IMPACT OF REPO RATE ANNOUNCEMENT ON BANK NIFTY

Abstract

Monetary policy plays a significant role in influencing liquidity, interest rates, credit availability and investor sentiment within financial markets. Among the various monetary policy instruments adopted by the Reserve Bank of India (RBI), the Repo Rate serves as one of the most important tools for regulating money supply and maintaining macroeconomic stability. Changes in Repo Rate directly influence the borrowing cost of commercial banks and indirectly affect stock market performance, particularly in interest-sensitive sectors such as banking.

The present study examines the impact of Repo Rate announcements on the volatility and returns of Bank Nifty, one of the major sectoral indices representing the Indian banking sector. The study investigates the pre- and post-announcement volatility patterns of Bank Nifty returns across multiple event windows of 3 days, 6 days, and 9 days during the period from 2018 to 2020. The study adopts a descriptive research design and uses secondary data collected from the official sources of the Reserve Bank of India and National Stock Exchange. Statistical tools including Mean Return Analysis, Variance Analysis, and F-Static Test were employed to evaluate the significance of changes in returns and volatility.

The findings reveal that Repo Rate announcements do not create immediate statistically significant changes in Bank Nifty returns in short-term windows of 3 and 6 days. However, evidence of moderate long-run influence was observed in selected 9-day post-announcement windows, indicating delayed market reaction to monetary policy changes. Although reductions in Repo Rate generally created positive market expectations and improved investor sentiment, external macroeconomic shocks such as the COVID-19 pandemic significantly altered market behavior and reduced the effectiveness of monetary transmission to stock returns.

The study concludes that Repo Rate announcements alone are insufficient to explain short-term Bank Nifty volatility and that investors should avoid making immediate trading decisions solely based on monetary policy announcements. Instead, investment decisions should consider broader macroeconomic indicators and longer observation periods. The study contributes to the growing literature on monetary policy transmission and provides practical implications for investors, policymakers, and financial analysts in understanding the behavior of banking sector indices in India.