses to monetary policy adjustments, reflecting the complex interplay of economic dynamics and policy measures. While some sectors exhibit positive correlations with certain monetary instruments, others display negative associations, underscoring the diverse impacts of monetary policy on sectoral performance. The study highlights the significance of understanding these nuanced relationships for policymakers, investors, and market participants in navigating India's evolving economic landscape.