Arbitrage Opportunities around Key Monetary Rate Announcements: An Event Study Methodology

The study examines the impact of stock market returns to the announcement of monetary policy changes with respect to key rates such as CRR Rate, Repo rate and Reverse repo rate. If the markets are semi-strong efficient as assumed by the market efficiency theories, then investors would not have any opportunities to make abnormal profits by forming various trading strategies considering the various announcements declared by companies, governments or central bank of India. The central Bank of India plays a very important role in tackling the monetary issues in the country. The study is exhaustive enough in encompassing major events. The study thus aims at examining the impact of monetary steps taken by central bank of India in the form of changes to monetary rates on the stock market returns. Banks are always assumed in the literature to be impacted by the monetary changes first and foremost since they are linked directly with the credit delivery. Standard Event study methodology and sample t-test for equal means was used to analyse the impact of changes in the Key monetary rates mainly the CRR, Repo and Reverse Repo rate. 448 event studies were conducted considering 14 bank stock prices for a period 2006-2013. From the analysis, we find no significant differences in the stock mean returns around the announcement dates. Thus we infer that, the markets are semi-strong efficient and Investors should consider fundamental intrinsic strength of the companies before making decisions. The retail investors and institutional investors should thus avoid these rallies around the announcement dates and should consider policies with long term vision in selection of portfolios.