Description
This paper titled “Impact of interest rate announcements on Indian Stock Markets” aims to analyze the market efficiency of the Indian Stock Markets with respect to interest rate adjustments announced by the RBI. To test the market’s efficiency with respect to information embedded in the public announcement of interest rate changes, it has used the standard event study methodology.
Impact of interest rate announcements on Indian Stock Markets
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Preface
This paper titled “Impact of interest rate announcements on Indian Stock Markets” aims to analyze the market efficiency of the Indian Stock Markets with respect to interest rate adjustments announced by the RBI. To test the market’s efficiency with respect to information embedded in the public announcement of interest rate changes, we have used the standard event study methodology. The study examines the effects of five increases and three decreases in the repo rates to test market efficiency and to see the impact of the RBI’s monetary policy action on the stock market. We have taken the 14 stocks comprising the BANKEX for the purpose of analysis. The paper begins with a brief introduction about the efficiency market hypothesis and the forms of market efficiency. The next chapter reviews the literature available on the subject in a nutshell. Our research methodology, the sample of study, scope and limitations of the research are covered in Chapter 3. Chapter 4 contains the analysis and interpretation with the research findings with respect to the sample that we have chosen. Chapter 5 lists down the conclusions from the above studies and our suggestions for investors.
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Acknowledgment
We would like to express our deep and sincere gratitude to Professor Anant Gupta (Deputy Director and the Head of Department, Finance, SCMHRD) for giving us this opportunity to undertake a research project. Also, we wish to convey our warm and sincere thanks to Ms. Dipali Krishnakumar (Assistant Professor, Finance, SCMHRD) who has spent considerable time with us in discussing small details at each stage of the project and for giving us valuable suggestions during the entire project . Her encouragement and personal guidance has helped us in successful completion of our project.
NAMAN GUPTA
VARUN GUPTA
PAVITRA SUDHINDRAN
SREYASH BHANDARI
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Table of Contents
Preface .................................................................................................................................................... 2 Acknowledgment .................................................................................................................................... 3 Abstract ................................................................................................................................................... 6 1. Chapter 1 Introduction .................................................................................................................... 7 1.1 Market Efficiency ......................................................................................................................... 7 1.1.1 Key Concepts: ........................................................................................................................ 7 1.1.2 Efficiency Market Hypothesis: .............................................................................................. 8 1.2 Event Studies ................................................................................................................................ 9 Chapter 2 Review of literature .............................................................................................................. 10 Chapter 3 Research Methodology ......................................................................................................... 12 3.1 Primary Research Objective........................................................................................................ 12 3.2 Secondary Research Objectives .................................................................................................. 12 3.3 Research Tools ............................................................................................................................ 12 3.4 Type of data ................................................................................................................................ 13 3.5 Sample Size................................................................................................................................. 13 3.5.1 Description of the study sample ........................................................................................... 14 3.6 Hypothesis................................................................................................................................... 14 3.7 Scope of the research .................................................................................................................. 14 3.8 Limitation of the research ........................................................................................................... 15 Chapter 4 Analysis and Interpretation .................................................................................................. 16 4.1 Rate Decrease.............................................................................................................................. 16 4.2 Rate Increase ............................................................................................................................... 18 4.3 Comparison of CAAR of all the events ...................................................................................... 21 4.3.1 Rate decrease ....................................................................................................................... 21 4
4.3.2 Rate increase ........................................................................................................................ 22 4.4 Overall Impact ............................................................................................................................ 23 4.4.1 For Rate Decrease ................................................................................................................ 23 4.4.2 For Rate Increase ................................................................................................................. 23 4.4.3 Checking for statistical significance of abnormal returns .................................................... 24 4.5 Key observations......................................................................................................................... 24 Chapter 5 Conclusion and Suggestions ................................................................................................. 25 5.1 Investment Decisions .................................................................................................................. 25 References ............................................................................................................................................. 27 Annexures ............................................................................................................................................. 29 Annexure 1 : Event details ................................................................................................................ 29 Annexure 2 : Statistical Results ......................................................................................................... 30
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Abstract This paper attempts to investigate the impact of interest rate announcements by RBI in the Indian stock market. The effect of 8 different interest rate change announcements by RBI post 2006 period on the returns of the BANKEX stocks was examined with event study methodology. In the past, event studies have been conducted on Indian Stock Markets to test for market efficiency. However, we have gone a step further. In this paper, we attempt to not only test the efficiency of Indian Stock Markets, but to also analyse the relationship between the monetary policies of the RBI and the Indian stock markets and hence suggest investment strategies. The paper tests the efficiency of the Indian stock market through hypothesis. Appropriate statistical tests for significance were conducted. Results show a significant negative market reaction prior to and post the announcement of both increases and decreases in the repo rate. Moreover, the Indian Markets do not exhibit semi-strong-form efficiency. The impact of the announcements, either decrease or increase in the rates has not been consistent and we can see vast fluctuations between the various events. This can be attributed to the various Macroeconomic & Global factors which, in addition to interest rate changes, impact the stock markets.
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1. Chapter 1 Introduction The movement of share price is unpredictable in any economy. Sudden ups and downs of the price of the share make people wonder watching. Certain factors are held responsible for the movement in share prices. In some studies micro variables like dividend per share, earning per share, company size and book value per share have got importance and in others, macro variables like rate of interest, index of industrial production, union budget, inflation rate and foreign currency have been highlighted. Hence change in rate of interest is one such event which may have an impact on stock market. Rate of interest is an important tool in the hands of RBI for controlling inflation and fostering economic growth. 1.1 Market Efficiency The concept of efficiency is central to finance. Primarily, the term efficiency is used to describe a market in which relevant information is impounded into the price of financial assets. The simplest definition of market efficiency is that the price already reflects the available information and thus buying or selling the stock should, on an average, return only a "fair" measure of return (after transaction costs) for the associated risk. The basic point is that beating the market is incredibly difficult. Market efficiency does not imply market perfection. Markets are not perfect, but they are very tough to beat. 1.1.1 Key Concepts: ? Market efficiency does not require that the market price be equal to the true value at every point in time. All it requires is that errors in the market price be unbiased, i.e., that prices can be greater than or less than true value, as long as these deviations are random. ? The fact that the deviations from true value are random implies, in a rough sense, that there is an equal chance that stocks are under or over valued at any point in time, and that these deviations are uncorrelated with any observable variable. For instance, in an efficient market, stocks with lower PE ratios should be no more or less likely to be undervalued than stocks with high PE ratios.
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? If the deviations of market price from true value are random, it follows that no group of investors should be able to consistently find under or overvalued stocks using any investment strategy. 1.1.2 Efficiency Market Hypothesis: The concept of Efficiency Market Hypothesis (EMH) is based on the arguments put forward by Samuelson (1965) that anticipated that the price of an asset fluctuates randomly. Fama (1970) presented a formal review of the theory and evidence for market efficiency and subsequently revised it further on the basis of development in research. Fama (1991) classified market efficiency into three forms – ? Weak-form efficiency ? Semi-strong form efficiency and ? Strong-form efficiency. In weak-form efficiency, future prices cannot be predicted by analyzing prices from the past. Excess returns cannot be earned in the long run by using investment strategies based on historical share prices or other historical data. Technical analysis techniques will not be able to consistently produce excess returns, though some forms of fundamental analysis may still provide excess returns. Share prices exhibit no serial dependencies, meaning that there are no patterns to asset prices. This implies that future price movements are determined entirely by information not contained in the price series. Hence, prices must follow a random walk. In semi-strong-form efficiency, it is implied that share prices adjust to publicly available new information very rapidly and in an unbiased fashion, such that no excess returns can be earned by trading on that information. Semi-strong-form efficiency implies that neither fundamental analysis nor technical analysis techniques will be able to reliably produce excess returns. To test for semi-strong-form efficiency, the adjustments to previously unknown news must be of a reasonable size and must be instantaneous. To test for this, consistent upward or downward adjustments after the initial change must be looked for. If there are any such adjustments it would suggest that investors had interpreted the information in a biased fashion and hence in an inefficient manner.
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In strong-form efficiency, share prices reflect all information, public and private, and no one can earn excess returns. If there are legal barriers to private information becoming public, as with insider trading laws, strong-form efficiency is impossible, except in the case where the laws are universally ignored. To test for strong-form efficiency, a market needs to exist where investors cannot consistently earn excess returns over a long period of time. Even if some money managers are consistently observed to beat the market, no refutation even of strongform efficiency follows: with hundreds of thousands of fund managers worldwide, even a normal distribution of returns (as efficiency predicts) should be expected to produce a few dozen "star" performers. 1.2 Event Studies An Event study is a statistical method to assess the impact of an event on the value of a firm. For example, the announcement of a merger between two business entities can be analyzed to see whether investors believe the merger will create or destroy value. The basic idea is to find the abnormal return attributable to the event being studied by adjusting for the return that stems from the price fluctuation of the market as a whole. In these event studies, the changes in a stock price caused by new public information are measured. The method has been applied to a great extent to study the effects on stock prices caused by different events, such as the publication of result reports, dividend announcements, information about share splits, and changes in accounting standards. The method has the limitation that it ignores the content of information; it only confirms that new information has reached the market and caused movements in stock prices in a defined time period surrounding the point in time of publication.
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Chapter 2 Review of literature Malkiel, B.G. (2003) in his paper titled “The Efficient Market Hypothesis and its critics” tries to defend the efficient market hypothesis by citing out cases of rationality even in the “Market Crash of 1987” and the “Internet bubble of the late 1990s”. The author strongly believes that whatever patterns or irrationalities in the pricing of individual stocks that have been discovered in a search of historical experience are unlikely to persist and will not provide investors with a method to obtain extraordinary returns. Craig MacKinlay (1997) in his paper on “Event Studies in Economics and Finance” elaborates the procedure for carrying out an event study beginning with identifying the event and defining the event window. The next step is to determine the abnormal return which is the difference between the actual ex post return of the security over the event window and the normal return of the firm over the event window. The two models for determining the normal returns are the Constant Mean Return Model and the Market Model. With the aggregation of abnormal returns, it is tested whether or not the event has an impact on stock performance. Lyroudi, K. & Dasilas, A. in their paper titled “The valuation effects of stock splits in NASDAQ” investigates the response of the market to the announcement of stock splits for the period 1999-2000 for a sample of 57 firms listed on the NASDAQ. They followed the event study methodology of Strong (1992), specifically, the market model method. Their results indicate that the market reaction to stock splits announcements is positive. Donor, A.W. carried out a study to investigate the stock market reaction to financial information. The method used was a computer-based content analysis of qualitative data. The data is from a Swedish real estate ?rm during the period 1991-1996. The information collected and analysed comes from the company’s press releases, quarterly statements and articles in the six largest business magazines in Sweden. A positive correlation was found between the stock prices and the following information categories: net asset value, occupancy rates, cash ?ow and overall capitalisation rate. Gupta, R. & Basu, P.K. (2007) attempted to test the weak form efficiency in Indian Stock Markets. The study was done in the framework of random walk hypothesis for the two major equity markets in India for the period 1991 to 2006. The model used to test the weak form efficiency of the Indian Stock Markets is the Augmented Dickey Fuller test (ADF test). Three regression models (standard model, with drift and with drift and trend) are used in this study
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to test for unit root in the research. The evidence suggests that the series do not follow random walk model and there is an evidence of autocorrelation in both markets rejecting the weak form efficiency hypothesis. These results support the common notion that the equity markets in the emerging economies are not efficient. Padhan, P.C. investigated the nexus between stock market and economic activity in India. The paper applies recently developed Granger non-causality tests by Toda-Yamamota, Dolado and Lutkephol (popularly known as the TYDL model) for an empirical exercise. The notable ?nding of the paper is that both the stock price (BSE Sensex) and economic activity (IIP) are integrated of order one, i.e. I (1). The Johansen-Juselius co-integration tests suggest the existence of one co-integrating vector. Several researchers have tested the impact of various other events on the Indian Stock Markets, some of them being the impact of the Union budget, bonus announcements and FII investments. Gurcharan, S., & Salony, K. (2010) tested the impact of the Union Budget on the Indian Stock Market in terms of returns and volatility. The impact on S&P CNX Nifty was studied prior to and subsequent to the budget day. The study used the statistical techniques of paired t-test and F-test on average returns and variance in returns respectively over different periods around the budget. With regard to return, the result proves that the budget has the maximum impact in the short term period, with some impact extending into the medium term and no significant impact at all on long term average returns. With regard to volatility, the result obtained was that the long term period after the budget tends to be more volatile than the medium term and short term periods when compared to similar long term before the budget. With respect to the impact of bonus announcements on stock performance, Raja, M. & Sudhakar, J.C. (2010) carried out a study to examine the information content of bonus issue announcement made by the Information Technology (IT) companies, test the speed with which the bonus issue announcement contained information impounded in the share prices of IT companies and suggest investment strategies for the investors, fund managers and analysts. The study involved the analysis of Average Security Returns Variability, Abnormal Returns and Cumulative abnormal returns. From the above analysis, the author suggests that when a company comes up with the bonus issue announcement, they should take immediate investment decision (buy or sell) in order to benefit from the bonus issue announcement. Thus one can safely conclude that the Indian capital market for the IT sector, in general, is efficient, but not perfectly efficient, to the announcement of bonus issue. This informational inefficiency can be used by the investors for making abnormal returns at any point of the announcement period.
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Chapter 3 Research Methodology
3.1 Primary Research Objective
To test the market efficiency of the Indian Stock Markets with respect to interest rate adjustments and examine the speed of adjustment of stock prices to the release of such information to investors.
3.2 Secondary Research Objectives
? To analyze the reaction of the stocks comprising the BANKEX to interest rate adjustments announced by the RBI ? To compare the reaction of the stocks comprising the BANKEX to interest rate decrease and increase ? To suggest investment decisions based upon the above analysis
3.3 Research Tools
The research was carried out as per the following steps: 1. The first step was to identify the event : repo rate announcement by the RBI. 2. Then the closing price data of the SENSEX and the stocks comprising the BANKEX were taken for a period of -250 days to -50 days before the event. This is called the Estimation Window. 3. Daily returns of SENSEX and the stocks comprising the BANKEX were calculated as:
Closing Price T1 - Closing Price T0 Closing Price T0
4. A regression was run between each of the banking stock returns and the SENSEX for the Estimation Window to get alpha and beta for each banking stock. i.e Stock Returns = Alpha + Beta (SENSEX Returns) 5. Using this alpha and beta, we found out the expected returns for each of the banking stocks for a period - 15 to +15 days around the event date. This is called Event Window. Expected Return = Alpha + Beta (Actual SENSEX Return)
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6. The actual returns were found by taking the actual closing prices of the stocks for the period -15 days to +15 days and computing the returns as per the formula in point 3. 7. Then the Abnormal Returns were calculated as: Abnormal returns = Actual returns - Expected returns 8. The Average of the Abnormal Returns of all the 14 stocks are computed for each of the days -15 to +15. 9. We then standardized the average abnormal returns and check for significance of the average abnormal returns using t test. 10. The next step was to find out the Cumulative Average Abnormal Returns for each day. 11. A graph of CAAR was plotted to see if there is a visible graphical pattern between CAAR and time. 12. The average of the CAARs for each event (rate decreases/increases) was computed to find out the CAAR for rate decrease and rate increase as a whole. A graph of this was plotted to see the trend.
3.4 Type of data
The data was collected from secondary sources i.e the internet. Data related to the stock markets was obtained from the BSE. Data relating to interest rate adjustments was obtained from the official website of the RBI.
3.5 Sample Size
We have taken the 14 stocks comprising the BANKEX for the purpose of our analysis.
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3.5.1 Description of the study sample
Stocks comprising the BANKEX
Full Mkt. Cap.* S.No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Company (Rs. crore) ICICI Bank HDFC Bank State Bank of India AXIS Bank Bank of Baroda Punjab National Bank Kotak Mahindra Bank Bank of India Indus Ind Bank Canara Bank Union Bank of India YES Bank Federal Bank IDBI Bank 1,13,381.79 95,018.16 1,64,077.39 50,469.59 31,558.23 33,325.90 29,688.63 22,858.25 10,058.93 24,089.55 15,931.42 8,878.19 5,734.56 12,793.92 Weight in Index (%) 29.13 19.53 18.97 8.43 4.05 3.85 3.81 2.35 1.94 1.86 1.84 1.6 1.47 1.15
* as on 28th Feb. 2011
3.6 Hypothesis
1. H0: The abnormal returns on the stocks are not significantly different from 0. H1: The abnormal returns on the stocks are significantly different from 0. (This will be tested using t test). 2. H0: The Stocks comprising the BANKEX exhibit semi strong form efficiency H1: The stocks comprising the BANKEX do not exhibit semi strong form efficiency (This will be tested by observing the pattern of CAAR with time).
3.7 Scope of the research
The research was conducted on the 14 banking stocks comprising the BANKEX. The events have been selected from 2006 onwards i.e 3 rate decreases and 5 rate increases in this period have been selected for the purpose of research.
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3.8 Limitation of the research
The research is restricted to the impact of change in only one event i.e. repo rate adjustment by the RBI for the period post 2006. 8 different announcements of the repo rate adjustment by RBI post 2006 were considered for analyzing the impact of the event. Moreover, the impact of this event is analyzed only on the 14 banking stocks comprising the BANKEX index. The impact of various Macroeconomic & Global factors has not been captured by the study. The various factors like Recession in the economy, Inflation scenario, Global Crude oil prices, War-like conditions in various nations etc, has led to the varying magnitude of impact of the announcements.
