THE IMPACT OF RBI RATE ADJUSTMENTS ON BANK STOCK RETURNS

Abstract

This study examines the short-term impact of Reserve Bank of India (RBI) monetary policy rate adjustments — specifically repo rate changes — on the stock returns of major listed Indian banks over the period 2012–2024. Using a standard event study methodology with market-adjusted and market model abnormal returns, we analyze 32 rate change events (18 rate cuts and 14 rate hikes) across a symmetric event window of 21 trading days (−10 to +10 days relative to the announcement date). The sample comprises six major Indian banks listed on the National Stock Exchange (NSE): State Bank of India (SBI), HDFC Bank, ICICI Bank, Kotak Mahindra Bank, Axis Bank, and Bank of Baroda (BOB). Results reveal statistically significant cumulative abnormal returns (CAR) across all rate change events, with rate cuts generating an average CAR of +2.68% over the event window, and rate hikes producing a corresponding CAR of −2.41%. Cross-sectional analysis shows that private sector banks (HDFC, ICICI, Kotak, Axis) exhibit higher abnormal return sensitivity to rate cuts, while public sector banks (SBI, BOB) respond more strongly to rate hikes. Rolling correlation analysis reveals that the bank stock return–interest rate nexus has strengthened significantly in the post-2018 period, potentially attributable to the structural liquidity frameworks introduced by the RBI and increased market depth. Regression analysis further confirms that the magnitude of rate change, the policy stance (accommodative vs. restrictive), and prior market expectations are significant determinants of abnormal return magnitude. These findings have important implications for portfolio managers, bank treasuries, and monetary policy transmission research.