RBI Analysis: Equity markets driven more by future policy expectations

RBI Analysis: An analysis conducted by Reserve Bank of India (RBI) officials reveals that equity markets are significantly influenced by future monetary policy expectations rather than the immediate policy rate surprises during the announcement.

The working paper, titled "Equity Markets and Monetary Policy Surprises," highlights the substantial impact of market expectations on stock markets, emphasising their forward-looking nature.

The paper underscores that while the announcement of regulatory and developmental measures alongside monetary policy affects market volatility, the primary driver remains the market's anticipation of future policy trajectories.

Authored by Mayank Gupta, Amit Pawar, Satyam Kumar, Abhinandan Borad, and Subrat Kumar Seet from the Department of Economic and Policy Research at RBI, the analysis delves into the decomposition of changes in overnight indexed swap (OIS) rates on policy announcement days into target and path factors.

While the study focuses on the BSE Sensex, it acknowledges that market reactions are nuanced and affected by both immediate policy surprises and broader expectations.

The analysis also considers the influence of other domestic and global developments during the evaluation period, which spans from January 2014 to July 2022, coinciding with the adoption of a flexible inflation targeting regime in India.

It's worth noting that the RBI's Working Papers series, initiated in March 2011, aims to foster academic discourse on economic issues. The central bank clarifies that the views expressed in the paper solely reflect those of the authors, not necessarily the institution's official stance.

(with PTI inputs)