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Chapter 4 Analysis and Interpretation
4.1 Rate Decrease
Cumulative Average Abnormal Returns
2.00% 0.00% -15-13-11 -9 -7 -5 -3 -1 1 3 5 7 9 11 13 15 -2.00% -4.00% -6.00% -8.00% -10.00%
Cumulative Average Abnormal Returns
-12.00%
Event date: 8th Dec 2008
From day -11, there was a downward trend in the CAAR. Also there was a sharp drop in the CAAR in the post event period just following the event announcement. Post day +1, there was a rise in the CAAR. This can be attributed to the fiscal stimulus measures announced by the Govt. at that time.
Cumulative Average Abnormal Returns
0.00% -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 -5.00% -10.00%
-15.00%
-20.00% -25.00% -30.00%
Cumulative Average Abnormal Returns
Event date: 20th Oct 2008
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The sharp decrease in the CAAR in the post event period can be attributed to the fact that the decrease was contradictory to the expectation and the fact that rates were slashed for the first time since March 2004.
Cumulative Average Abnormal Returns
16.00% 14.00%
12.00%
10.00%
8.00%
6.00% 4.00% 2.00% 0.00% -15 -13 -11 -9 -7 -5 -3 -1 1 3 5 7 9 11 13 15
Cumulative Average Abnormal Returns
Event date: 21st April 2009
There was slight volatility in the CAAR around the event date. Contradictory to expectations of probable decrease in repo rate by 50 bps, it was cut by 25 bps only. However, unlike the above two scenarios, CAAR showed an upward trend.
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4.2 Rate Increase
Cumulative Average Abnormal Returns
6.00% 4.00% 2.00% 0.00% -15 -13 -11 -9 -7 -5 -3 -1 -2.00% -4.00% -6.00% -8.00% 1 3 5 7 9 11 13 15
Cumulative Average Abnormal Returns
Event date: 24th Jan 2006
The CAAR started its downward trend from day -9 and continued beyond the event date as well. It was only towards day +14 that the CAAR began increasing towards pre event levels.
Cumulative Average Abnormal Returns
5.00% 4.00% 3.00% 2.00% 1.00% 0.00% -1.00% -2.00% -3.00% -4.00% -15 -12 -9 -6 -3 0 3 6 9 12 15 Cumulative Average Abnormal Returns
-5.00%
Event date: 31 st Jan 2007
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There was a significant drop in CAAR in the post event period, starting from day +5 onwards.
Cumulative Average Abnormal Returns
10.00%
5.00% 0.00% -11 -5.00% -10.00% -15.00% -20.00% -9 -7 -5 -3 -1 1 3 5 7 9 11 Cumulative Average Abnormal Returns
Event date: 25th June 2008
There was a sharp decrease in the CAAR from day -6 onwards beyond the event date. CRR was also hiked by 50 bps. Inflation had reached a 13 year high, this explains the sharp fall in CAAR.
Cumulative Average Abnormal Returns
6.00% 5.00% 4.00%
3.00% 2.00% 1.00% 0.00% -1.00% -2.00% -15 -13 -11 -9 -7 -5 -3 -1 1 3 5 7 9 11 13 15 Cumulative Average Abnormal Returns
Event date: 27th July 2010 19
The economy was in a good state. Here we see that the CAAR fell in the period immediately prior to the event date.
Cumulative Average Abnormal Returns
0.00%
-15 -13 -11 -9 -7 -5 -3 -1 -1.00% -2.00% -3.00% -4.00% Cumulative Average Abnormal Returns 1 3 5 7 9 11 13 15
-5.00%
-6.00% -7.00%
Event date: 25th Jan 2011
There was a sharp fall in the CAAR in the pre event period and it began to rise thereafter. Post event period, the CAAR fell, before rising after day +2. There was speculation that the RBI might increase the repo rates by around 50 bps and this explains the sharp fall in CAAR in the pre event period.
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4.3 Comparison of CAAR of all the events
4.3.1 Rate decrease
20.00% 15.00% 10.00% 5.00% 0.00% -15 -13 -11 -9 -5.00% -10.00% -15.00% -20.00% -25.00% -30.00% -7 -5 -3 -1 1 3 5 7 9 11 13 15
Comparison of CAAR across the 3 rate decrease events
CAAR 21.4.09 CAAR 20.10.08 CAAR 8.12.08
We see that the reaction to the rate decrease has been on the similar lines for the events of 20th Oct. 2008 and 8th Dec. 2008 however the magnitude of decrease has been higher in the case of the former owing to the announcement being contradictory to expectations. However in the case of the event of 21st April 2009, there was an upward trend in the CAAR.
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4.3.2 Rate increase
10.00%
Comparison of CAAR for the 5 rate increase events
5.00%
0.00%
-15 -14 -13 -12 -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
CAAR 31.01.07 CAAR 27.07.10
-5.00%
CAAR 25.06.08 CAAR 25.01.11 CAAR 24.01.06
-10.00%
-15.00%
-20.00%
Here also we see that there is a difference in the magnitude of decrease in the returns across the 5 events.
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4.4 Overall Impact
4.4.1 For Rate Decrease
CUMULATIVE AVERAGE ABNORMAL RETURNS
10.00%
8.00% 6.00% 4.00% 2.00% 0.00% -2.00% -15 -13 -11 -9 -4.00% -6.00% -8.00% -10.00% CUMULATIVE AVERAGE ABNORMAL RETURNS -7 -5 -3 -1 1 3 5 7 9 11 13 15
We can see that the CAAR has fallen in the post event period. This shows that the Indian Stock Markets are not semi-strong-form efficient. The news of rate decrease may not have been factored into the stock prices prior to event announcement.
4.4.2 For Rate Increase
CUMULATIVE AVERAGE ABNORMAL RETURNS
3.00% 2.00% 1.00% 0.00% -1.00% -2.00% -3.00% -4.00% -15 -13 -11 -9 -7 -5 -3 -1 1 3 5 7 9 11 13 15
CUMULATIVE AVERAGE ABNORMAL RETURNS
-5.00%
-6.00%
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Here we see that the CAAR has begun decreasing from the pre event period starting from day -6 and continued beyond the event date upto day +9 before returning to pre event levels. This also shows that the Indian Stock Markets are not semi-strong-form efficient.
4.4.3 Checking for statistical significance of abnormal returns
The standardized average abnormal returns were tested for statistical significance with 90% confidence using the t test. In most cases, the returns were found to be statistically significant around the event date. (Please refer Annexure – 2 for detailed statistical results)
4.5 Key observations
? We see that both rate decrease and rate increase are seen negatively by the market with a reduction in the CAAR around the event date. However, the rebound to pre event levels is faster in the case of rate decrease than rate increase. ? There is no major difference in the trend of CAAR in those cases where reverse repo rate has also been adjusted in addition to adjustment in the repo rate. ? However, in the case where CRR was adjusted in addition to the repo rate, there is a significant drop in the CAAR. (See event date 25/06/2008) ? In the scenario when the RBI announced a rate adjustment which was not in line with the market expectations, the banking stocks reacted severely with a sharp fall in CAAR (See event date 20/10/2008) ? The reaction of banking stocks to interest rate adjustments is irrespective of the condition of the economy. This could be due to the short time frame used for analysis.
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Chapter 5 Conclusion and Suggestions
This study tested the effects of three repo rate decrease announcements and five repo rate increase announcements announced by the RBI since the year 2006 on stock price performance as measured by the 14 stocks comprising the BANKEX. The impact of the announcements, either decrease or increase in the rates has not been consistent and we can see vast fluctuations between the various events. This can be attributed to the various Macroeconomic & Global factors which the study has not been able to capture. The various factors like Recession in the economy, Inflation scenario, Global Crude oil prices, War-like conditions in various nations etc, has led to the varying magnitude of impact of the announcements. Hence the difference in stocks / Indices behaviour is seen on various dates when the Rate increase was announced and similarly during the dates when Rate decrease was announced. Appropriate statistical tests for significance were conducted. Results show a significant negative market reaction prior to and post the announcement of both increases and decreases in the repo rate. Moreover, the Indian Markets do not exhibit semi-strong-form efficiency.
5.1 Investment Decisions
From the above analysis, we clearly see that there is volatility in the stock market prior & post announcement of adjustment of interest rates by RBI. We could also see that BANKEX stocks react negatively to both interest rate increase & decrease. This could be a good investment opportunity for those traders & big investors, looking for a short term gain. Timing is very important in these events; small retail investors may not benefit much from these events. We could see 15 days before the event the CAAR begins to decrease, it’s time to sell off your holdings in banking stocks, in case you have any. Buy it back, at lower price within -15 days to day 0 period and sell off 4 - 5 days post announcement. For illustration purposes, we could look at the YES bank stock for the event 27th July 2010. Around 30th June, one could see YES bank stock price moving around 280. As the event date comes closer, 15 days prior to the event date on 5th July, the stock price decreased to 268. Post event, the stock price rose till 327-342 range. The return earned is Rs 59 taking 327 as selling price; average return of 20-22% in two months. This trend could be seen in all stocks. But the most important part is timing.
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2010)
Yes Bank Bank of Baroda Bank of India Canara Bank IDBI bank Federal Bank IndusInd Kotak bank Union Bank PNB SBI Axis HDFC ICICI 268 327 59 75 75 35 4.05 32 12 776 439 491 122 348 219 412 33 701 364 456 117.95 316 207 379 312 1046 2272 1238 1912 841 339 1117 2646 1358 2136 980 27 71 374 120 224 139
Bank
Pre annoncement period share price (min)
Post Announcement Period share price (max)
The table below illustrates how the same strategy if followed for other stocks as well would
Profit
yield similar profits. (Note: This illustration is for the rate increase announced on 27 th July
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References
1. Abraham, S.E. Layoff announcements and employment guarantee announcements: How do shareholders respond? 2. Asiri, B. (2008). Testing weak form efficiency in the Bahrain Stock Market, International Journal of Emerging Markets, 3, 38 – 53. 3. Bacon, F.W. & McMillan, C.E. (2007). Federal Funds Rate Changes : A Test of Market Efficiency, Management Review, An International Journal, II, 2. 4. Donor, A.W. Stock Market reaction to financial information 5. Gupta, R. & Basu, P.K. (2007). Weak form efficiency in Indian Stock Markets, 6. 6. Gurcharan, S., & Salony, K. (2010). Impact of Union Budgets on Indian Stock Market - A Case Study of NSE, Asia Pacific Journal of Social Sciences, II,1, 148-160. 7. Hyde, S. The response of industry stock returns to market, exchange rate and interest rate risks, Managerial Finance, 33, 693 – 709. 8. Lyroudi,K. & Dasilas,A. The valuation effects of stock splits in NASDAQ 9. MacKinlay, A.C. (1997). Event Studies in Economics and Finance, Journal of Economic Literature, XXXV, 13 – 39. 10. Malkiel, B.G. (2003). The Efficient Market Hypothesis and its critics. 11. Mishra, P.K., Das, K.B. & Pradhan, B.B. (2009). Empirical Evidence on Indian Stock Market Efficiency in context of the global financial crisis, Global Journal of Finnace and Management, 1, 149 – 157. 12. Padhan, P.C. The nexus between stock market and economic activity: an empirical analysis for India 13. Raja, M. & Sudhakar, J.C. (2009). Testing the semi strong form efficiency of Indian Stock Market with respect to information content of stock split announcement – A study in IT industry, International Research Journal of Finance and Economics. 14. Raja, M. & Sudhakar, J.C. (2010). An empirical test of Indian Stock Market Efficiency in respect of bonus announcement, 4. 15. Solibakke, P.B. (2002). Calculating Abnormal Returns in Event Studies: Controlling for Non synchronous trading and volatility clustering in thinly traded markets. 16. Tripathy, N. & Badani, K.N.(2009).Behaviour of Indian Stock Market – Evidence and Explanation. Journal of International Finance and Economics.
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17. Vaidyanathan, R. & Gali, K.K. (1994). Efficiency of the Indian Capital Market. Indian Journal of Finance & Research, V. 18. www.bseindia.com 19. www.rbi.org.in 20. www.allbankingsolutions.com/Chronology-Repo-Rate-India.html
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S.No.
Event date
Event details
Expectation * Economic Condition Other Comments
Reverse Repo/CRR also adjusted?
1
Repo rate was 24-01-2006 increased from 6.25% to 6.5% In Line with expectations
Reverse repo rate was also increased by 25 bps to 5.5%
The economy was facing liquidity pressures arising out of government and private sector borrowings.
The Reserve Bank on Tuesday said it is moving away from the blunt instruments like cash reserve ratio (CRR) to sophisticated and indirect tools like repo rates to manage liquidity in the system.
Annexures
2
Repo rate was 31-01-2007 increased from 7.25% to 7.5% In Line with expectations
Reverse Repo Rate, Bank Rate and Cash Reserve Ratio (CRR) kept unchanged.
S&P raised India's sovereign local currency credit ratings to investment grade with a Impact of monetary policy expected stable outlook, citing to be stronger than before as a strong economic result of tightening of liquidity prospects and an improving fiscal situation.
Annexure 1 : Event details
3
Repo rate was 25-06-2008 increased from 8% to 8.5% In Line with expectations
CRR was hiked by 50 basis points to 8.75% in two stages.The CRR was hiked to 8.5% with effect from the fortnight beginning July 5, 2008, while it was further raised to 8.75% from the fortnight beginning July 19, 2008.
Inf ati l on had touched a 13- year hi gh of 11.05% when governm ent rel eased f gures i prom pti ng seri ous conf abul ati ons between the governm ent and the central bank on how best to tackl e the pri ce si tuati on and tem per i nf ati l onary expectati ons.
Equi es extended l ti osses f or the f f i th strai ght day on 24 June 2008 wi th the barom eter i ndex BSE Sensex f l ng bel al i ow the psychol ogi cal y l i m portant 14,000 m ark f or the f rst i ti m e i n 10 m onths si nce l ate August 2007. The 30- share BSE Sensex was down 186.74 poi nts or 1.31% at 14,106.58. The broader based S&P CNX Ni ty sl f um ped 75.30 poi nts or 1.76% at 4,191.10.
4
Repo rate 20-10-2008 reduced from 9% to 8% No
It was expected that there would not be any change made to interest rates Economy was facing credit crunch due to the impact of poor global conditions and FIIs were pulling out of the Indian Markets.
The rate were slashed for the first time since March 2004. The objective was to kick start growth which has turned sluggish. Since October 6 2008, RBI had cut CRR by 2.50 percentage points to inject Rs 100,000 crore into the cashstrapped system. Besides, it also released Rs 25,000 crore for banks, RRBs and cooperative lending institutions as the first instalment against their outgo on the farm debt waiver scheme.
5
Repo rate 08-12-2008 reduced from 7.5% to 6.5% In Line with expectations
Reverse Repo was also reduced by 100 bps i.e from 6% to 5% Poor after several months. CRR was left unchanged at 5.5%
A few days after the rate decrease, the Govt. announced a fiscal stimulus measure to infuse Rs. 11,000 crore in Small Industries Development Bank of India and National Housing Bank
6
Repo rate was 21-04-2009 reduced from 5% to 4.75%
It was expected that the Repo rate would be cut by 50 bps and no change in reverse repo rate. Reverse Repo rate was reduced Poor by 25 bps to 3.25%
RBI reduced the economic growth forecast to 6% as against 6.5 - 6.7% estimated for 2008 - 2009. But the good news was that inflation was projected to remain around 3% in the medium term and 4% by the end of March 2010.
7
Repo rate was 27-07-2010 increased from 5.5% to 5.75%
It was expected that both repo rate & reverse repo rate will be raised by 25 bps Reverse repo rate was unexpectedly raised by 50 bps points. CRR left unchanged
Good
Economic growth to continue at 8.5 but inflation more than expected. Inflation was rising above 10 percent where as the target was 5.5% to 6 %
8
Repo rate was 25-01-2011 increased from 6.25% to 6.5%
It was expected that RBI would increase repo rate, reverse repo rate by 25 bps and an increase in CRR as well
Repo rate & reverse repo rate was increased by 25bps but no increase in CRR
Good
RBI reduced the economic growth to 8% for FY11 & inflation to continue its trend. It raised target inflation rate from 5.5 % to 7% considering rising international commodity prices & food prices in india
29
* - whether the rate adjustment was inline with expectations or not
Annexure 2 : Statistical Results
The standardized values of average abnormal returns are tested for statistical significance at the 90% confidence level using the t test. The following hypothesis is tested: H0: The average abnormal returns are not significantly different from zero H1: The average abnormal returns are significantly different from zero t critical value (0.05,13) = 2.16 If the standardized average abnormal returns are greater than the t value, then reject H0, else do not reject H0. We have also found out the corresponding p values for each of the t values. For 90% confidence, if the p value so obtained is greater than 0.1, then do not reject H0, else reject H0.
