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Editorial Board A Refereed Monthly International Journal of Management
Prof. B. P. Sharma
(Editor in Chief)
Prof. Mahima Birla
(Additional Editor in Chief)
Dr. Khushbu Agarwal
(Editor)
Ms. Asha Galundia
(Circulation Manager)

 Editorial Team

Dr. Devendra Shrimali
Dr. Dharmesh Motwani
 
  1. IMPACT OF REPO RATE ANNOUNCEMENT ON INDEX PRICE MOVEMENT OF NSE AND BSE

    Dr.S.Rajamohan1C.Vijayakumar2

    1Professor, Alagappa Institute of Management,Alagappa University,Karaikudi-03.

    2Research Scholar,Alagappa Institute of Management,Alagappa University,Karaikudi-03.

    ABSTRACT

                The Reserve Bank of India (RBI) credit policy announcement is the most considerable event in the stock market practices. Whenever the RBI announces information oncredit policy,the market has becomevibrant and there is some impact on the market index. Repo rate plays the most important key factorfor lending of the economy of the country hence the market tendency has been analysed at the time of repo rate announcement. The study has been made at what extent the market has reacted when changes occurred on the repo rate. The study undertakes to know the volatility, range of risk and return and investors’ reactions on the basis of descriptive and analytical nature. The researcher has used the statistical tools like, Wilcoxon signed rank test and paired sample t test to find out the before and after effect of the repo rate announcement on the stock market index price.

    Keywords: Repo rate announcement,Index Price movement, Stock market Volatility,

    INTRODUCTION:

                Indian financial system has intermix deal with all industries in which financial market performs based on the several market determinantssuch as demand and supply, investors emotions, international dealings, government initiatives, industry performances, special announcements, other economic factors and so on. The financial market is being as an important component to contribute more in the economic development and it is also performing as a pulse of an economic condition of the nation. Especiallythe stock markets havegiven a significant cradle to gather money from various investors to distribute their investment in various fields for the business growth.The market contribution has a significant role on the Indian economy. Indian economy is also functioning with different components and it has unique structure to monitor and control it. Each country has different regulated financial system. India also hasan important regulatorsuch as Reserve Bank of India (RBI), Securities and Exchange board of India (SEBI), Unit Trust of India (UTI) and so on.It regulates monitor and controlactivities. In this context, their initiatives and announcements have been creatingan influence on the stock markets.Hence the researcher has focused to analyse the impact of repo rate announcement on the stock market.The study would help to recap about the economic factors which influence on the stock market.

    STATEMENT OF THE PROBLEM

                Repo rate provides a significant impact on the monetary activity of the country because most of them deal with the banks like big corporates, small and medium enterprises, farmer community, individuals and so on.Every business organisations are working towards the profit intension. Business development can be achieved by yielding more profit but higher borrowing cost is the biggest challenges for business development.Higher interest rate is being a road block to the growth of entire business process and it is also hurting overall profitability of business enterprise. Every organisation has to know, if any substantial change in the interest ratewhich will reflect in the business performance and market price of the share.Market index price movement is based on the companies’ performances, investors’ behaviour, internal and external factorsand so on. Repo rate has a considerable factor to know how it will stimulate the volatility of the stock market and thisannouncement has huge possibilities to create significant influence on the stock price movement positively or negatively.

    OBJECTIVES

    1. To find out the influence of repo rate announcement on the price movements of NSE and BSE Index.
    2. To analyse the performance of price movements in NSE and BSE Index after the announcement of repo rate.

    REVIEW OF LITERATURE

                Yu Hsing (2011)1 examined the relationship between stock market index of Hungary and relevant macro-economic variables. The study has concluded that the stock market index of Hungary has a positive relationship with macroeconomic variables such as the real GDP, ratio of government debt to GDP, nominal effective exchange rate and German stock market index. Further, the signalindicated that the market index of Hungary has negatively related to real interest rate, expected inflation rate and government bond yield in Euro region.

                S.Vanitha (2013)2the study showed that the security prices reacted to the announcements of reverse repo rate and cash reserve ratio. The reaction took place for very few days only. In this study clearly indicates that that reverse repo rate and cash reserve ratio has such influence on the price of Indian Banking Stocks. Indian Stock Market was able to capture the RBI announcement information immediately. Indian Stock Markets in respect of banking companies in general are efficient to some extent, but not perfectly efficient in responding to the RBI Announcements.

                Vivek Sharma (2013)3 Post Sep, 2010 till Jul 2011, whenever repo rate was increased Sensex reacted negatively to the news. In fact, when RBI hiked repo rate by 50% basis point on 03rd Mar,2011, Sensex points improved almost 460 point. This was the time when market realized that the hike would make a significant impact on the cost of capital of the companies and will drive profitability down for the companies in general. However, when repo rates were upped to 8.25 percent and 8.50 percent respectively from their previous levels market has reacted positively as there was a confidence built in the market that the rates won’t go up significantly.

