Vol.:(0123456789) Indian Economic Review (2020) 55:27–50 https://doi.org/10.1007/s41775-020-00078-2 1 3 ARTICLE Impact of monetary policy on the Indian stock market: Does the devil lie in the detail? A. Edwin Prabu 1  · Indranil Bhattacharyya 2  · Partha Ray 3 Published online: 25 February 2020 © Editorial Ofce, Indian Economic Review 2020 Abstract Although the link between the stock market and monetary policy is nebulous in the Indian context, it is perceived to be signifcant in popular perception. Towards explaining this disconnect, we probe the impact of Indian and US monetary pol- icy announcements on disaggregated sectoral stock indices using the identifcation through heteroscedasticity approach. Our fndings suggest diferential impact of monetary policy on stocks across sectors. Illustratively, in terms of monetary policy surprises, the impact on the stocks of banking and fnancial services as well as the realty sector turns out to be signifcant. In contrast, sectors like media, metal, phar- maceuticals, information technology or fast moving consumer goods are found to be unresponsive. Interestingly, US unconventional monetary policy (quantitative eas- ing) measures are found to have an impact on fast moving consumer goods and the media sector. These fndings are attributed to: (1) dominance of the bank lending channel; (2) predominance of public sector vis-a-vis private banks; (3) signifcant infuence of monetary policy on demand for housing and automobiles; (4) relative inefectiveness of the asset-price channel of monetary transmission; and (5) sector- specifc afects arising out of fnancial liberalisation. Keywords India · Stock market · Monetary policy · Event study · SVAR · Heteroscedasticity An earlier version of the paper was presented in the India Finance Conference 2018 held at the Indian Institute of Management, Calcutta during December 20–22, 2018. * Indranil Bhattacharyya bhattacharyya.i@gmail.com A. Edwin Prabu edwinprabu@gmail.com Partha Ray pray@iimcal.ac.in 1 Reserve Bank of India, Chennai 600001, India 2 Reserve Bank of India, Mumbai 400001, India 3 Indian Institute of Management Calcutta, Kolkata 700104, India