30
Event: Rate decrease 8/12/2008
DATE 1.41% -4.84% 0.20% 1.30% -0.72% -6.48% -2.47% 4.15% -2.00% 2.08% -2.06% 2.31% 5.72% -5.90% -0.78% -3.77% -4.98% -0.31% -0.97% -0.73% 0.14% 2.30% 4.21% 5.83% 3.69% -0.07% 0.06% 2.06% -0.52% -1.19% -2.36% 2.13% 1.72% 0.44% 2.15% -1.94% -5.93% -1.23% 2.79% -2.22% -0.37% 1.74% -1.10% 2.87% -1.84% -0.97% -1.70% -2.20% 1.77% 0.04% 1.93% -1.00% 2.83% -2.00% 1.20% 8.47% 1.66% 2.47% 0.17% -0.03% 1.60% -0.84% 2.05% -6.66% 2.36% -1.33% -3.31% -1.91% -2.85% 2.93% 4.38% 0.60% 0.71% -0.37% -0.56% -2.60% 0.47% -1.45% -2.98% -0.77% -0.26% 1.04% 2.42% 4.65% 1.67% -1.15% -1.20% -1.31% 1.93% 1.32% 0.66% -0.66% -1.30% 3.84% 0.01% 4.43% -2.73% 5.77% -7.39% -4.71% 4.20% -4.54% -4.33% -0.29% 1.07% 2.22% -1.38% 2.19% -2.43% -3.12% 3.56% 3.78% -1.61% 2.03% -3.84% 1.46% 3.58% 0.44% -3.55% 4.05% 0.28% 3.06% 0.71% -1.54%
DAY
ICICI
AXIS Bank
Bank of Baroda
Bank of India
Canara Bank
Federal Bank
IndusInd HDFC Bank IDBI Bank Bank
14-Nov-08 17-Nov-08 18-Nov-08 19-Nov-08 20-Nov-08 21-Nov-08 24-Nov-08 25-Nov-08 26-Nov-08 28-Nov-08 01-Dec-08 02-Dec-08 03-Dec-08 04-Dec-08 05-Dec-08 08-Dec-08 10-Dec-08 11-Dec-08 12-Dec-08 15-Dec-08 16-Dec-08 17-Dec-08 18-Dec-08 19-Dec-08 22-Dec-08 23-Dec-08 24-Dec-08 26-Dec-08 29-Dec-08 30-Dec-08 31-Dec-08
-15 -14 -13 -12 -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
1.85% -0.74% -1.22% -0.92% -2.48% -3.17% -3.62% 2.62% 4.08% -0.75% -3.13% 0.99% 3.36% 0.81% 2.63% 0.03% 0.41% 1.78% 0.66% -0.38% -1.34% 6.28% 3.82% -0.15% -2.98% -0.75% 5.09% -1.48% 3.22% 0.32% -1.04%
-3.93% -6.71% 0.77% -0.04% -0.37% -5.80% -3.37% -1.05% 1.02% -0.61% 4.99% 5.17% 0.74% -2.08% 0.93% -1.05% -4.55% -1.09% 1.78% 1.52% 1.12% 2.60% 3.31% 0.96% 0.46% -4.05% -0.48% 1.60% -0.23% 0.56% -0.33%
-0.59% -1.14% 1.10% 1.68% 2.05% -2.68% -4.69% -2.75% 0.65% 0.76% -2.02% 0.20% 1.83% -4.42% 1.02% -0.29% -7.05% 0.94% 1.11% -0.01% 0.14% 2.20% 0.17% -0.42% 2.24% -3.45% 4.15% 0.31% -0.97% 1.01% 2.60%
3.05% -5.38% 0.98% 1.76% 1.77% -3.90% -5.07% 0.95% -1.03% 2.43% -0.72% 1.40% 0.98% -4.35% 1.45% -1.94% -5.34% 4.80% 1.97% -2.19% 0.88% 2.14% 0.48% 0.75% 4.03% -2.10% 1.90% 0.81% 0.50% -0.51% -1.33%
Cumulative Standardized Union Bank Average Kotak PNB SBI Yes Bank Average Abnormal Returns SD of Abnormal returns Average Abnormal p value of India Abnormal Returns Returns 1.70% -0.02% 2.85% 1.21% 3.07% 1.24% 1.42% 1.95% 2.724 0.017 1.42% 1.76% -8.13% 0.32% 0.90% -5.44% -3.24% -2.68% 3.46% -2.900 0.012 -1.27% -2.40% -4.34% 0.59% -1.11% 5.20% -0.28% 0.48% 2.48% 0.726 0.481 -0.79% 0.27% -1.49% 0.15% -0.67% -2.37% -0.90% -0.22% 1.54% -0.542 0.597 -1.01% -2.23% 4.13% -0.06% 5.08% 5.99% -3.72% 0.71% 3.43% 0.776 0.451 -0.30% -5.24% -1.86% -0.63% 2.53% -8.01% -8.35% -4.20% 3.11% -5.049 0.000 -4.50% -1.29% 1.33% -2.70% -2.88% -3.36% 0.67% -2.59% 1.90% -5.090 0.000 -7.09% 2.19% 2.92% 1.48% -4.10% 2.65% 5.53% 1.75% 2.70% 2.429 0.030 -5.34% -9.52% -1.40% -1.13% -1.00% -1.79% -2.85% -1.24% 3.42% -1.354 0.199 -6.58% -2.00% 2.21% -0.69% -2.34% 2.63% -2.23% -0.19% 2.10% -0.333 0.744 -6.76% 0.09% -0.46% -4.73% 0.09% -0.08% -0.75% -0.47% 2.27% -0.779 0.450 -7.24% -1.72% 4.20% 0.07% -0.29% 0.90% -1.56% 0.81% 2.01% 1.504 0.156 -6.43% 0.14% 0.24% 4.47% 5.41% -0.17% 1.27% 2.04% 2.06% 3.700 0.003 -4.39% -0.24% -0.08% -0.98% 0.77% -3.99% 3.86% -1.60% 2.58% -2.319 0.037 -5.99% 6.93% 5.47% 1.71% 0.14% 2.47% 5.71% 2.10% 2.41% 3.258 0.006 -3.90% -5.26% -5.27% -1.53% 0.58% -5.08% 0.96% -2.01% 2.11% -3.566 0.003 -5.91% -9.29% -4.85% -5.41% -3.84% -6.36% -0.66% -4.30% 2.53% -6.366 0.000 -10.21% 4.36% 4.83% 1.11% 0.86% 0.30% 3.24% 1.81% 2.03% 3.337 0.005 -8.40% 2.65% -2.51% 2.10% 0.90% 1.31% -1.21% 0.81% 1.68% 1.813 0.093 -7.59% 14.26% 1.67% -0.95% -2.38% 0.04% 0.64% 0.92% 4.08% 0.842 0.415 -6.67% -3.23% -2.27% 0.45% 1.26% 3.21% 1.30% 0.37% 1.81% 0.757 0.462 -6.30% -4.33% -2.06% 2.67% -0.22% 3.47% -0.69% 1.28% 3.10% 1.551 0.145 -5.02% 2.02% -0.47% 0.49% 3.98% 1.04% -0.43% 1.41% 1.89% 2.795 0.015 -3.61% -0.48% -1.29% 3.43% -0.86% 0.43% 0.91% 0.91% 2.06% 1.653 0.122 -2.70% 4.18% -2.32% 2.20% 0.76% -0.33% 3.46% 1.65% 3.03% 2.037 0.063 -1.05% 0.41% -3.12% -1.64% 1.75% -1.49% -5.07% -1.63% 2.09% -2.909 0.012 -2.67% -0.58% 6.93% 1.72% 3.06% 2.25% 1.66% 2.44% 2.11% 4.323 0.001 -0.23% 1.84% -0.19% 0.77% -0.64% 1.26% 1.25% 0.67% 1.00% 2.507 0.026 0.44% -1.86% 0.47% 0.31% -0.08% -0.01% 2.13% 0.48% 1.44% 1.237 0.238 0.91% -1.22% -0.04% 1.61% -0.66% -0.82% 0.26% 0.07% 0.95% 0.272 0.790 0.98% 2.85% -0.21% -0.30% 0.70% 0.15% -2.65% -0.40% 1.61% -0.930 0.369 0.58%
31
We see that around the event date (from day -3 to day + 2), the average abnormal returns are significantly different from zero. This we can see from the standardized average abnormal returns which are greater than the t critical value and the p values which are lesser than 0.1.
32
Event: Rate decrease 20/10/2008
DATE -4.59% 1.31% -5.03% -4.75% 2.34% 0.78% -5.35% -0.03% -2.55% -2.04% -0.47% -2.44% -3.01% -9.26% -8.45% 4.84% -5.77% 4.47% 9.36% 1.72% -4.98% -3.80% -3.91% -10.59% -6.04% 2.32% -4.19% -8.82% -1.60% -6.80% -2.92% 4.27% -4.59% -5.60% -9.71% -2.00% 12.03% 14.01% 7.04% 6.88% -3.59% 2.15% 2.41% 4.34% 0.26% -4.09% -4.74% -3.16% -3.89% 4.71% 4.71% -1.02% -5.19% -3.33% -4.68% -8.29% 5.73% -0.48% -3.08% -4.22% -0.11% 1.01% 0.47% 2.87% -3.11% -2.91% 2.80% -4.92% 2.67% -3.03% -2.18% -5.90% -8.11% -10.87% -7.16% -19.97% -3.88% -7.84% -12.00% -0.07% 2.92% 7.08% 6.15% 5.41% -1.98% -5.97% 7.64% 4.25% 7.46% 4.05% 3.66% 2.98% 4.08% 6.20% 3.65% 9.59% 3.48% 7.54% 3.83% 14.06%
DAY
ICICI
Bank of Bank of Canara AXIS Bank Baroda India Bank
Federal IndusInd HDFC Bank IDBI Bank Kotak PNB Bank Bank
06-Oct-08 07-Oct-08 08-Oct-08 10-Oct-08 13-Oct-08 14-Oct-08 15-Oct-08 16-Oct-08 17-Oct-08 20-Oct-08 21-Oct-08 22-Oct-08 23-Oct-08 24-Oct-08 27-Oct-08 28-Oct-08 29-Oct-08 31-Oct-08 03-Nov-08 04-Nov-08
-9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10
-1.90% -0.69% -5.92% -18.69% 16.27% 5.30% -6.46% 0.70% -4.73% 4.98% 4.68% -7.25% -7.10% -13.77% 2.55% 5.71% 3.33% 14.93% 7.61% 6.52%
-3.39% 0.43% -5.23% -14.05% 20.14% -3.53% -3.07% 0.87% -0.43% -0.22% 6.66% -3.91% -1.25% -13.99% 0.75% 5.89% -7.06% 6.70% 7.17% 6.51%
-0.98% -5.30% -2.47% 0.08% 3.83% -0.14% -1.62% -3.88% -5.73% -0.06% -3.20% 4.28% 9.22% 6.48% 2.95% 0.30% 6.02% -1.31% -0.01% -1.65% -0.82% 4.28% 2.59% 4.56% -2.73% -0.10% -4.60% 2.48% 0.89% 5.14% -1.65% -2.92% 1.12% -7.47% -6.31% -3.38% -2.50% -5.02% -0.83% -8.10% -11.12% -10.06% -6.55% -9.43% -5.22% 1.40% 3.74% 3.74% 3.66% 4.48% 3.17% -1.35% 8.33% 4.98% 1.79% 3.04% 1.34% 15.11% 11.78% 6.28%
Cumulative Union Bank Standardized Average Average SBI Yes Bank Average Abnormal Returns SD of Abnormal returns p value of India Abnormal Returns Abnormal Returns 0.35% -2.22% 1.68% -10.42% -3.75% 3.48% -4.034 0.001 -3.75% 1.97% -1.45% 1.84% 0.19% -0.67% 3.48% -0.719 0.485 -4.42% -0.97% -5.45% -1.16% -11.58% -3.83% 3.66% -3.911 0.002 -8.25% -5.10% 3.41% 2.92% -18.75% -5.42% 7.52% -2.697 0.018 -13.67% 8.22% 10.38% 1.67% 9.51% 9.08% 5.29% 6.429 0.000 -4.59% -2.03% 1.83% 0.11% 7.23% 1.43% 3.42% 1.562 0.142 -3.16% 0.02% -1.05% 1.72% -4.52% -2.35% 2.47% -3.557 0.004 -5.51% 2.67% 3.64% 6.66% 2.02% 2.32% 2.79% 3.112 0.008 -3.19% -0.41% -7.44% -3.71% -3.14% -3.67% 2.44% -5.627 0.000 -6.86% 1.24% 1.37% 1.02% 2.93% 1.12% 3.01% 1.396 0.186 -5.73% -0.31% 3.52% -4.05% 0.58% 0.81% 2.89% 1.055 0.311 -4.92% -5.20% -5.70% -6.46% -1.51% -4.13% 2.72% -5.675 0.000 -9.05% 0.76% -4.09% 1.42% -2.13% -2.30% 2.76% -3.120 0.008 -11.35% -10.14% -11.05% -8.93% -10.64% -10.94% 3.25% -12.581 0.000 -22.29% -5.05% -8.10% -0.86% -7.48% -5.12% 4.29% -4.461 0.001 -27.40% 3.78% 5.83% 3.11% 9.31% 4.92% 2.00% 9.226 0.000 -22.48% -2.85% -1.81% 1.08% -5.43% -0.23% 4.76% -0.183 0.858 -22.71% 3.88% 0.01% -4.12% 7.11% 4.51% 4.61% 3.655 0.003 -18.21% 7.29% 11.35% 7.63% 13.28% 6.67% 3.57% 6.998 0.000 -11.54% 7.26% 6.39% 8.46% 7.70% 7.62% 3.80% 7.500 0.000 -3.92%
33
For most of the pre event period, the average abnormal returns are significantly different from zero. In the post event period, from day + 2 onwards, the average abnormal returns are significantly different from zero. This can be attributed to the fact that the rate decrease came as a surprise. Moreover, the rate was slashed for the first time since March 2004. However, on the day of the event, the average abnormal returns are not significantly different from zero.
34
Event: Rate decrease 21/04/2009
DATE 0.44% 3.82% 3.37% -0.95% -2.16% -2.07% -1.76% -0.95% -1.66% 4.36% 3.15% 2.96% -1.07% 1.68% 0.37% -5.06% 1.59% -1.40% 2.09% 0.21% -3.80% -9.96% -8.08% 2.00% -1.85% 0.99% 1.08% 2.06% -1.79% -1.64% 1.36% 0.37% 1.69% 3.70% 2.23% -0.70% -3.14% -2.43% 0.21% -3.87% 3.82% 6.83% 0.62% 2.02% 5.31% -0.96% -2.43% -1.51% -2.41% 1.18% -0.14% -2.89% 4.10% 0.28% 1.10% 6.37% 3.46% -1.71% -2.69% -3.39% 1.76% 2.82% -0.85% -0.98% 9.08% -3.80% 0.20% 2.01% 1.54% 5.21% -2.37% 5.88% 4.32% -2.00% -5.25% 5.52% 4.79% 0.34% -4.60% -0.12% 1.59% 5.33% -3.66% 3.39% -2.43% -3.64% -3.97% -2.54% 1.70% 1.06% 0.19% 5.81% 0.90% 1.37% -1.58% -0.37% -0.41% 0.81% 0.89% -0.94% 0.78% -3.73% -0.67% 3.19% -4.24% 1.14% -0.45% 0.18% 2.48% 0.89% -2.80% -0.28% 0.00% -0.80% -1.03% 1.89% -0.55% -0.04% -1.11% -0.92% 1.66% -0.34% -1.17% 1.26% -0.21% -1.49% 2.91% -0.60% -3.32% 0.32% 2.33% 1.73% 2.22% 1.08% 2.89% 5.04% -1.12% 4.04% -0.62% -0.30% -3.29% -0.15% 11.34% -5.23% -2.62% 1.51% -3.87% 5.36% -2.97% 0.83% -1.75% -3.09% -4.99% 1.56% 1.39% -0.79% 4.42% 1.93% -2.27% 0.41% 0.79% -2.23% 6.47% 1.32% 2.35% 3.79% 1.06% -4.56% 2.26% 6.51% 3.80% -3.58% -0.50% 0.39% -2.76% -1.79% -3.11% 2.40% 6.53% -1.07% 1.74% -0.23% -2.38% -1.74% -2.40% -0.27%
DAY
ICICI
AXIS Bank
Bank of Baroda
Bank of India
Canara Bank
Federal Bank
IndusInd HDFC Bank IDBI Bank Kotak Bank
25-Mar-09 26-Mar-09 27-Mar-09 30-Mar-09 31-Mar-09 01-Apr-09 02-Apr-09 06-Apr-09 08-Apr-09 09-Apr-09 13-Apr-09 15-Apr-09 16-Apr-09 17-Apr-09 20-Apr-09 21-Apr-09 22-Apr-09 23-Apr-09 24-Apr-09 27-Apr-09 28-Apr-09 29-Apr-09 04-May-09 05-May-09 06-May-09 07-May-09 08-May-09 11-May-09 12-May-09 13-May-09 14-May-09
-15 -14 -13 -12 -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
-0.43% -3.33% 2.10% -4.79% -4.04% 1.78% -4.20% 1.02% -2.75% 4.59% 1.97% 2.04% 0.73% 2.31% -2.87% -5.46% 1.40% 1.07% -0.79% 7.47% -1.07% 2.81% 0.43% 7.56% -2.82% -0.77% -2.16% 3.02% 0.13% 0.08% -0.54%
4.09% 1.42% 1.65% -1.74% 2.33% -1.83% -0.65% -3.15% -0.90% -0.65% 1.96% 5.28% -2.87% 6.08% 1.74% -2.34% -3.44% 2.51% 2.89% 4.89% -0.71% -0.06% 1.23% 3.08% -1.83% 1.42% -0.27% 3.75% 2.85% 1.70% -3.40%
-2.45% 1.77% 4.72% -3.72% 0.65% -2.74% 1.84% -3.12% -0.04% 4.45% 4.04% 1.79% 4.55% 1.94% -0.67% -3.67% 2.35% 1.26% 0.78% 2.43% 0.57% 3.15% -5.72% -1.08% -0.91% 2.80% -1.16% 4.42% -2.42% 2.86% -0.10%
Cumulative Standardized Union Bank Average PNB SBI Yes Bank Average Abnormal Returns SD of Abnormal returns Average Abnormal p value of India Abnormal Returns Returns 0.95% 6.69% -0.76% 1.42% 2.58% 0.89% 2.33% 1.427 0.177 0.89% 1.36% 2.48% 0.47% -0.12% 4.37% 1.02% 2.35% 1.627 0.128 1.91% 2.10% 5.28% 2.32% 5.92% 2.50% 3.37% 2.30% 5.480 0.000 5.28% -4.97% -6.05% -4.30% -3.75% -3.32% -2.75% 2.24% -4.591 0.001 2.54% 3.58% 2.10% 2.74% 2.44% -1.89% 0.23% 2.37% 0.356 0.727 2.76% 3.46% -3.24% -1.47% -1.91% 1.05% -0.44% 2.16% -0.755 0.464 2.33% 7.91% 1.88% 1.87% 1.22% -1.84% 0.32% 3.00% 0.404 0.693 2.65% 6.85% 3.11% -3.39% 1.60% -1.66% 1.05% 3.42% 1.149 0.271 3.70% -5.43% -1.84% -2.59% -0.54% 2.47% -1.41% 2.33% -2.259 0.042 2.29% 2.04% 0.65% 0.79% 1.24% 10.32% 2.87% 2.96% 3.630 0.003 5.17% 6.06% -1.92% 5.14% -1.21% 7.71% 3.42% 2.72% 4.715 0.000 8.59% 2.81% 2.64% 3.28% 0.37% 4.14% 1.84% 2.61% 2.645 0.020 10.43% -3.17% 4.57% 0.40% -0.62% -4.40% -0.69% 3.16% -0.816 0.429 9.74% 0.15% 0.73% 2.73% 1.93% 2.67% 2.64% 1.98% 4.990 0.000 12.38% 0.30% -1.13% -0.47% 1.48% 5.60% 1.02% 2.76% 1.378 0.191 13.40% -2.35% -3.68% -2.45% -2.56% 9.26% -1.03% 3.96% -0.972 0.349 12.37% -3.15% 1.51% -1.13% 2.34% -2.88% -0.96% 2.54% -1.419 0.179 11.41% 2.05% 2.13% -0.45% -0.92% -7.79% -0.54% 2.65% -0.757 0.462 10.87% -0.44% 3.69% 1.43% -0.23% 1.80% 1.82% 3.03% 2.241 0.043 12.69% -1.22% 0.54% -2.44% 0.27% 2.81% 0.87% 3.44% 0.944 0.362 13.56% -3.42% -7.01% 0.00% -2.00% -2.29% -2.25% 1.92% -4.376 0.001 11.31% 1.22% -2.14% -0.85% -3.12% 0.22% -0.28% 3.66% -0.284 0.781 11.03% 2.22% -0.19% 0.17% 0.22% -0.26% -0.84% 3.11% -1.007 0.333 10.19% 7.01% 0.02% -1.71% 0.87% 1.40% 2.00% 3.47% 2.150 0.051 12.19% -4.53% 1.40% -0.04% -1.35% -3.15% -1.20% 2.72% -1.648 0.123 10.99% 1.83% 2.24% 1.76% -7.10% 3.09% 0.62% 2.79% 0.830 0.421 11.61% 1.39% 2.28% -1.09% 1.75% -1.28% -0.17% 1.51% -0.422 0.680 11.44% 3.48% -0.29% -3.25% -0.55% -1.95% 0.37% 2.75% 0.510 0.619 11.81% 4.37% 2.37% -1.56% 1.13% -1.91% -0.51% 2.56% -0.742 0.471 11.31% 1.74% 2.53% -1.47% 2.90% 12.17% 1.89% 3.70% 1.907 0.079 13.19% 4.54% 1.70% 1.63% 4.89% 9.56% 1.84% 3.04% 2.263 0.041 15.03%
35
The average abnormal returns are significantly different from zero for a few days in the pre event period nearing the event date. However in the post event period, barring three days, the average abnormal returns are not significantly different from zero. So we can say that in this case the market has factored in the information of rate decrease into the stock prices before the actual rate announcement.
