The Impact of Changes in Monetary Variables on Stock Prices of Commercial Banks in India

The Impact of Changes in Monetary Variables on Stock Prices of Commercial Banks in India

Commercial banks in India, as agents of the reserve bank of India, are key players in the implementation of exchange rate and interest rates and have huge role to control the inflation in the country. The purpose of this study is to examine impact on banking stocks because of frequent changes in important monetary variables. The concern is whether or not current economic indicators, as reflected in interest rates exchange rates and inflation, can explain banking stock returns. This study considered NSE bank nifty index as banks stocks representative because this bank index consist of all major banks listed in the Indian capital market The explanatory variables in this study considered the three important monetary variables namely foreign exchange rates ,long-term interest rates and inflation rates. This paper tries to find the impact of changes in monetary variables on bank nifty. Also the relationship (long run and short run) between bank nifty and monetary variables has been analysed. Different econometric tools have been applied in the study to attain the objectives. The econometric tools like unit root test, ordinary least squares, Johansen-Juselius (1990) Multivariate Co integration test and Vector error correction model (VECM). Based on the unit root test, it is found that all the variables are used in the study are non stationary at level and become stationary at first differences. Johansen cointegration test prove that there is long run relationship between bank nifty and three monetary variables. Based on the result of Ordinary least squares on vector error correction equation this study find that monetary variables have significant impact on bank stock return, but major portion of the bank nifty movement is explains by its own innovations. And also this study find that changes in foreign exchange rates and long term interest rates are affecting the bank nifty movement negatively. But the whole sale price index or inflation rates does not affect the bank nifty or banks stock price movement significantly. Among the three monetary variables are used in this study foreign exchange rates have high influence on bank stock prices.

Sebastian Shinil

Commerce