Asymmetric effect of monetary policy on Indian stock market sectors: Do monetary policy stimulus transpire the same effect on all sectors?

Abstract

Most studies for the monetary policy effect on stock markets have concentrated on using the primary index to proxy the stock market. The present paper, avoiding “aggregation bias”, seeks to unbundle the effect of monetary policy on the stock market in two ways. First, the non-linear model is used. Second, sector-level monetary policy variable association and strength is known. Nonlinear Auto-Regressive Distributed Lag method (NARDL) has been used to separate the effect of monetary policy implications. The positive and negative separation of monetary policy variables shows meaningful information relating to each sector. Furthermore, the NARDL model provides the Error Correction equation for future prediction of the sector performance. The Error Correction Term (ECT) is significant for all the sectors, besides Information Technology. While ECT is highest for the Power sector, the lowest is reported for the Metal sector. Inflation increase has substantially more effect on sectors then its decrease. For short-run, real exchange rate positive (REER_POS (−2)), with a lag of 2 months, is effective for all the sectors. The health care sector stands out in its sensitivity to monetary policy variables. The asymmetric response of the Sector equity markets to monetary policy variables throws new insight for the policymakers, business managers, and fund managers. The nonlinearity can be helpful for business managers to relate revenue and valuation to monetary policy. Likewise, the portfolio fund managers can prepare for the expected changes in the economy to reallocate and rebalance their portfolios.

Keywords:

• Non-linear Model
• monetary policy asymmetric effectiveness
• sectoral stock market
• Bombay stock exchange India

PUBLIC INTEREST STATEMENT

Monetary Policy affects all of us today. With the availability of the latest information, we can foresee and manage our consumption and savings better. For example, suppose inflation increases by 1%. In that case, our savings will no longer buy the same amount of products/services we intend to believe in in the future. Therefore, the loss of investment returns is easily assessed. However, suppose inflation decreases by 1%. In that case, stock returns may not increase with the same percentage as returns decreased due to a 1% increase in inflation. The asymmetry hence is highlighted by using the new technique of NRADL. This article helps show how each industrial sector equity market acts very different from the other. Monetary policy variables such as inflation, interest rates, money supply and exchange rates impact are evaluated on 14 sectors. Each variable is compared to its own increase decrease effect on each sector. This adds to the multidimensional information availability for each industry.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Public interest statement

Monetary Policy affects all of us today. With the availability of the latest information, we can foresee and manage our consumption and savings better. For example, suppose inflation increases by 1%. In that case, our savings will no longer buy the same amount of products/services we intend to believe in in the future. Therefore, the loss of investment returns is easily assessed. However, suppose inflation decreases by 1%. In that case, stock returns may not increase with the same percentage as returns decreased due to a 1% increase in inflation. This article helps show how each industrial sector's equity market acts very differently from the other. Monetary policy variables such as inflation, interest rates, money supply, and exchange rates impact are evaluated on 14 sectors. Each variable is compared to its own increase decrease effect on each sector. This adds to the multidimensional information availability for each industry.

Additional information

Funding

The authors received no direct funding for this research.

Notes on contributors

Kunwar Sanjay Tomar

Kunwar Sanjay Tomar is a research scholar with Indira Gandhi National Open University New Delhi. Department of Commerce. His area of research interest is Value Investing, Sector-level analysis for investment and portfolio construction. He has been associated as faculty with NDIM, AIMA, FOSTIIMA, JK Business School, and AJS Cloud India

Subodh Kesarwani is also a founder Editor-in-chief of a peer reviewed refereed journal entitled “Global Journal of Enterprise Information System [GJEIS] from 2009 onwards. Dr. Kesharwani had participated as a debater in diverse TV shows and participates in Interactive Radio Counselling including Gyanvani and Gyandasrshan. He had been awarded “IT Innovation & Excellence Award 2012” in the field of ERP solutions, by KRDWG’s Selection Committee at IIT Delhi. He is in the panel of the Steering Committee of the International Journal of Computing and e-Systems, TIGERA-USA