36
Event: Rate increase 24/01/2006
DATE
DATA NOT AVAILABLE FOR FULL ESTIMATION WINDOW. DATA AVAILABLE ONLY FROM 12 JULY 2005
DAY 0.53% -0.61% 3.26% 1.96% -0.61% 0.19% -0.53% 1.04% -3.07% 0.55% -1.87% 0.90% -2.64% -0.62% 0.94% -1.44% 3.03% 1.68% -0.33% -4.26% -3.29% -2.16% 2.29% -3.89% -1.16% 2.50% -0.76% 0.29% -0.25% -1.80% -0.15% 7.49% 1.08% 0.31% -0.49% -0.35% -0.73% -0.27% -0.04% 1.71% 2.09% 0.69% 2.27% 1.100 -1.57% -1.65% 2.91% 7.40% -3.23% -0.85% 2.43% 0.30% -0.42% -1.31% -3.14% -1.13% -0.61% -0.85% 4.01% -2.19% -6.01% 4.28% -2.67% -0.88% -2.62% -2.21% -1.59% -2.07% 4.92% -0.38% 3.76% 0.18% 2.83% -5.01% -0.73% -0.70% 1.49% 1.37% -2.04% -1.01% -0.12% 1.94% -0.28% -1.49% -2.63% 1.51% -2.13% -1.36% 4.35% -0.98% -4.54% 6.29% -0.10% 2.00% -3.21% -1.28% 1.02% -3.01% -0.16% 2.31% 9.32% 7.81% -3.10% -0.76% -0.72% 0.08% -1.10% 3.31% -1.92% 0.17% -0.55% -0.80% -1.03% -0.51% 2.25% 2.50% -0.01% 2.66% -2.77% -1.76% -4.71% 2.57% -2.12% -0.73% -1.04% -0.48% -0.43% -2.12% -0.50% 0.97% 1.65% 0.53% -0.53% -1.37% 1.44% 1.45% 0.96% 5.17% -0.86% -1.41% 1.08% 0.74% 0.00% -2.56% -3.99% -0.74% 0.80% 0.90% -0.15% -2.83% -3.08% -0.76% -4.47% -0.99% -1.05% -2.38% 0.75% -2.79% 2.73% 0.15% -0.02% -1.95% 1.63% 1.49% 1.70% 1.33% -4.35% 2.61% -1.93% -0.16% 1.34% 0.62% -1.32% -0.18% -4.57% 0.75% -1.09% -0.10% -0.87% -0.34% -5.15% 1.00% -1.67% -0.71% -1.11% -2.60% 6.25% -3.69% 0.03% -1.56% 1.21% 1.90% 0.59% -1.26% 0.49% 3.77% 0.54% 2.93% -2.25% 1.95% -0.46% -2.57% -0.85% -1.42% -0.41% -0.94% 0.04% 6.00% -0.79% -1.15% -3.13% 4.14% 0.16% -3.12% 0.42% -2.65% 2.61% 5.11% 4.13% -2.56% -4.55% 0.40% -1.03% -0.45% 1.50% -1.54% 1.02% 2.55% -1.10% -0.94% 0.21% -0.07% -0.55% -0.47% -0.21% -1.12% -2.43% -0.76% -0.10% 0.60% -2.72% 1.86% -1.55% 1.20% -2.17% 0.48% 0.65% -3.75% -1.23% 0.40% 0.49% -0.30% -0.17% -1.61% -0.20% -1.14% -0.62% 2.85% -0.42% -0.80% -0.12% 3.23% -0.94% 0.18% -1.31% -0.63% -0.98% -1.13% 0.12% -1.08% -3.45% 0.96% -3.05% -0.48% -1.28% -0.38% 0.25% -1.96% 0.09% 0.76% -0.72% -0.28% -0.75% -0.50% 0.88% -1.35% 1.83% 1.05% 3.66% -0.87% -0.01% 0.16% -1.69% 1.56% 1.21% -0.95% -3.04% -1.07% -0.30% -1.26% -0.83% 0.82% 1.10% 2.02% -2.80% -0.18% 0.44% -0.35% 2.82% -0.92% -0.75% -2.59% 0.74% -0.67%
ICICI
AXIS Bank PNB SBI
Bank of Baroda
Bank of India
Canara Bank
Federal IndusInd IDBI Bank Kotak Bank Bank
HDFC Bank
Union Bank of India
02-Jan-06 03-Jan-06 04-Jan-06 05-Jan-06 06-Jan-06 09-Jan-06 10-Jan-06 12-Jan-06 13-Jan-06 16-Jan-06 17-Jan-06 18-Jan-06 19-Jan-06 20-Jan-06 23-Jan-06 24-Jan-06 25-Jan-06 27-Jan-06 30-Jan-06 31-Jan-06 01-Feb-06 02-Feb-06 03-Feb-06 06-Feb-06 07-Feb-06 08-Feb-06 10-Feb-06 13-Feb-06 14-Feb-06 15-Feb-06
-15 -14 -13 -12 -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
0.53% -0.61% 3.26% 1.96% -0.61% 0.19% -0.53% 1.04% -3.07% 0.55% -1.87% 0.90% -2.64% -0.62% 0.94% -1.44% 3.03% 1.68% -0.33% -4.26% -3.29% -2.16% 2.29% -3.89% -1.16% 2.50% -0.76% 0.29% -0.25% -1.80%
0.75% -0.88% 1.22% 2.99% 2.91% 2.50% -0.90% 0.79% 1.22% 2.38% 0.21% -0.15% 0.34% 2.10% 9.67% -8.05% -5.73% 0.91% 0.27% 0.51% 0.33% 0.68% -2.04% -0.12% 3.06% -3.18% 1.67% 0.90% 3.61% -2.36%
Standardized Cumulative Average SD of Average Average Yes Bank Abnormal Abnormal p value Abnormal Abnormal Returns returns Returns Returns -1.26% 1.07% 0.26% 0.26% 0.868 0.401 -0.67% -0.19% 1.54% -0.454 0.657 0.06% 3.35% 1.06% 2.16% 1.765 0.101 1.12% 7.28% 3.34% 2.04% 5.905 0.000 4.46% -0.17% -0.66% 1.96% -1.210 0.248 3.80% -1.84% -0.22% 1.26% -0.636 0.536 3.58% 0.31% 0.17% 0.94% 0.637 0.535 3.75% 1.11% 0.58% 1.36% 1.534 0.149 4.33% -1.40% -1.03% 1.17% -3.185 0.007 3.30% -1.66% -0.34% 1.39% -0.878 0.396 2.96% -1.94% -1.41% 1.98% -2.557 0.024 1.55% -0.43% 0.04% 1.16% 0.110 0.914 1.59% -1.26% -1.21% 1.28% -3.393 0.005 0.38% -1.72% 0.26% 2.17% 0.436 0.670 0.65% 1.19% 1.25% 3.17% 1.421 0.179 1.90% 1.10% -1.60% 2.20% -2.625 0.021 0.29% -5.26% -2.96% 3.02% -3.540 0.004 -2.67% 1.86% 2.10% 1.85% 4.098 0.001 -0.57% -0.92% -1.21% 1.57% -2.770 0.016 -1.78% 0.06% -0.74% 2.08% -1.291 0.219 -2.52% -2.27% -1.80% 1.28% -5.050 0.000 -4.32% 0.71% -1.12% 1.31% -3.104 0.008 -5.44% 1.43% 1.07% 2.10% 1.841 0.089 -4.37% -4.22% -2.06% 2.52% -2.938 0.012 -6.43% 1.52% 1.16% 2.15% 1.948 0.073 -5.27% 0.08% 0.08% 1.82% 0.162 0.874 -5.19% 1.17% 0.90% 3.19% 1.019 0.327 -4.29% -5.65% 0.12% 3.01% 0.141 0.890 -4.17% 1.75% 0.39% 1.77% 0.794 0.441 -3.78% -0.97% -1.31% 1.46% -3.252 0.006 -5.09% 0.291 -4.40%
16-Feb-06
15
-0.15%
-1.51%
37
In the pre event period, barring four days, the average abnormal returns are not significantly different from zero. However, in the post event period, the average abnormal returns are significantly different from zero upto day +8 barring day +4 and +7. This shows that the event has had a substantial impact on the stock prices and also shows that the market does not exhibit semi strong form efficiency.
38
Event: Rate increase 31/01/2007
DATE -0.02% -3.08% 0.19% -1.95% 3.73% -0.98% -0.03% -0.22% -0.92% -0.33% -0.92% 1.84% 4.24% 2.90% -2.67% 1.75% 1.06% -3.46% -1.08% 0.64% -0.89% -2.56% -0.63% 0.96% 0.21% -2.49% 0.22% -2.34% 0.28% 0.24% -3.02% -0.21% -3.66% 1.27% -1.06% 3.22% -2.32% -0.49% 0.02% 0.72% -0.77% 0.26% -2.51% -0.53% -2.02% -0.34% -0.48% 1.21% -2.25% -1.40% -0.56% -1.33% 0.16% -2.22% -1.13% 0.00% -3.78% 1.74% -0.13% 0.12% -1.32% -2.63% 3.53% -2.60% -3.83% -4.12% 2.01% -0.90% -0.78% 0.57% -0.68% -2.50% -0.26% -3.72% 0.61% -2.24% -0.62% -1.01% -0.34% -3.32% -0.34% 0.55% -0.43% -1.37% -1.65% -1.11% -0.22% -4.25% 0.31% 0.70% 0.09% -0.54% 0.35% 3.55% 0.83% 1.95% 3.04% 4.34% 1.18% 0.22% 2.70% -1.30% -1.51% -2.67% 1.70% -1.65% 0.86% -1.21% -0.79% -0.09% 4.28% -0.23% 0.30% -2.67% -0.04% -2.82% -2.92% 4.80% -2.49% -4.08% 1.40% -0.54% -1.41% 0.53% 1.80% -0.58% 5.11% 9.00% -4.21% 3.55% 4.66% 1.94% 2.10% 0.55% -3.96% -1.64% 1.45% 1.77% 8.79% -0.07% -1.36% -1.77% 6.11% 0.52% -2.85% 1.14% -7.41% -7.90% 3.39% 4.64% 3.58% -2.71% -0.30% 1.41% -0.99% 2.61% -1.84% 1.08% 2.23% -0.48% -0.91% 1.26% 2.97% -0.94% -0.63% -2.51% -1.46% 1.44% -0.58% -3.12% 1.28% -0.11% -1.28% -1.49% 1.72% 12.30% -1.90% -5.61% -3.75% -4.24% 2.89% 2.99% -2.06% -0.94% -0.30% 4.93% 2.54% -1.76% 1.09% -0.65% -1.04% 0.11% -0.58% 1.55% -1.65% 4.68% 7.62% -2.98% 1.35% -0.58% -0.19% -0.76% -1.93% 4.15% 2.40% 0.75% -0.99% 0.24% -0.87% -4.30% 1.20% 1.44% -1.95% 0.97% -2.45% -0.28% -2.85% 1.27% -2.27% -0.12% -2.24% 3.41% 0.29% -0.17% 1.13% -0.21% -1.27% 1.47% -1.05% -1.01% -0.09% -1.76% 1.38% 2.67% -2.66% 0.20% 0.16% -1.76% -0.36% -1.45% -0.22% -0.98% -4.17% -1.40% 0.20% 1.11% 0.15% -2.78% -1.41% -2.72% -2.09% -0.41% 3.97% -0.55% -1.00% 0.99% 0.22% -0.67% 0.05% -3.24% -0.49% -0.72% -1.39% -0.89% 4.73% -2.57% 0.68% 0.08% -0.83% 0.58% -0.02% 0.47% -0.27% -5.69% 0.08% 0.39% -1.40% 0.32% -1.55%
DAY
ICICI
AXIS Bank PNB SBI
Bank of Bank of Canara Baroda India Bank
Federal IndusInd IDBI Bank Kotak Bank Bank
HDFC Bank
08-Jan-07 09-Jan-07 10-Jan-07 11-Jan-07 12-Jan-07 15-Jan-07 16-Jan-07 17-Jan-07 18-Jan-07 19-Jan-07 22-Jan-07 23-Jan-07 24-Jan-07 25-Jan-07 29-Jan-07 31-Jan-07 01-Feb-07 02-Feb-07 05-Feb-07 06-Feb-07 07-Feb-07 08-Feb-07 09-Feb-07 12-Feb-07 13-Feb-07 14-Feb-07 15-Feb-07 19-Feb-07 20-Feb-07 21-Feb-07 22-Feb-07
-15 -14 -13 -12 -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
0.72% 1.19% -2.06% -0.48% 5.77% -1.79% 0.24% 2.54% -2.00% 1.56% -1.07% -0.31% 0.55% -0.06% -2.64% -0.94% 0.12% -1.69% -0.49% 1.27% 1.58% 1.46% 0.01% -0.79% -0.59% -3.67% 1.50% 2.76% -0.35% 0.76% -1.37%
0.37% 0.35% 0.16% 2.31% 1.12% 6.46% 3.34% -0.97% -0.73% -1.90% 1.65% -5.64% -0.55% 0.00% -1.67% 6.64% 0.40% 7.46% -4.56% -2.82% -0.20% 1.93% 2.34% -1.51% -5.82% 0.69% 2.88% 0.04% -2.20% 0.88% -1.91%
Standardized Cumulative Union Average SD of Average Average Bank of Yes Bank Abnormal Abnormal p value Abnormal Abnormal India Returns returns Returns Returns -1.36% 2.37% 0.57% 1.17% 0.0157 2.775 0.016 1.17% -1.00% -1.67% -0.04% -1.35% 0.0145 -3.463 0.004 -0.18% -0.22% 2.54% -0.55% 0.32% 0.0211 0.572 0.577 0.14% -1.66% -5.35% -0.45% -0.13% 0.0338 -0.141 0.890 0.01% 3.86% 0.37% 1.28% 1.95% 0.0256 2.862 0.013 1.97% 2.21% -0.71% 8.69% 1.02% 0.0309 1.241 0.236 2.99% 0.40% -0.85% 4.28% 0.75% 0.0185 1.515 0.154 3.74% -3.41% -0.32% -1.67% 0.56% 0.0174 1.202 0.251 4.30% -0.17% -1.11% -2.61% -0.66% 0.0114 -2.175 0.049 3.64% 0.25% -0.59% 2.26% -0.06% 0.0180 -0.131 0.898 3.58% -1.09% -0.69% -2.23% -0.31% 0.0267 -0.436 0.670 3.27% -1.50% -0.21% 0.14% -1.47% 0.0199 -2.758 0.016 1.80% 2.04% -1.09% -1.30% 0.36% 0.0157 0.863 0.404 2.16% 0.02% -3.63% -0.04% -0.31% 0.0157 -0.752 0.466 1.85% -0.53% 0.69% -0.29% -0.50% 0.0278 -0.668 0.516 1.35% 2.45% 0.15% -2.47% 0.45% 0.0214 0.781 0.449 1.80% 1.18% 0.30% -0.47% 0.53% 0.0160 1.229 0.241 2.32% -0.55% -2.05% -0.91% -0.47% 0.0319 -0.554 0.589 1.85% -1.02% -0.71% -0.56% -0.18% 0.0226 -0.294 0.774 1.67% -1.06% 0.39% 1.12% 0.22% 0.0108 0.756 0.463 1.89% 0.15% -1.42% 3.94% 0.33% 0.0371 0.333 0.745 2.22% -0.08% -0.68% -4.04% -0.40% 0.0157 -0.946 0.361 1.82% 1.39% 0.95% -1.41% -1.39% 0.0252 -2.061 0.060 0.44% 0.29% -1.37% -1.71% -1.79% 0.0224 -2.980 0.011 -1.35% -1.42% 4.55% -2.84% -0.16% 0.0293 -0.205 0.841 -1.51% -4.75% -3.44% 4.75% -1.45% 0.0346 -1.568 0.141 -2.96% 0.46% 0.90% -0.26% 0.50% 0.0199 0.935 0.367 -2.46% -1.19% -0.53% 0.90% -0.11% 0.0148 -0.288 0.778 -2.58% 0.31% 1.06% -1.48% -0.48% 0.0106 -1.684 0.116 -3.05% -1.03% -1.74% 5.35% 0.18% 0.0169 0.394 0.700 -2.88% -1.69% -2.47% -1.93% -1.24% 0.0201 -2.311 0.038 -4.12%
39
The average abnormal returns are significantly different from zero for 5 days in the pre event period. In the post event period, the AAR is significantly different from zero for only 2 days. This shows that this interest rate announcement has not had a significant impact on the BANKEX or the information of rate increase has already been factored into the stock prices.