     

  1. HYPOTHESES

    1. H0-There is no significant difference between before and after the announcement of repo rate in each quarter towards price movement ofNSE Index.
    2. H0-There is no significant difference between the before and after the announcement ofrepo rate in each quarter towards price movement of BSE Index.
    3. H0-The repo rate announcement does not create any impact on the Index priceperformances of NSE in eachquarter.
    4. H0-The repo rate announcement does not createany impact on the Index price performances of BSE in eachquarter.

    METHODOLOGY

                            The research is based on the secondary data and the data have been collected from the authorised websites of RBI, NSE and BSE.30 days closing prices of data have been considered in a chronological order to analyse based on before and after the announcement of repo rate. Four quarters of repo rate announcement have considered in the year of 2015 to retrievethe data and the announcement date has been given in Table1. Wilcoxon signed rank test has been used to measure the influence level on the stock price movement before and after the repo rate announcement. Paired sample t test has been used to find out the performance of index movement based on before and after announcement basis.

    SIGNIFICANCE OF THE STUDY

                The RBI has the most important role of monitoring and controlling the credit of the nation. The RBI has an authority to regulate and control the volume of credit through both quantitatively and qualitatively. It includes the bank rate policy, open market operations, variable reserve ratio, moral suasion publicity, credit rationing and so on. Repo rate has most possibility to create vibrations on the open market systems.

     

    REPO RATE ANNOUNCEMENT OF THE RBI

                The Repo rate is the rate at which the RBI lends money to the bank for short term. It is a bench mark rate which will make influence on the people or companies borrowings from the bank. If the rate affects the borrowings of the companies, that will make some influence on the profitability and growth of the companies.

  1. Table-1

    REPO RATE DECLARATION OF RBI IN 2015

    Date of Announcement

    Changes

    % of Repo rate

    15-01-2015(Q1)

    -0.25

    7.75

    04-03-2015(Q2)

    -0.25

    7.50

    02-06-2015(Q3)

    -0.25

    7.25

    29-09-2015(Q4)

    -0.50

    6.75

                            Source: www.rbi.org.in

                Table 1 displays the repo rate announced by the RBI during the year of 2015. The Repo rate has consistently decreased in first three quarters upto 0.25 percent and the rate which decreased upto 0.50 percent in the last quarter of 2015.The Repo rate has been consistently decreased by the RBI hence it willsupport to increase the profitability and reduce the cost of capital of the business enterprise and the decreasing trend which create some positive impact on the industries share price movement in the market.

    Table-2

    IMPACT OF REPO RATE ON THE PRICE MOVEMENTS OF NSE (Wilcoxon signed rank Test)

    Date

     

    Mean Value

    Std.Dev Value

    N

    Mean Rank of NSE

    / Z / value

    Asymp.sig (2 tailed) 

    H0

    Positive

    Negative

    15-01-2015

    Before

    8.281

    129.275

    30

    30 (15.5)

    0

    (0)

    4.8

    0

    Rejected 

    (Q1)

    After

    8.756

    117.601

    04-03-2015

    Before

    8.786

    113.24

    30

    1

    (8)

    29

    (15.76)

    4.6

    0

    Rejected

    (Q2)

    After

    8.632

    144.08

    02-06-2015

    Before

    8.311

    108.302

    30

    16 (11.75)

    14

    (19.79)

    0.9

    0.36

    Accepted

    (Q3)

    After

    8.267

    177.992

    29-09-2015

    Before

    7.951

    267.802

    30

    24 (13.33)

    6

    (24.17)

    1.8

    0.072

    Accepted

    (Q4)

    After

    8.091

    147.494

    Source: www.nseindia.com, Figures in brocket indicates the mean rank

Table 2 describes the influence of repo rate announcement on NSE index closing price movement.  There are no more changes on the mean value of after and before index movements. There is no higher standard deviationvalue when we analyse the each quarter movements.The first quarter and the second quarter /Z/ value has 4.782 and 4.618 respectively. The absolute computed value of Z is more than the absolute critical value of ±1.96. The significant level of 2 tailed has also less than 0.05 hence thatnull hypothesis is rejected.Third and fourth quarter /Z/ value has 0.915 and 1.800 respectively and it is less than the absolute critical value of ±1.96. The significance level has more than the value of 0.05 hence the Null hypothesis has been accepted.

Table-3

IMPACT OF REPO RATE ON THE PRICE MOVEMENTS OF BSE(Wilcoxon signed rank Test)

Date

 

Mean Value

Std.Dev Value

N

Mean Rank of NSE

/ Z / value

Asymp.sig (2 tailed) 

H0

Positive

Negative

15-01-2015

Before

2.764

551.859

30

30 (15.50)

0

(0)

4.8

0.000

Rejected 

(Q1)

After

2.897

395.033

04-03-2015

Before

2.908

353.007

30

0

(0)

30

 (15.50)

4.8

0.000

Rejected 

(Q2)

After

2.853

474.809

02-06-2015

Before

2.743

354.756

30

17

(12.59)

13

(19.31)

0.4

0.704

Accepted 

(Q3)

After

2.738

608.887

29-09-2015

Before

2.618

881.082

30

22

(16.32)

8

(13.25)

2.6

0.009

Rejected 

(Q4)

After

2.673

505.966

Source: www.bseindia.com, Figures in brocket which indicates the mean rank

            Table 3 shows the influence of repo rate announcement on BSE index price movement.  There is no highest difference in the mean values. Standard deviation result shows that consistent improvement on the Index return after the repo rate announcement for each quarter. First, second and fourth quarter absolute /Z/ value has 4.782, 4.782and 2.602 respectively. The absolute computed value of Z is more than the absolute critical value of ±1.96 andthe significant level of 2 tailed has also less than 0.05 hence that null hypothesis has rejected. Third quarter Plevel is 0.704it is more than the significance level of 0.05 hence null hypothesis accepted.

