IMPACT OF RBI MONETARY POLICY ON STOCK MARKET VOLATILITY

Abstract

The project titled " Impact of RBI Monetary Policy on Stock Market Volatility :An Empirical Analysis of Nifty 50 & BSE Sensex", analyzes the effects of Reserve Bank of India monetary policies on India's primary stock indices from 2016-2025. The project scope covers a range of significant economic and financial events such as the flexible inflation targeting framework, establishment of the Monetary Policy Committee (MPC), demonetization, the COVID-19 crisis, post-pandemic inflation trends and subsequent monetary tightening cycle. The aim of the project is to evaluate how monetary policy actions of key RBI policy instruments namely Repo Rate, Reverse Repo Rate, SLR, MSF and Bank Rate influence Indian stock markets. The project also examines the correlation between monetary tightening cycles and market movements. To enable comprehensive analysis, the project uses a mixed-method approach combining quantitative econometric analysis with qualitative policy evaluation. For this study, Nifty 50, BSE Sensex and RBI monetary policy time series data for the period January 2016 - December 2025 were collected from RBI-DBIE portal, NSE and BSE historical data and related official sources. We also examined the volatility trends and cumulative abnormal returns around MPC meeting dates utilizing several econometric techniques such as Augmented Dickey-Fuller (ADF), KPSS tests, GARCH(1,1) and EGARCH. The findings of the analytical study show that RBI monetary policy has a significant effect on stock market volatility in India. The results reveal that changes in Reverse Repo Rate/Standing Deposit Facility (SDF) shows the strongest statistical relationship with market volatility. A contractionary monetary policy and tight monetary tightening generally lead to increase in market volatility and investor uncertainty, while expansionary policy leads to better market stability and investor confidence. EGARCH model proved to be comparatively better than GARCH in depicting the behavior of volatility, especially the leverage effect and the asymmetrical behavior of the market for SENSEX, particularly during events like the COVID-19 pandemic. The results from the event study analyses confirm that the stock markets show strong response to major MPC announcements, especially unexpected policy pronouncements and during periods of economic uncertainty.