40
Event: Rate increase 25/06/2008
DATE -1.02% 4.74% 0.11% -0.44% 0.42% 4.94% -2.02% -4.63% -6.60% -8.85% -3.79% 8.49% 3.21% -7.38% -3.30% -7.92% 11.00% 1.61% 1.54% 2.55% 0.64% 4.49% 0.59% -6.61% 0.57% 2.08% 1.45% 0.28% 4.49% -0.98% 0.04% -2.69% -4.24% -0.80% -3.82% 1.96% -0.10% 0.47% 0.25% -0.27% -1.31% -4.68% -0.26% 0.14% -1.58% 0.65% -4.79% -0.38% -0.96% 2.14% 2.10% 3.86% 3.92% -3.14% -3.27% -5.59% -2.95% -0.45% 5.16% -2.13% -0.59% -0.43% 3.87% -1.29% -0.25% -3.65% -1.88% 3.51% -1.94% -4.11% 3.73% -2.12% -3.44% 1.76% 3.87% -2.81% -3.16% -0.61% 0.45% -2.91% 0.78% -2.21% -2.07% -0.70% -2.19% 3.17% -1.96% 0.29% 0.25% -0.06% 3.58% -0.43% 1.05% 0.02% 2.77% -1.90% 0.07% 5.44% -0.85% -2.03% -3.39% -3.31% -2.67% 0.75% -1.90% -2.41% -3.88% -5.26% 3.35% 0.63% 3.67% 2.16% -0.17% 3.80% -1.34% 3.77% -1.39% 2.31% 5.60% -4.29% 2.28% -2.74% -2.07% -3.19% -4.43% -3.47% -3.73% -2.72% -6.95% -1.54% -0.80% 1.99% -3.84% -0.13% -4.08% 0.37% 2.18% 8.88%
DAY
ICICI
Bank of AXIS Bank Baroda
Bank of India
Canara Bank
Federal IndusInd HDFC Bank IDBI Bank Kotak Bank Bank
10-Jun-08 11-Jun-08 12-Jun-08 13-Jun-08 16-Jun-08 17-Jun-08 18-Jun-08 19-Jun-08 20-Jun-08 23-Jun-08 24-Jun-08 25-Jun-08 26-Jun-08 27-Jun-08 30-Jun-08 01-Jul-08 02-Jul-08 03-Jul-08 04-Jul-08 07-Jul-08 08-Jul-08 09-Jul-08 10-Jul-08
-11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11
-1.93% 0.43% -0.13% 3.21% 3.78% 1.77% -3.44% -3.07% -0.88% -0.92% -1.64% -1.45% -0.67% -4.39% -2.36% -4.72% 3.12% -5.94% 3.36% 0.25% -1.04% 2.54% -0.71%
-3.23% 2.81% 1.48% -1.70% 4.13% 7.40% -5.04% -4.48% -1.42% -0.72% -2.83% 0.89% -1.95% -6.46% -3.79% -1.44% 6.31% -8.31% 2.80% 0.31% 0.96% 9.17% 1.26%
-1.97% 3.68% 3.16% -2.06% 3.37% 5.03% -3.54% -1.56% -5.34% -5.36% -0.51% 0.34% -1.23% -1.32% -0.67% -2.96% 3.16% 3.90% -2.21% 1.16% 2.51% -0.04% -1.30%
Cumulative Standardized Union Bank Average PNB SBI Yes Bank Average Abnormal Returns SD of Abnormal returns Average Abnormal p value of India Abnormal Returns Returns -0.85% 1.16% -0.74% -1.41% -2.79% -1.67% 2.64% -2.370 0.034 -1.67% 0.46% -1.11% 1.58% 4.42% -3.13% 1.17% 2.39% 1.835 0.090 -0.50% -2.93% 0.23% 2.06% 0.57% 2.40% 0.79% 1.87% 1.583 0.137 0.29% -1.16% -2.64% -0.34% 0.94% -0.44% -0.06% 2.49% -0.084 0.934 0.23% 2.24% 3.26% -1.18% 3.08% 2.11% 1.51% 2.29% 2.469 0.028 1.74% 6.45% 2.94% 3.79% 4.51% 3.32% 4.29% 1.53% 10.479 0.000 6.03% -3.60% -2.53% -2.08% -3.04% -2.62% -2.24% 2.07% -4.045 0.001 3.79% -4.67% -4.51% -3.02% -2.01% -4.24% -3.04% 1.40% -8.104 0.000 0.75% -1.80% -0.16% -2.99% -3.74% -2.23% -2.74% 1.78% -5.750 0.000 -1.98% -4.61% -1.81% -2.82% -4.73% -3.32% -3.59% 2.38% -5.636 0.000 -5.57% -3.96% 0.25% 0.94% -1.47% 4.83% -1.50% 2.37% -2.367 0.034 -7.07% -2.98% 0.12% -1.10% -2.62% -3.02% -0.56% 3.12% -0.668 0.516 -7.63% -2.07% -0.83% 0.50% -1.32% -0.37% -0.32% 2.29% -0.518 0.613 -7.95% -4.01% -3.45% -3.34% -1.53% -4.24% -3.56% 2.20% -6.062 0.000 -11.50% -4.66% -5.88% -3.26% -1.02% -7.95% -2.79% 2.35% -4.457 0.001 -14.30% -2.15% -5.96% -6.59% -8.05% -2.41% -3.62% 2.78% -4.870 0.000 -17.91% 6.01% 8.72% 3.32% 4.54% 1.08% 4.24% 2.96% 5.355 0.000 -13.67% -9.32% -0.07% 3.45% 6.62% -7.32% -1.65% 4.82% -1.283 0.222 -15.33% 3.53% 0.21% 1.29% -2.08% 4.78% 0.87% 2.67% 1.213 0.247 -14.46% 2.91% -0.71% 3.64% 0.11% 0.87% 0.39% 2.21% 0.668 0.516 -14.07% 4.35% -2.84% 3.16% 0.19% 4.46% 0.77% 2.17% 1.330 0.206 -13.30% 5.46% 1.63% 1.11% 3.47% 1.97% 2.95% 2.56% 4.306 0.001 -10.35% -0.40% 2.36% -0.34% 0.18% 0.25% 0.55% 2.64% 0.779 0.450 -9.80%
41
The AAR is significantly different from zero from day – 7 to day – 1. In the post event period, from day +2 to day +5, the AAR is significantly different from zero. This shows that the market began reacting to an expectation in interest rate hike prior to the actual event and then continued beyond the event as well.
42
DATE
DAY
ICICI
AXIS Bank
Bank of Baroda
Bank of India
Canara Bank
Federal Bank
IndusInd HDFC Bank IDBI Bank Kotak Bank
Event: Rate increase 27/07/2010
06-07-2010
07-07-2010 08-07-2010 09-07-2010 12-07-2010 13-07-2010 14-07-2010 15-07-2010 16-07-2010 19-07-2010 20-07-2010 21-07-2010 22-07-2010 23-07-2010 26-07-2010 27-07-2010 28-07-2010 29-07-2010 30-07-2010 02-08-2010 03-08-2010 04-08-2010 05-08-2010 06-08-2010 09-08-2010 10-08-2010 11-08-2010 12-08-2010 13-08-2010 16-08-2010
17-08-2010
-15 -14 -13 -12 -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
0.65% -0.31% 0.37% -0.43% 1.19% 0.61% -0.50% -0.79% 1.93% -0.02% -0.83% 0.68% -0.44% 0.12% 1.34% 0.42% -0.68% 1.61% -1.40% 2.15% 2.09% -0.01% -1.12% -0.23% 1.84% 1.40% -0.64% -0.79% 0.42% -0.98% 0.32%
-0.05% -0.61% -0.63% 0.83% 0.74% 0.51% 1.18% 2.38% 0.64% 0.17% 0.90% -2.53% 0.35% 1.73% 0.04% -0.60% -1.78% 0.58% -0.62% -0.99% 0.22% -2.69% -1.00% -0.37% -1.11% -0.73% 0.18% 1.95% 0.20% 1.03% -0.44%
-1.05% 0.69% -0.82% -1.10% -0.87% -0.56% 0.13% 0.21% 1.10% 0.53% -0.22% -1.19% -0.80% -0.41% -0.19% -0.33% -0.63% 2.18% 2.86% 0.46% 1.19% -1.38% -0.52% -1.02% 0.77% -1.29% 0.59% 1.07% 0.19% 1.29% 6.00%
1.54% -0.91% -0.80% 0.92% -1.65% 1.88% 1.21% 2.59% 0.75% 0.01% 1.64% 1.82% -1.64% -0.17% -1.77% 0.46% 2.22% 1.96% 0.50% 6.04% -0.73% -0.47% 0.29% -0.41% 0.20% -0.31% 1.12% 5.94% -0.36% 0.92% 0.86%
-1.13% 1.29% -0.90% -0.12% 0.83% -0.66% -0.56% 0.47% 0.80% 3.93% -2.30% -1.08% -0.74% -1.16% -2.17% -0.50% 2.59% 0.79% -0.69% 0.06% 0.94% -2.48% -0.59% -1.00% 1.26% -0.44% 0.65% 1.71% 1.45% 0.56% 2.42%
3.30% 2.10% -0.23% 1.24% -0.22% -1.01% -0.46% -0.88% 0.43% -0.21% 2.28% -1.62% -1.68% -0.54% -2.83% 0.43% -0.24% 2.41% -1.08% -0.64% -1.41% -1.86% -0.85% -2.30% 1.00% -1.17% -0.48% -0.90% 1.60% 2.53% 0.59%
1.60% -0.68% -0.51% 2.25% 1.54% 0.73% 1.20% -1.14% -1.53% 0.57% -0.19% -1.04% 0.45% -1.00% 0.97% 0.33% 1.40% 0.47% 1.60% -0.53% -0.81% -1.00% -0.59% -0.21% -1.36% 0.84% -0.11% -0.51% 0.10% 0.20% 1.76%
0.24% 0.35% 1.98% -1.13% 0.21% 0.50% -1.56% 1.02% -2.10% 0.64% -0.24% -0.44% -1.13% -0.76% -1.11% 0.39% -1.60% 0.83% 1.43% -0.55% 1.48% -1.40% -0.50% -1.21% 0.59% -0.83% 0.40% 0.89% 0.20% 3.47% 4.08%
0.48% 2.52% -3.04% -1.12% -2.15% -1.28% -0.67% 1.47% -2.20% 0.25% -1.83% -1.96% 2.91% -1.49% -2.18% 0.00% -1.16% 0.80% -0.76% 2.13% -2.48% 0.38% -1.51% 2.85% 2.21% 0.33% 1.40% -0.43% -0.96% -1.01% -0.27%
Cumulative Standardized Union Bank Average PNB SBI Yes Bank Average Abnormal Returns SD of Abnormal returns Average Abnormal p value of India Abnormal Returns Returns -1.16% -1.14% 0.45% -0.43% 1.44% 0.34% 1.31% 0.963 0.353 0.34% -0.76% -0.71% 0.52% 0.14% -1.31% 0.17% 1.16% 0.536 0.601 0.50% -0.30% -0.97% 0.91% -0.17% 0.40% -0.34% 1.13% -1.116 0.285 0.17% -1.02% -1.02% -0.86% -1.19% 2.07% -0.05% 1.26% -0.143 0.889 0.12% -1.28% -0.94% 0.47% -0.76% -1.06% -0.28% 1.13% -0.935 0.367 -0.16% 0.05% -0.34% 0.75% -0.41% 0.11% 0.06% 0.84% 0.278 0.786 -0.10% -0.69% -0.08% 1.72% 0.20% -0.91% 0.02% 0.97% 0.061 0.952 -0.08% 0.85% 0.75% -0.91% 4.47% 0.64% 0.79% 1.57% 1.889 0.081 0.71% 2.46% 0.30% -0.35% -0.14% 3.86% 0.42% 1.69% 0.943 0.363 1.13% 1.26% -0.50% 0.70% -0.05% -0.21% 0.51% 1.09% 1.740 0.105 1.64% -1.08% -0.16% -0.07% -0.08% -0.30% -0.18% 1.21% -0.549 0.592 1.46% -0.24% -0.48% -1.25% -1.06% -0.80% -0.80% 1.08% -2.764 0.016 0.66% -3.10% -1.20% 0.61% -0.52% -1.04% -0.57% 1.39% -1.527 0.151 0.10% -0.17% -0.78% 0.48% 0.39% 0.92% -0.20% 0.87% -0.868 0.401 -0.11% -0.07% -0.82% -2.78% -1.26% -0.56% -0.96% 1.31% -2.739 0.017 -1.06% 0.09% 0.99% 0.59% 0.38% -0.30% 0.17% 0.46% 1.360 0.197 -0.90% 0.49% 1.33% 2.20% -0.40% -1.98% 0.12% 1.58% 0.295 0.772 -0.77% -0.14% -1.17% -0.24% -2.04% -0.34% 0.55% 1.27% 1.617 0.130 -0.22% 1.29% 1.77% 1.99% 0.90% 1.54% 0.67% 1.34% 1.862 0.085 0.44% 0.18% 3.50% 1.51% 1.15% 1.74% 1.16% 1.92% 2.255 0.042 1.60% 1.92% -0.51% 0.52% -0.26% 0.78% 0.21% 1.32% 0.597 0.561 1.81% 2.07% -2.23% -1.13% -1.23% -2.50% -1.14% 1.31% -3.251 0.006 0.68% 0.21% 0.86% 2.20% -0.30% -1.54% -0.35% 0.99% -1.329 0.207 0.32% -1.13% -0.56% -0.90% -0.11% -1.02% -0.54% 1.13% -1.800 0.095 -0.22% -0.06% 0.14% 0.04% 0.62% 1.67% 0.56% 1.03% 2.029 0.063 0.34% -1.12% -0.38% -0.31% -0.43% -0.47% -0.35% 0.76% -1.733 0.107 -0.02% 0.68% 0.17% -0.15% 0.14% 0.21% 0.29% 0.57% 1.949 0.073 0.28% -0.43% 2.65% 6.80% 2.71% 1.33% 1.57% 2.38% 2.465 0.028 1.85% 2.74% 0.09% 1.61% 1.72% 3.89% 0.92% 1.31% 2.627 0.021 2.77% 0.40% 3.17% -0.33% 1.35% 0.03% 0.90% 1.39% 2.430 0.030 3.67% 0.75% 1.39% -0.16% 2.92% 2.62% 1.63% 1.83% 3.328 0.005 5.30%
43
In the pre event period, the AAR is significantly different from zero on day – 4 and day – 1. In the post event period, the AAR is significantly different from zero on day +4 and +6 and from day + 12 to + 15. This shows that the event has had a delayed impact on the market.