Table-4

NSE PRICE INDEX PERFORMANCEBEFORE AND AFTER THE REPO RATE ANNOUNCEMENT (Pared sample T test)

Date

Paired Differences

T

df

Sig. (2-tailed)

H0

Mean

Std. Deviation

Std. Error Mean

95% Confidence Interval of the Difference

Lower

Upper

15-01-2015 (Q1)

-4.75E+02

169.758

30.9934

-538.005

-411.228

-15.3

29

0

Rejected

04-03-2015

(Q2)

1.53E+02

95.4906

17.4341

117.6082

188.9218

8.791

29

0

Rejected

02-06-2015 (Q3)

4.38E+01

248.33

45.3386

-48.9262

136.5295

0.966

29

0.342

Accepted

29-09-2015

(Q3)

-1.40E+02

398.331

72.725

-288.839

8.63927

-1.93

29

0.064

Accepted

Source:www.nseindia.com

                   Table 4 shows the descriptive statistic as well as actual resultof paired sample t test to understand theperformance of NSE index price movement before and after the announcement of repo rate.The first and second quarter have significant difference between the price movements of before and after repo rate announcement hence that P value is 0.000 level and it is less than the significant level of  0.05 hence null hypothesis is rejected. Third quarter has 2 tailed P value has more than the significance level hence that Null hypothesis accepted. In fourth quarter result shows that small difference in the significant level.

Table-5

BSE PRICE INDEX PERFORMANCE BEFORE AND AFTER THE REPO RATE ANNOUNCEMENT (Pared sample T test)

Date

Paired Differences

T

df

Sig. (2-tailed)

H0

Mean

Std. Deviation

Std. Error Mean

95% Confidence Interval of the Difference

Lower

Upper

15-01-2015 (Q1)

-1.33E+03

550.152

100.444

-1539.41

-1128.55

-13.3

29

0.000

Rejected

04-03-2015

(Q2)

5.46E+02

289.22

52.804

437.8769

653.8696

10.34

29

0.000

Rejected

02-06-2015 (Q3)

5.63E+01

860.974

157.192

-265.233

377.7532

0.358

29

0.723

Accepted

29-09-2015

(Q3)

-5.58E+02

1320.22

241.038

-1051.42

-65.4585

-2.32

29

0.028

Rejected

Source: www.bseindia.com

                   Table 4 shows the descriptive statistic as well as actual result of paired sample t test to understand the performance of BSE index price movement before and after the announcement of repo rate. The first, second and fourth quarters have significant difference between the price movements before and after the repo rate announcement hence the P value is below the significant level of 0.05 hence null hypothesis rejected. Third quarter P value is 0.723 it is more than the significance level of 0.05 hence the null hypothesis is accepted.

CONCLUSION

            Stock market deals with various industries stock and other financial instruments and so on.Stock index value indicates the performance of industries or companies listed in themarket. Every business organisation has such deal and contribution on the economic development. Every nation has such system to control over the economic condition. So that, if any change in economic control factors that will make such influenceson the economic conditions and which can becreate vibrant on the stock markets. During such time interval, RBI takes monetary control activities of the nation like changes in CRR, SLR, repo rate, reverse repo rate and so on. This study helps to understand whether any positive or negative impact on the stock market by the announcement of repo rate. The result of the study showed that the NSE and BSE index prices reacted by the repo rate announcement. In this study, repo rate announcement has the positive impact on the stock market index because the rate has consistently decreased by the RBI. The stock market index has the positive performance after the repo rate announcement and the effect has not continued as for long time.  The investor has to consider this announcement before making their investment on the stock because it will help them to earn more return or safe their investment.

 

References

  1. Yu Husing “Effects of macro-economic variables on the stock market:The case of Czech republic ,, Theoriticle and applied economics, Volume XVIII (2011), No. 7(560), pp. 53-64.
  2. vanitha “Impact of reverse repo rate and cash reserve ratio in National Stock Exchange (NSE) CNX bank index”, International Journal of Management and Business Studies ISSN: 2167-0439 Vol. 3 (1), pp. 072- 081
  3. http://www.moneycontrol.com/news/economy/do-repo-rate-changes-really-impact-stock-market_841813.html?utm_source=ref_articleThe repo rate announcement has created justifiable vibrant on the industry activities
  4. http://craytheon.com/charts/rbi_base_rate_repo_reverse_rate_crr_slr.php
  5. http://economictimes.indiatimes.com/definition/repo-rate

Websites

  1. nseindia.com
  2. bseindia.com
  3. yahoofinance.com
  4. rbi.org.in
  5. money control.com

 

 

 
 

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