44
Event: Rate increase 25/01/2011
DATE
DAY
04-01-2011 05-01-2011 06-01-2011 07-01-2011 10-01-2011 11-01-2011 12-01-2011 13-01-2011 14-01-2011 17-01-2011 18-01-2011 19-01-2011 20-01-2011 21-01-2011 24-01-2011 25-01-2011 27-01-2011 28-01-2011 31-01-2011 01-02-2011 02-02-2011 03-02-2011
Cumulative Standardized AXIS Bank of Bank of Canara Federal IndusInd Union Bank Average ICICI HDFC Bank IDBI Bank Kotak PNB SBI Yes Bank Average Abnormal Returns SD of Abnormal returns Average Abnormal p value Bank Baroda India Bank Bank Bank of India Abnormal Returns Returns -15 -3.03% 0.84% -2.82% -1.39% -2.17% -2.69% -1.82% -1.68% -3.41% 1.26% -0.08% -2.87% -2.63% -2.63% -1.79% 1.47% -4.570 0.001 -1.79% -14 -1.66% -1.73% 0.67% 0.45% -3.99% -2.23% -0.89% -1.68% -1.93% -1.48% -0.92% -0.40% -1.26% -3.57% -1.47% 1.29% -4.259 0.001 -3.27% -13 -0.77% -1.74% 1.09% -3.58% 0.65% -1.65% 1.26% -0.48% -1.54% 0.06% -0.58% -2.16% -1.14% -2.52% -0.94% 1.40% -2.507 0.026 -4.20% -12 3.16% -0.66% 2.66% 2.67% -1.03% 1.43% -0.60% 0.09% -3.18% 0.43% -0.25% 1.55% 2.70% -1.52% 0.53% 1.89% 1.052 0.312 -3.67% -11 0.33% -1.33% -1.08% 2.27% -1.78% 2.01% -3.14% 0.52% -1.40% -2.12% 0.47% 0.44% 0.30% -0.79% -0.38% 1.55% -0.916 0.377 -4.05% -10 1.06% -1.70% 0.83% 0.78% -0.60% 0.65% -0.37% -0.91% 4.39% 1.22% 1.74% 2.57% 1.35% 4.13% 1.08% 1.75% 2.305 0.038 -2.97% -9 1.78% 3.20% -0.79% -1.50% -0.85% -0.81% 1.22% 0.69% 2.06% -0.50% -0.43% 0.05% 2.18% -0.86% 0.39% 1.46% 0.996 0.337 -2.58% -8 -1.21% 0.48% -2.96% -1.63% -1.75% 0.11% -1.52% -0.56% -2.15% -1.97% -3.46% -2.08% -1.41% -0.77% -1.49% 1.08% -5.187 0.000 -4.07% -7 0.86% -2.37% -1.83% 1.05% -3.16% 0.41% -2.88% 0.72% -0.88% -0.23% -0.18% -0.58% -1.43% -0.74% -0.80% 1.37% -2.192 0.047 -4.88% -6 -1.19% -4.67% 4.00% 0.07% -4.24% -2.27% 0.89% -3.93% -1.08% 1.16% 1.35% 0.34% 0.44% -2.49% -0.83% 2.48% -1.252 0.233 -5.71% -5 -0.68% 0.16% -0.35% -2.92% 0.89% 0.17% 0.59% 0.60% 2.97% -0.89% -0.13% 0.30% -1.00% -0.35% -0.05% 1.29% -0.133 0.896 -5.75% -4 2.10% 4.86% -1.79% 2.04% 8.05% 1.84% -1.09% 1.15% -0.85% 2.77% -0.17% -1.33% 0.91% 5.66% 1.73% 2.88% 2.245 0.043 -4.03% -3 2.09% -1.47% 0.56% -0.05% 1.92% 0.08% 1.55% 2.99% 2.31% 1.11% -0.76% 0.56% 0.64% 0.74% 0.88% 1.23% 2.673 0.019 -3.15% -2 1.70% -0.10% 6.42% 1.10% 1.61% 0.10% -0.85% 0.93% -3.41% -1.04% -1.13% 2.61% 2.21% -0.82% 0.67% 2.31% 1.077 0.301 -2.48% -1 0.52% 0.39% 0.65% 3.78% -0.42% -0.91% 1.64% 0.13% 1.58% -0.57% 1.76% 2.75% 2.50% 4.12% 1.28% 1.59% 3.022 0.010 -1.20% 0 -2.81% 3.22% 0.49% 0.31% -0.79% -0.50% -2.17% 0.42% -2.28% -1.03% -0.60% 0.40% 0.33% -1.10% -0.44% 1.51% -1.082 0.299 -1.64% 1 0.17% -0.99% -0.98% -1.76% -0.96% -2.95% -0.53% -4.43% -3.02% -1.68% -0.78% 0.55% -1.87% -2.88% -1.58% 1.37% -4.316 0.001 -3.22% 2 2.30% -0.89% -4.15% 0.16% -3.75% -1.70% 1.47% 0.90% -1.48% -1.20% -1.03% 0.23% -0.56% -0.96% -0.76% 1.78% -1.601 0.133 -3.98% 3 0.81% -3.71% 0.33% 4.33% 7.06% 4.24% -0.55% 0.33% 3.78% 1.45% 0.90% 1.16% 3.88% 2.28% 1.88% 2.65% 2.655 0.020 -2.11% 4 2.57% 0.57% 0.41% -0.05% -0.80% 0.68% 1.14% -0.48% -0.98% -0.22% 0.86% -0.03% -0.40% 2.47% 0.41% 1.09% 1.406 0.183 -1.70% 5 -1.69% -2.36% 1.08% 0.68% -4.11% -2.07% -1.50% -0.73% 1.93% -1.04% -2.32% -1.37% -0.68% -0.69% -1.06% 1.55% -2.561 0.024 -2.76% 6 -3.11% 1.78% 1.57% -0.87% 0.74% -0.78% 0.38% 1.78% 0.16% 1.54% -0.96% 0.86% 0.44% 0.42% 0.28% 1.36% 0.777 0.451 -2.48%
45
From day – 10, the AAR is significantly different from zero barring a few days in between. Immediately post the event also, the AAR is significantly different from zero. This shows that the market does not exhibit semi strong form efficiency and rather reacts to rate adjustments instead of factoring it into the prices in the pre event period.
46
doc_241380633.docx
This paper titled “Impact of interest rate announcements on Indian Stock Markets” aims to analyze the market efficiency of the Indian Stock Markets with respect to interest rate adjustments announced by the RBI. To test the market’s efficiency with respect to information embedded in the public announcement of interest rate changes, it has used the standard event study methodology.
Impact of interest rate announcements on Indian Stock Markets
1
Preface
This paper titled “Impact of interest rate announcements on Indian Stock Markets” aims to analyze the market efficiency of the Indian Stock Markets with respect to interest rate adjustments announced by the RBI. To test the market’s efficiency with respect to information embedded in the public announcement of interest rate changes, we have used the standard event study methodology. The study examines the effects of five increases and three decreases in the repo rates to test market efficiency and to see the impact of the RBI’s monetary policy action on the stock market. We have taken the 14 stocks comprising the BANKEX for the purpose of analysis. The paper begins with a brief introduction about the efficiency market hypothesis and the forms of market efficiency. The next chapter reviews the literature available on the subject in a nutshell. Our research methodology, the sample of study, scope and limitations of the research are covered in Chapter 3. Chapter 4 contains the analysis and interpretation with the research findings with respect to the sample that we have chosen. Chapter 5 lists down the conclusions from the above studies and our suggestions for investors.
2
Acknowledgment
We would like to express our deep and sincere gratitude to Professor Anant Gupta (Deputy Director and the Head of Department, Finance, SCMHRD) for giving us this opportunity to undertake a research project. Also, we wish to convey our warm and sincere thanks to Ms. Dipali Krishnakumar (Assistant Professor, Finance, SCMHRD) who has spent considerable time with us in discussing small details at each stage of the project and for giving us valuable suggestions during the entire project . Her encouragement and personal guidance has helped us in successful completion of our project.
NAMAN GUPTA
VARUN GUPTA
PAVITRA SUDHINDRAN
SREYASH BHANDARI
3
Table of Contents
Preface .................................................................................................................................................... 2 Acknowledgment .................................................................................................................................... 3 Abstract ................................................................................................................................................... 6 1. Chapter 1 Introduction .................................................................................................................... 7 1.1 Market Efficiency ......................................................................................................................... 7 1.1.1 Key Concepts: ........................................................................................................................ 7 1.1.2 Efficiency Market Hypothesis: .............................................................................................. 8 1.2 Event Studies ................................................................................................................................ 9 Chapter 2 Review of literature .............................................................................................................. 10 Chapter 3 Research Methodology ......................................................................................................... 12 3.1 Primary Research Objective........................................................................................................ 12 3.2 Secondary Research Objectives .................................................................................................. 12 3.3 Research Tools ............................................................................................................................ 12 3.4 Type of data ................................................................................................................................ 13 3.5 Sample Size................................................................................................................................. 13 3.5.1 Description of the study sample ........................................................................................... 14 3.6 Hypothesis................................................................................................................................... 14 3.7 Scope of the research .................................................................................................................. 14 3.8 Limitation of the research ........................................................................................................... 15 Chapter 4 Analysis and Interpretation .................................................................................................. 16 4.1 Rate Decrease.............................................................................................................................. 16 4.2 Rate Increase ............................................................................................................................... 18 4.3 Comparison of CAAR of all the events ...................................................................................... 21 4.3.1 Rate decrease ....................................................................................................................... 21 4
4.3.2 Rate increase ........................................................................................................................ 22 4.4 Overall Impact ............................................................................................................................ 23 4.4.1 For Rate Decrease ................................................................................................................ 23 4.4.2 For Rate Increase ................................................................................................................. 23 4.4.3 Checking for statistical significance of abnormal returns .................................................... 24 4.5 Key observations......................................................................................................................... 24 Chapter 5 Conclusion and Suggestions ................................................................................................. 25 5.1 Investment Decisions .................................................................................................................. 25 References ............................................................................................................................................. 27 Annexures ............................................................................................................................................. 29 Annexure 1 : Event details ................................................................................................................ 29 Annexure 2 : Statistical Results ......................................................................................................... 30
5
Abstract This paper attempts to investigate the impact of interest rate announcements by RBI in the Indian stock market. The effect of 8 different interest rate change announcements by RBI post 2006 period on the returns of the BANKEX stocks was examined with event study methodology. In the past, event studies have been conducted on Indian Stock Markets to test for market efficiency. However, we have gone a step further. In this paper, we attempt to not only test the efficiency of Indian Stock Markets, but to also analyse the relationship between the monetary policies of the RBI and the Indian stock markets and hence suggest investment strategies. The paper tests the efficiency of the Indian stock market through hypothesis. Appropriate statistical tests for significance were conducted. Results show a significant negative market reaction prior to and post the announcement of both increases and decreases in the repo rate. Moreover, the Indian Markets do not exhibit semi-strong-form efficiency. The impact of the announcements, either decrease or increase in the rates has not been consistent and we can see vast fluctuations between the various events. This can be attributed to the various Macroeconomic & Global factors which, in addition to interest rate changes, impact the stock markets.
6
1. Chapter 1 Introduction The movement of share price is unpredictable in any economy. Sudden ups and downs of the price of the share make people wonder watching. Certain factors are held responsible for the movement in share prices. In some studies micro variables like dividend per share, earning per share, company size and book value per share have got importance and in others, macro variables like rate of interest, index of industrial production, union budget, inflation rate and foreign currency have been highlighted. Hence change in rate of interest is one such event which may have an impact on stock market. Rate of interest is an important tool in the hands of RBI for controlling inflation and fostering economic growth. 1.1 Market Efficiency The concept of efficiency is central to finance. Primarily, the term efficiency is used to describe a market in which relevant information is impounded into the price of financial assets. The simplest definition of market efficiency is that the price already reflects the available information and thus buying or selling the stock should, on an average, return only a "fair" measure of return (after transaction costs) for the associated risk. The basic point is that beating the market is incredibly difficult. Market efficiency does not imply market perfection. Markets are not perfect, but they are very tough to beat. 1.1.1 Key Concepts: ? Market efficiency does not require that the market price be equal to the true value at every point in time. All it requires is that errors in the market price be unbiased, i.e., that prices can be greater than or less than true value, as long as these deviations are random. ? The fact that the deviations from true value are random implies, in a rough sense, that there is an equal chance that stocks are under or over valued at any point in time, and that these deviations are uncorrelated with any observable variable. For instance, in an efficient market, stocks with lower PE ratios should be no more or less likely to be undervalued than stocks with high PE ratios.
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? If the deviations of market price from true value are random, it follows that no group of investors should be able to consistently find under or overvalued stocks using any investment strategy. 1.1.2 Efficiency Market Hypothesis: The concept of Efficiency Market Hypothesis (EMH) is based on the arguments put forward by Samuelson (1965) that anticipated that the price of an asset fluctuates randomly. Fama (1970) presented a formal review of the theory and evidence for market efficiency and subsequently revised it further on the basis of development in research. Fama (1991) classified market efficiency into three forms – ? Weak-form efficiency ? Semi-strong form efficiency and ? Strong-form efficiency. In weak-form efficiency, future prices cannot be predicted by analyzing prices from the past. Excess returns cannot be earned in the long run by using investment strategies based on historical share prices or other historical data. Technical analysis techniques will not be able to consistently produce excess returns, though some forms of fundamental analysis may still provide excess returns. Share prices exhibit no serial dependencies, meaning that there are no patterns to asset prices. This implies that future price movements are determined entirely by information not contained in the price series. Hence, prices must follow a random walk. In semi-strong-form efficiency, it is implied that share prices adjust to publicly available new information very rapidly and in an unbiased fashion, such that no excess returns can be earned by trading on that information. Semi-strong-form efficiency implies that neither fundamental analysis nor technical analysis techniques will be able to reliably produce excess returns. To test for semi-strong-form efficiency, the adjustments to previously unknown news must be of a reasonable size and must be instantaneous. To test for this, consistent upward or downward adjustments after the initial change must be looked for. If there are any such adjustments it would suggest that investors had interpreted the information in a biased fashion and hence in an inefficient manner.
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In strong-form efficiency, share prices reflect all information, public and private, and no one can earn excess returns. If there are legal barriers to private information becoming public, as with insider trading laws, strong-form efficiency is impossible, except in the case where the laws are universally ignored. To test for strong-form efficiency, a market needs to exist where investors cannot consistently earn excess returns over a long period of time. Even if some money managers are consistently observed to beat the market, no refutation even of strongform efficiency follows: with hundreds of thousands of fund managers worldwide, even a normal distribution of returns (as efficiency predicts) should be expected to produce a few dozen "star" performers. 1.2 Event Studies An Event study is a statistical method to assess the impact of an event on the value of a firm. For example, the announcement of a merger between two business entities can be analyzed to see whether investors believe the merger will create or destroy value. The basic idea is to find the abnormal return attributable to the event being studied by adjusting for the return that stems from the price fluctuation of the market as a whole. In these event studies, the changes in a stock price caused by new public information are measured. The method has been applied to a great extent to study the effects on stock prices caused by different events, such as the publication of result reports, dividend announcements, information about share splits, and changes in accounting standards. The method has the limitation that it ignores the content of information; it only confirms that new information has reached the market and caused movements in stock prices in a defined time period surrounding the point in time of publication.
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Chapter 2 Review of literature Malkiel, B.G. (2003) in his paper titled “The Efficient Market Hypothesis and its critics” tries to defend the efficient market hypothesis by citing out cases of rationality even in the “Market Crash of 1987” and the “Internet bubble of the late 1990s”. The author strongly believes that whatever patterns or irrationalities in the pricing of individual stocks that have been discovered in a search of historical experience are unlikely to persist and will not provide investors with a method to obtain extraordinary returns. Craig MacKinlay (1997) in his paper on “Event Studies in Economics and Finance” elaborates the procedure for carrying out an event study beginning with identifying the event and defining the event window. The next step is to determine the abnormal return which is the difference between the actual ex post return of the security over the event window and the normal return of the firm over the event window. The two models for determining the normal returns are the Constant Mean Return Model and the Market Model. With the aggregation of abnormal returns, it is tested whether or not the event has an impact on stock performance. Lyroudi, K. & Dasilas, A. in their paper titled “The valuation effects of stock splits in NASDAQ” investigates the response of the market to the announcement of stock splits for the period 1999-2000 for a sample of 57 firms listed on the NASDAQ. They followed the event study methodology of Strong (1992), specifically, the market model method. Their results indicate that the market reaction to stock splits announcements is positive. Donor, A.W. carried out a study to investigate the stock market reaction to financial information. The method used was a computer-based content analysis of qualitative data. The data is from a Swedish real estate ?rm during the period 1991-1996. The information collected and analysed comes from the company’s press releases, quarterly statements and articles in the six largest business magazines in Sweden. A positive correlation was found between the stock prices and the following information categories: net asset value, occupancy rates, cash ?ow and overall capitalisation rate. Gupta, R. & Basu, P.K. (2007) attempted to test the weak form efficiency in Indian Stock Markets. The study was done in the framework of random walk hypothesis for the two major equity markets in India for the period 1991 to 2006. The model used to test the weak form efficiency of the Indian Stock Markets is the Augmented Dickey Fuller test (ADF test). Three regression models (standard model, with drift and with drift and trend) are used in this study
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to test for unit root in the research. The evidence suggests that the series do not follow random walk model and there is an evidence of autocorrelation in both markets rejecting the weak form efficiency hypothesis. These results support the common notion that the equity markets in the emerging economies are not efficient. Padhan, P.C. investigated the nexus between stock market and economic activity in India. The paper applies recently developed Granger non-causality tests by Toda-Yamamota, Dolado and Lutkephol (popularly known as the TYDL model) for an empirical exercise. The notable ?nding of the paper is that both the stock price (BSE Sensex) and economic activity (IIP) are integrated of order one, i.e. I (1). The Johansen-Juselius co-integration tests suggest the existence of one co-integrating vector. Several researchers have tested the impact of various other events on the Indian Stock Markets, some of them being the impact of the Union budget, bonus announcements and FII investments. Gurcharan, S., & Salony, K. (2010) tested the impact of the Union Budget on the Indian Stock Market in terms of returns and volatility. The impact on S&P CNX Nifty was studied prior to and subsequent to the budget day. The study used the statistical techniques of paired t-test and F-test on average returns and variance in returns respectively over different periods around the budget. With regard to return, the result proves that the budget has the maximum impact in the short term period, with some impact extending into the medium term and no significant impact at all on long term average returns. With regard to volatility, the result obtained was that the long term period after the budget tends to be more volatile than the medium term and short term periods when compared to similar long term before the budget. With respect to the impact of bonus announcements on stock performance, Raja, M. & Sudhakar, J.C. (2010) carried out a study to examine the information content of bonus issue announcement made by the Information Technology (IT) companies, test the speed with which the bonus issue announcement contained information impounded in the share prices of IT companies and suggest investment strategies for the investors, fund managers and analysts. The study involved the analysis of Average Security Returns Variability, Abnormal Returns and Cumulative abnormal returns. From the above analysis, the author suggests that when a company comes up with the bonus issue announcement, they should take immediate investment decision (buy or sell) in order to benefit from the bonus issue announcement. Thus one can safely conclude that the Indian capital market for the IT sector, in general, is efficient, but not perfectly efficient, to the announcement of bonus issue. This informational inefficiency can be used by the investors for making abnormal returns at any point of the announcement period.
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Chapter 3 Research Methodology
3.1 Primary Research Objective
To test the market efficiency of the Indian Stock Markets with respect to interest rate adjustments and examine the speed of adjustment of stock prices to the release of such information to investors.
3.2 Secondary Research Objectives
? To analyze the reaction of the stocks comprising the BANKEX to interest rate adjustments announced by the RBI ? To compare the reaction of the stocks comprising the BANKEX to interest rate decrease and increase ? To suggest investment decisions based upon the above analysis
3.3 Research Tools
The research was carried out as per the following steps: 1. The first step was to identify the event : repo rate announcement by the RBI. 2. Then the closing price data of the SENSEX and the stocks comprising the BANKEX were taken for a period of -250 days to -50 days before the event. This is called the Estimation Window. 3. Daily returns of SENSEX and the stocks comprising the BANKEX were calculated as:
Closing Price T1 - Closing Price T0 Closing Price T0
4. A regression was run between each of the banking stock returns and the SENSEX for the Estimation Window to get alpha and beta for each banking stock. i.e Stock Returns = Alpha + Beta (SENSEX Returns) 5. Using this alpha and beta, we found out the expected returns for each of the banking stocks for a period - 15 to +15 days around the event date. This is called Event Window. Expected Return = Alpha + Beta (Actual SENSEX Return)
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6. The actual returns were found by taking the actual closing prices of the stocks for the period -15 days to +15 days and computing the returns as per the formula in point 3. 7. Then the Abnormal Returns were calculated as: Abnormal returns = Actual returns - Expected returns 8. The Average of the Abnormal Returns of all the 14 stocks are computed for each of the days -15 to +15. 9. We then standardized the average abnormal returns and check for significance of the average abnormal returns using t test. 10. The next step was to find out the Cumulative Average Abnormal Returns for each day. 11. A graph of CAAR was plotted to see if there is a visible graphical pattern between CAAR and time. 12. The average of the CAARs for each event (rate decreases/increases) was computed to find out the CAAR for rate decrease and rate increase as a whole. A graph of this was plotted to see the trend.
3.4 Type of data
The data was collected from secondary sources i.e the internet. Data related to the stock markets was obtained from the BSE. Data relating to interest rate adjustments was obtained from the official website of the RBI.
3.5 Sample Size
We have taken the 14 stocks comprising the BANKEX for the purpose of our analysis.
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3.5.1 Description of the study sample
Stocks comprising the BANKEX
Full Mkt. Cap.* S.No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Company (Rs. crore) ICICI Bank HDFC Bank State Bank of India AXIS Bank Bank of Baroda Punjab National Bank Kotak Mahindra Bank Bank of India Indus Ind Bank Canara Bank Union Bank of India YES Bank Federal Bank IDBI Bank 1,13,381.79 95,018.16 1,64,077.39 50,469.59 31,558.23 33,325.90 29,688.63 22,858.25 10,058.93 24,089.55 15,931.42 8,878.19 5,734.56 12,793.92 Weight in Index (%) 29.13 19.53 18.97 8.43 4.05 3.85 3.81 2.35 1.94 1.86 1.84 1.6 1.47 1.15
* as on 28th Feb. 2011
3.6 Hypothesis
1. H0: The abnormal returns on the stocks are not significantly different from 0. H1: The abnormal returns on the stocks are significantly different from 0. (This will be tested using t test). 2. H0: The Stocks comprising the BANKEX exhibit semi strong form efficiency H1: The stocks comprising the BANKEX do not exhibit semi strong form efficiency (This will be tested by observing the pattern of CAAR with time).
3.7 Scope of the research
The research was conducted on the 14 banking stocks comprising the BANKEX. The events have been selected from 2006 onwards i.e 3 rate decreases and 5 rate increases in this period have been selected for the purpose of research.
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3.8 Limitation of the research
The research is restricted to the impact of change in only one event i.e. repo rate adjustment by the RBI for the period post 2006. 8 different announcements of the repo rate adjustment by RBI post 2006 were considered for analyzing the impact of the event. Moreover, the impact of this event is analyzed only on the 14 banking stocks comprising the BANKEX index. The impact of various Macroeconomic & Global factors has not been captured by the study. The various factors like Recession in the economy, Inflation scenario, Global Crude oil prices, War-like conditions in various nations etc, has led to the varying magnitude of impact of the announcements.
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Chapter 4 Analysis and Interpretation
4.1 Rate Decrease
Cumulative Average Abnormal Returns
2.00% 0.00% -15-13-11 -9 -7 -5 -3 -1 1 3 5 7 9 11 13 15 -2.00% -4.00% -6.00% -8.00% -10.00%
Cumulative Average Abnormal Returns
-12.00%
Event date: 8th Dec 2008
From day -11, there was a downward trend in the CAAR. Also there was a sharp drop in the CAAR in the post event period just following the event announcement. Post day +1, there was a rise in the CAAR. This can be attributed to the fiscal stimulus measures announced by the Govt. at that time.
Cumulative Average Abnormal Returns
0.00% -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 -5.00% -10.00%
-15.00%
-20.00% -25.00% -30.00%
Cumulative Average Abnormal Returns
Event date: 20th Oct 2008
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The sharp decrease in the CAAR in the post event period can be attributed to the fact that the decrease was contradictory to the expectation and the fact that rates were slashed for the first time since March 2004.
Cumulative Average Abnormal Returns
16.00% 14.00%
12.00%
10.00%
8.00%
6.00% 4.00% 2.00% 0.00% -15 -13 -11 -9 -7 -5 -3 -1 1 3 5 7 9 11 13 15
Cumulative Average Abnormal Returns
Event date: 21st April 2009
There was slight volatility in the CAAR around the event date. Contradictory to expectations of probable decrease in repo rate by 50 bps, it was cut by 25 bps only. However, unlike the above two scenarios, CAAR showed an upward trend.
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4.2 Rate Increase
Cumulative Average Abnormal Returns
6.00% 4.00% 2.00% 0.00% -15 -13 -11 -9 -7 -5 -3 -1 -2.00% -4.00% -6.00% -8.00% 1 3 5 7 9 11 13 15
Cumulative Average Abnormal Returns
Event date: 24th Jan 2006
The CAAR started its downward trend from day -9 and continued beyond the event date as well. It was only towards day +14 that the CAAR began increasing towards pre event levels.
Cumulative Average Abnormal Returns
5.00% 4.00% 3.00% 2.00% 1.00% 0.00% -1.00% -2.00% -3.00% -4.00% -15 -12 -9 -6 -3 0 3 6 9 12 15 Cumulative Average Abnormal Returns
-5.00%
Event date: 31 st Jan 2007
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There was a significant drop in CAAR in the post event period, starting from day +5 onwards.
Cumulative Average Abnormal Returns
10.00%
5.00% 0.00% -11 -5.00% -10.00% -15.00% -20.00% -9 -7 -5 -3 -1 1 3 5 7 9 11 Cumulative Average Abnormal Returns
Event date: 25th June 2008
There was a sharp decrease in the CAAR from day -6 onwards beyond the event date. CRR was also hiked by 50 bps. Inflation had reached a 13 year high, this explains the sharp fall in CAAR.
Cumulative Average Abnormal Returns
6.00% 5.00% 4.00%
3.00% 2.00% 1.00% 0.00% -1.00% -2.00% -15 -13 -11 -9 -7 -5 -3 -1 1 3 5 7 9 11 13 15 Cumulative Average Abnormal Returns
Event date: 27th July 2010 19
The economy was in a good state. Here we see that the CAAR fell in the period immediately prior to the event date.
Cumulative Average Abnormal Returns
0.00%
-15 -13 -11 -9 -7 -5 -3 -1 -1.00% -2.00% -3.00% -4.00% Cumulative Average Abnormal Returns 1 3 5 7 9 11 13 15
-5.00%
-6.00% -7.00%
Event date: 25th Jan 2011
There was a sharp fall in the CAAR in the pre event period and it began to rise thereafter. Post event period, the CAAR fell, before rising after day +2. There was speculation that the RBI might increase the repo rates by around 50 bps and this explains the sharp fall in CAAR in the pre event period.
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4.3 Comparison of CAAR of all the events
4.3.1 Rate decrease
20.00% 15.00% 10.00% 5.00% 0.00% -15 -13 -11 -9 -5.00% -10.00% -15.00% -20.00% -25.00% -30.00% -7 -5 -3 -1 1 3 5 7 9 11 13 15
Comparison of CAAR across the 3 rate decrease events
CAAR 21.4.09 CAAR 20.10.08 CAAR 8.12.08
We see that the reaction to the rate decrease has been on the similar lines for the events of 20th Oct. 2008 and 8th Dec. 2008 however the magnitude of decrease has been higher in the case of the former owing to the announcement being contradictory to expectations. However in the case of the event of 21st April 2009, there was an upward trend in the CAAR.
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4.3.2 Rate increase
10.00%
Comparison of CAAR for the 5 rate increase events
5.00%
0.00%
-15 -14 -13 -12 -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
CAAR 31.01.07 CAAR 27.07.10
-5.00%
CAAR 25.06.08 CAAR 25.01.11 CAAR 24.01.06
-10.00%
-15.00%
-20.00%
Here also we see that there is a difference in the magnitude of decrease in the returns across the 5 events.
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4.4 Overall Impact
4.4.1 For Rate Decrease
CUMULATIVE AVERAGE ABNORMAL RETURNS
10.00%
8.00% 6.00% 4.00% 2.00% 0.00% -2.00% -15 -13 -11 -9 -4.00% -6.00% -8.00% -10.00% CUMULATIVE AVERAGE ABNORMAL RETURNS -7 -5 -3 -1 1 3 5 7 9 11 13 15
We can see that the CAAR has fallen in the post event period. This shows that the Indian Stock Markets are not semi-strong-form efficient. The news of rate decrease may not have been factored into the stock prices prior to event announcement.
4.4.2 For Rate Increase
CUMULATIVE AVERAGE ABNORMAL RETURNS
3.00% 2.00% 1.00% 0.00% -1.00% -2.00% -3.00% -4.00% -15 -13 -11 -9 -7 -5 -3 -1 1 3 5 7 9 11 13 15
CUMULATIVE AVERAGE ABNORMAL RETURNS
-5.00%
-6.00%
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Here we see that the CAAR has begun decreasing from the pre event period starting from day -6 and continued beyond the event date upto day +9 before returning to pre event levels. This also shows that the Indian Stock Markets are not semi-strong-form efficient.
4.4.3 Checking for statistical significance of abnormal returns
The standardized average abnormal returns were tested for statistical significance with 90% confidence using the t test. In most cases, the returns were found to be statistically significant around the event date. (Please refer Annexure – 2 for detailed statistical results)
4.5 Key observations
? We see that both rate decrease and rate increase are seen negatively by the market with a reduction in the CAAR around the event date. However, the rebound to pre event levels is faster in the case of rate decrease than rate increase. ? There is no major difference in the trend of CAAR in those cases where reverse repo rate has also been adjusted in addition to adjustment in the repo rate. ? However, in the case where CRR was adjusted in addition to the repo rate, there is a significant drop in the CAAR. (See event date 25/06/2008) ? In the scenario when the RBI announced a rate adjustment which was not in line with the market expectations, the banking stocks reacted severely with a sharp fall in CAAR (See event date 20/10/2008) ? The reaction of banking stocks to interest rate adjustments is irrespective of the condition of the economy. This could be due to the short time frame used for analysis.
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Chapter 5 Conclusion and Suggestions
This study tested the effects of three repo rate decrease announcements and five repo rate increase announcements announced by the RBI since the year 2006 on stock price performance as measured by the 14 stocks comprising the BANKEX. The impact of the announcements, either decrease or increase in the rates has not been consistent and we can see vast fluctuations between the various events. This can be attributed to the various Macroeconomic & Global factors which the study has not been able to capture. The various factors like Recession in the economy, Inflation scenario, Global Crude oil prices, War-like conditions in various nations etc, has led to the varying magnitude of impact of the announcements. Hence the difference in stocks / Indices behaviour is seen on various dates when the Rate increase was announced and similarly during the dates when Rate decrease was announced. Appropriate statistical tests for significance were conducted. Results show a significant negative market reaction prior to and post the announcement of both increases and decreases in the repo rate. Moreover, the Indian Markets do not exhibit semi-strong-form efficiency.
5.1 Investment Decisions
From the above analysis, we clearly see that there is volatility in the stock market prior & post announcement of adjustment of interest rates by RBI. We could also see that BANKEX stocks react negatively to both interest rate increase & decrease. This could be a good investment opportunity for those traders & big investors, looking for a short term gain. Timing is very important in these events; small retail investors may not benefit much from these events. We could see 15 days before the event the CAAR begins to decrease, it’s time to sell off your holdings in banking stocks, in case you have any. Buy it back, at lower price within -15 days to day 0 period and sell off 4 - 5 days post announcement. For illustration purposes, we could look at the YES bank stock for the event 27th July 2010. Around 30th June, one could see YES bank stock price moving around 280. As the event date comes closer, 15 days prior to the event date on 5th July, the stock price decreased to 268. Post event, the stock price rose till 327-342 range. The return earned is Rs 59 taking 327 as selling price; average return of 20-22% in two months. This trend could be seen in all stocks. But the most important part is timing.
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2010)
Yes Bank Bank of Baroda Bank of India Canara Bank IDBI bank Federal Bank IndusInd Kotak bank Union Bank PNB SBI Axis HDFC ICICI 268 327 59 75 75 35 4.05 32 12 776 439 491 122 348 219 412 33 701 364 456 117.95 316 207 379 312 1046 2272 1238 1912 841 339 1117 2646 1358 2136 980 27 71 374 120 224 139
Bank
Pre annoncement period share price (min)
Post Announcement Period share price (max)
The table below illustrates how the same strategy if followed for other stocks as well would
Profit
yield similar profits. (Note: This illustration is for the rate increase announced on 27 th July
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References
1. Abraham, S.E. Layoff announcements and employment guarantee announcements: How do shareholders respond? 2. Asiri, B. (2008). Testing weak form efficiency in the Bahrain Stock Market, International Journal of Emerging Markets, 3, 38 – 53. 3. Bacon, F.W. & McMillan, C.E. (2007). Federal Funds Rate Changes : A Test of Market Efficiency, Management Review, An International Journal, II, 2. 4. Donor, A.W. Stock Market reaction to financial information 5. Gupta, R. & Basu, P.K. (2007). Weak form efficiency in Indian Stock Markets, 6. 6. Gurcharan, S., & Salony, K. (2010). Impact of Union Budgets on Indian Stock Market - A Case Study of NSE, Asia Pacific Journal of Social Sciences, II,1, 148-160. 7. Hyde, S. The response of industry stock returns to market, exchange rate and interest rate risks, Managerial Finance, 33, 693 – 709. 8. Lyroudi,K. & Dasilas,A. The valuation effects of stock splits in NASDAQ 9. MacKinlay, A.C. (1997). Event Studies in Economics and Finance, Journal of Economic Literature, XXXV, 13 – 39. 10. Malkiel, B.G. (2003). The Efficient Market Hypothesis and its critics. 11. Mishra, P.K., Das, K.B. & Pradhan, B.B. (2009). Empirical Evidence on Indian Stock Market Efficiency in context of the global financial crisis, Global Journal of Finnace and Management, 1, 149 – 157. 12. Padhan, P.C. The nexus between stock market and economic activity: an empirical analysis for India 13. Raja, M. & Sudhakar, J.C. (2009). Testing the semi strong form efficiency of Indian Stock Market with respect to information content of stock split announcement – A study in IT industry, International Research Journal of Finance and Economics. 14. Raja, M. & Sudhakar, J.C. (2010). An empirical test of Indian Stock Market Efficiency in respect of bonus announcement, 4. 15. Solibakke, P.B. (2002). Calculating Abnormal Returns in Event Studies: Controlling for Non synchronous trading and volatility clustering in thinly traded markets. 16. Tripathy, N. & Badani, K.N.(2009).Behaviour of Indian Stock Market – Evidence and Explanation. Journal of International Finance and Economics.
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17. Vaidyanathan, R. & Gali, K.K. (1994). Efficiency of the Indian Capital Market. Indian Journal of Finance & Research, V. 18. www.bseindia.com 19. www.rbi.org.in 20. www.allbankingsolutions.com/Chronology-Repo-Rate-India.html
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S.No.
Event date
Event details
Expectation * Economic Condition Other Comments
Reverse Repo/CRR also adjusted?
1
Repo rate was 24-01-2006 increased from 6.25% to 6.5% In Line with expectations
Reverse repo rate was also increased by 25 bps to 5.5%
The economy was facing liquidity pressures arising out of government and private sector borrowings.
The Reserve Bank on Tuesday said it is moving away from the blunt instruments like cash reserve ratio (CRR) to sophisticated and indirect tools like repo rates to manage liquidity in the system.
Annexures
2
Repo rate was 31-01-2007 increased from 7.25% to 7.5% In Line with expectations
Reverse Repo Rate, Bank Rate and Cash Reserve Ratio (CRR) kept unchanged.
S&P raised India's sovereign local currency credit ratings to investment grade with a Impact of monetary policy expected stable outlook, citing to be stronger than before as a strong economic result of tightening of liquidity prospects and an improving fiscal situation.
Annexure 1 : Event details
3
Repo rate was 25-06-2008 increased from 8% to 8.5% In Line with expectations
CRR was hiked by 50 basis points to 8.75% in two stages.The CRR was hiked to 8.5% with effect from the fortnight beginning July 5, 2008, while it was further raised to 8.75% from the fortnight beginning July 19, 2008.
Inf ati l on had touched a 13- year hi gh of 11.05% when governm ent rel eased f gures i prom pti ng seri ous conf abul ati ons between the governm ent and the central bank on how best to tackl e the pri ce si tuati on and tem per i nf ati l onary expectati ons.
Equi es extended l ti osses f or the f f i th strai ght day on 24 June 2008 wi th the barom eter i ndex BSE Sensex f l ng bel al i ow the psychol ogi cal y l i m portant 14,000 m ark f or the f rst i ti m e i n 10 m onths si nce l ate August 2007. The 30- share BSE Sensex was down 186.74 poi nts or 1.31% at 14,106.58. The broader based S&P CNX Ni ty sl f um ped 75.30 poi nts or 1.76% at 4,191.10.
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Repo rate 20-10-2008 reduced from 9% to 8% No
It was expected that there would not be any change made to interest rates Economy was facing credit crunch due to the impact of poor global conditions and FIIs were pulling out of the Indian Markets.
The rate were slashed for the first time since March 2004. The objective was to kick start growth which has turned sluggish. Since October 6 2008, RBI had cut CRR by 2.50 percentage points to inject Rs 100,000 crore into the cashstrapped system. Besides, it also released Rs 25,000 crore for banks, RRBs and cooperative lending institutions as the first instalment against their outgo on the farm debt waiver scheme.
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Repo rate 08-12-2008 reduced from 7.5% to 6.5% In Line with expectations
Reverse Repo was also reduced by 100 bps i.e from 6% to 5% Poor after several months. CRR was left unchanged at 5.5%
A few days after the rate decrease, the Govt. announced a fiscal stimulus measure to infuse Rs. 11,000 crore in Small Industries Development Bank of India and National Housing Bank
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Repo rate was 21-04-2009 reduced from 5% to 4.75%
It was expected that the Repo rate would be cut by 50 bps and no change in reverse repo rate. Reverse Repo rate was reduced Poor by 25 bps to 3.25%
RBI reduced the economic growth forecast to 6% as against 6.5 - 6.7% estimated for 2008 - 2009. But the good news was that inflation was projected to remain around 3% in the medium term and 4% by the end of March 2010.
7
Repo rate was 27-07-2010 increased from 5.5% to 5.75%
It was expected that both repo rate & reverse repo rate will be raised by 25 bps Reverse repo rate was unexpectedly raised by 50 bps points. CRR left unchanged
Good
Economic growth to continue at 8.5 but inflation more than expected. Inflation was rising above 10 percent where as the target was 5.5% to 6 %
8
Repo rate was 25-01-2011 increased from 6.25% to 6.5%
It was expected that RBI would increase repo rate, reverse repo rate by 25 bps and an increase in CRR as well
Repo rate & reverse repo rate was increased by 25bps but no increase in CRR
Good
RBI reduced the economic growth to 8% for FY11 & inflation to continue its trend. It raised target inflation rate from 5.5 % to 7% considering rising international commodity prices & food prices in india
29
* - whether the rate adjustment was inline with expectations or not
Annexure 2 : Statistical Results
The standardized values of average abnormal returns are tested for statistical significance at the 90% confidence level using the t test. The following hypothesis is tested: H0: The average abnormal returns are not significantly different from zero H1: The average abnormal returns are significantly different from zero t critical value (0.05,13) = 2.16 If the standardized average abnormal returns are greater than the t value, then reject H0, else do not reject H0. We have also found out the corresponding p values for each of the t values. For 90% confidence, if the p value so obtained is greater than 0.1, then do not reject H0, else reject H0.
30
Event: Rate decrease 8/12/2008
DATE 1.41% -4.84% 0.20% 1.30% -0.72% -6.48% -2.47% 4.15% -2.00% 2.08% -2.06% 2.31% 5.72% -5.90% -0.78% -3.77% -4.98% -0.31% -0.97% -0.73% 0.14% 2.30% 4.21% 5.83% 3.69% -0.07% 0.06% 2.06% -0.52% -1.19% -2.36% 2.13% 1.72% 0.44% 2.15% -1.94% -5.93% -1.23% 2.79% -2.22% -0.37% 1.74% -1.10% 2.87% -1.84% -0.97% -1.70% -2.20% 1.77% 0.04% 1.93% -1.00% 2.83% -2.00% 1.20% 8.47% 1.66% 2.47% 0.17% -0.03% 1.60% -0.84% 2.05% -6.66% 2.36% -1.33% -3.31% -1.91% -2.85% 2.93% 4.38% 0.60% 0.71% -0.37% -0.56% -2.60% 0.47% -1.45% -2.98% -0.77% -0.26% 1.04% 2.42% 4.65% 1.67% -1.15% -1.20% -1.31% 1.93% 1.32% 0.66% -0.66% -1.30% 3.84% 0.01% 4.43% -2.73% 5.77% -7.39% -4.71% 4.20% -4.54% -4.33% -0.29% 1.07% 2.22% -1.38% 2.19% -2.43% -3.12% 3.56% 3.78% -1.61% 2.03% -3.84% 1.46% 3.58% 0.44% -3.55% 4.05% 0.28% 3.06% 0.71% -1.54%
DAY
ICICI
AXIS Bank
Bank of Baroda
Bank of India
Canara Bank
Federal Bank
IndusInd HDFC Bank IDBI Bank Bank
14-Nov-08 17-Nov-08 18-Nov-08 19-Nov-08 20-Nov-08 21-Nov-08 24-Nov-08 25-Nov-08 26-Nov-08 28-Nov-08 01-Dec-08 02-Dec-08 03-Dec-08 04-Dec-08 05-Dec-08 08-Dec-08 10-Dec-08 11-Dec-08 12-Dec-08 15-Dec-08 16-Dec-08 17-Dec-08 18-Dec-08 19-Dec-08 22-Dec-08 23-Dec-08 24-Dec-08 26-Dec-08 29-Dec-08 30-Dec-08 31-Dec-08
-15 -14 -13 -12 -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
1.85% -0.74% -1.22% -0.92% -2.48% -3.17% -3.62% 2.62% 4.08% -0.75% -3.13% 0.99% 3.36% 0.81% 2.63% 0.03% 0.41% 1.78% 0.66% -0.38% -1.34% 6.28% 3.82% -0.15% -2.98% -0.75% 5.09% -1.48% 3.22% 0.32% -1.04%
-3.93% -6.71% 0.77% -0.04% -0.37% -5.80% -3.37% -1.05% 1.02% -0.61% 4.99% 5.17% 0.74% -2.08% 0.93% -1.05% -4.55% -1.09% 1.78% 1.52% 1.12% 2.60% 3.31% 0.96% 0.46% -4.05% -0.48% 1.60% -0.23% 0.56% -0.33%
-0.59% -1.14% 1.10% 1.68% 2.05% -2.68% -4.69% -2.75% 0.65% 0.76% -2.02% 0.20% 1.83% -4.42% 1.02% -0.29% -7.05% 0.94% 1.11% -0.01% 0.14% 2.20% 0.17% -0.42% 2.24% -3.45% 4.15% 0.31% -0.97% 1.01% 2.60%
3.05% -5.38% 0.98% 1.76% 1.77% -3.90% -5.07% 0.95% -1.03% 2.43% -0.72% 1.40% 0.98% -4.35% 1.45% -1.94% -5.34% 4.80% 1.97% -2.19% 0.88% 2.14% 0.48% 0.75% 4.03% -2.10% 1.90% 0.81% 0.50% -0.51% -1.33%
Cumulative Standardized Union Bank Average Kotak PNB SBI Yes Bank Average Abnormal Returns SD of Abnormal returns Average Abnormal p value of India Abnormal Returns Returns 1.70% -0.02% 2.85% 1.21% 3.07% 1.24% 1.42% 1.95% 2.724 0.017 1.42% 1.76% -8.13% 0.32% 0.90% -5.44% -3.24% -2.68% 3.46% -2.900 0.012 -1.27% -2.40% -4.34% 0.59% -1.11% 5.20% -0.28% 0.48% 2.48% 0.726 0.481 -0.79% 0.27% -1.49% 0.15% -0.67% -2.37% -0.90% -0.22% 1.54% -0.542 0.597 -1.01% -2.23% 4.13% -0.06% 5.08% 5.99% -3.72% 0.71% 3.43% 0.776 0.451 -0.30% -5.24% -1.86% -0.63% 2.53% -8.01% -8.35% -4.20% 3.11% -5.049 0.000 -4.50% -1.29% 1.33% -2.70% -2.88% -3.36% 0.67% -2.59% 1.90% -5.090 0.000 -7.09% 2.19% 2.92% 1.48% -4.10% 2.65% 5.53% 1.75% 2.70% 2.429 0.030 -5.34% -9.52% -1.40% -1.13% -1.00% -1.79% -2.85% -1.24% 3.42% -1.354 0.199 -6.58% -2.00% 2.21% -0.69% -2.34% 2.63% -2.23% -0.19% 2.10% -0.333 0.744 -6.76% 0.09% -0.46% -4.73% 0.09% -0.08% -0.75% -0.47% 2.27% -0.779 0.450 -7.24% -1.72% 4.20% 0.07% -0.29% 0.90% -1.56% 0.81% 2.01% 1.504 0.156 -6.43% 0.14% 0.24% 4.47% 5.41% -0.17% 1.27% 2.04% 2.06% 3.700 0.003 -4.39% -0.24% -0.08% -0.98% 0.77% -3.99% 3.86% -1.60% 2.58% -2.319 0.037 -5.99% 6.93% 5.47% 1.71% 0.14% 2.47% 5.71% 2.10% 2.41% 3.258 0.006 -3.90% -5.26% -5.27% -1.53% 0.58% -5.08% 0.96% -2.01% 2.11% -3.566 0.003 -5.91% -9.29% -4.85% -5.41% -3.84% -6.36% -0.66% -4.30% 2.53% -6.366 0.000 -10.21% 4.36% 4.83% 1.11% 0.86% 0.30% 3.24% 1.81% 2.03% 3.337 0.005 -8.40% 2.65% -2.51% 2.10% 0.90% 1.31% -1.21% 0.81% 1.68% 1.813 0.093 -7.59% 14.26% 1.67% -0.95% -2.38% 0.04% 0.64% 0.92% 4.08% 0.842 0.415 -6.67% -3.23% -2.27% 0.45% 1.26% 3.21% 1.30% 0.37% 1.81% 0.757 0.462 -6.30% -4.33% -2.06% 2.67% -0.22% 3.47% -0.69% 1.28% 3.10% 1.551 0.145 -5.02% 2.02% -0.47% 0.49% 3.98% 1.04% -0.43% 1.41% 1.89% 2.795 0.015 -3.61% -0.48% -1.29% 3.43% -0.86% 0.43% 0.91% 0.91% 2.06% 1.653 0.122 -2.70% 4.18% -2.32% 2.20% 0.76% -0.33% 3.46% 1.65% 3.03% 2.037 0.063 -1.05% 0.41% -3.12% -1.64% 1.75% -1.49% -5.07% -1.63% 2.09% -2.909 0.012 -2.67% -0.58% 6.93% 1.72% 3.06% 2.25% 1.66% 2.44% 2.11% 4.323 0.001 -0.23% 1.84% -0.19% 0.77% -0.64% 1.26% 1.25% 0.67% 1.00% 2.507 0.026 0.44% -1.86% 0.47% 0.31% -0.08% -0.01% 2.13% 0.48% 1.44% 1.237 0.238 0.91% -1.22% -0.04% 1.61% -0.66% -0.82% 0.26% 0.07% 0.95% 0.272 0.790 0.98% 2.85% -0.21% -0.30% 0.70% 0.15% -2.65% -0.40% 1.61% -0.930 0.369 0.58%
31
We see that around the event date (from day -3 to day + 2), the average abnormal returns are significantly different from zero. This we can see from the standardized average abnormal returns which are greater than the t critical value and the p values which are lesser than 0.1.
32
Event: Rate decrease 20/10/2008
DATE -4.59% 1.31% -5.03% -4.75% 2.34% 0.78% -5.35% -0.03% -2.55% -2.04% -0.47% -2.44% -3.01% -9.26% -8.45% 4.84% -5.77% 4.47% 9.36% 1.72% -4.98% -3.80% -3.91% -10.59% -6.04% 2.32% -4.19% -8.82% -1.60% -6.80% -2.92% 4.27% -4.59% -5.60% -9.71% -2.00% 12.03% 14.01% 7.04% 6.88% -3.59% 2.15% 2.41% 4.34% 0.26% -4.09% -4.74% -3.16% -3.89% 4.71% 4.71% -1.02% -5.19% -3.33% -4.68% -8.29% 5.73% -0.48% -3.08% -4.22% -0.11% 1.01% 0.47% 2.87% -3.11% -2.91% 2.80% -4.92% 2.67% -3.03% -2.18% -5.90% -8.11% -10.87% -7.16% -19.97% -3.88% -7.84% -12.00% -0.07% 2.92% 7.08% 6.15% 5.41% -1.98% -5.97% 7.64% 4.25% 7.46% 4.05% 3.66% 2.98% 4.08% 6.20% 3.65% 9.59% 3.48% 7.54% 3.83% 14.06%
DAY
ICICI
Bank of Bank of Canara AXIS Bank Baroda India Bank
Federal IndusInd HDFC Bank IDBI Bank Kotak PNB Bank Bank
06-Oct-08 07-Oct-08 08-Oct-08 10-Oct-08 13-Oct-08 14-Oct-08 15-Oct-08 16-Oct-08 17-Oct-08 20-Oct-08 21-Oct-08 22-Oct-08 23-Oct-08 24-Oct-08 27-Oct-08 28-Oct-08 29-Oct-08 31-Oct-08 03-Nov-08 04-Nov-08
-9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10
-1.90% -0.69% -5.92% -18.69% 16.27% 5.30% -6.46% 0.70% -4.73% 4.98% 4.68% -7.25% -7.10% -13.77% 2.55% 5.71% 3.33% 14.93% 7.61% 6.52%
-3.39% 0.43% -5.23% -14.05% 20.14% -3.53% -3.07% 0.87% -0.43% -0.22% 6.66% -3.91% -1.25% -13.99% 0.75% 5.89% -7.06% 6.70% 7.17% 6.51%
-0.98% -5.30% -2.47% 0.08% 3.83% -0.14% -1.62% -3.88% -5.73% -0.06% -3.20% 4.28% 9.22% 6.48% 2.95% 0.30% 6.02% -1.31% -0.01% -1.65% -0.82% 4.28% 2.59% 4.56% -2.73% -0.10% -4.60% 2.48% 0.89% 5.14% -1.65% -2.92% 1.12% -7.47% -6.31% -3.38% -2.50% -5.02% -0.83% -8.10% -11.12% -10.06% -6.55% -9.43% -5.22% 1.40% 3.74% 3.74% 3.66% 4.48% 3.17% -1.35% 8.33% 4.98% 1.79% 3.04% 1.34% 15.11% 11.78% 6.28%
Cumulative Union Bank Standardized Average Average SBI Yes Bank Average Abnormal Returns SD of Abnormal returns p value of India Abnormal Returns Abnormal Returns 0.35% -2.22% 1.68% -10.42% -3.75% 3.48% -4.034 0.001 -3.75% 1.97% -1.45% 1.84% 0.19% -0.67% 3.48% -0.719 0.485 -4.42% -0.97% -5.45% -1.16% -11.58% -3.83% 3.66% -3.911 0.002 -8.25% -5.10% 3.41% 2.92% -18.75% -5.42% 7.52% -2.697 0.018 -13.67% 8.22% 10.38% 1.67% 9.51% 9.08% 5.29% 6.429 0.000 -4.59% -2.03% 1.83% 0.11% 7.23% 1.43% 3.42% 1.562 0.142 -3.16% 0.02% -1.05% 1.72% -4.52% -2.35% 2.47% -3.557 0.004 -5.51% 2.67% 3.64% 6.66% 2.02% 2.32% 2.79% 3.112 0.008 -3.19% -0.41% -7.44% -3.71% -3.14% -3.67% 2.44% -5.627 0.000 -6.86% 1.24% 1.37% 1.02% 2.93% 1.12% 3.01% 1.396 0.186 -5.73% -0.31% 3.52% -4.05% 0.58% 0.81% 2.89% 1.055 0.311 -4.92% -5.20% -5.70% -6.46% -1.51% -4.13% 2.72% -5.675 0.000 -9.05% 0.76% -4.09% 1.42% -2.13% -2.30% 2.76% -3.120 0.008 -11.35% -10.14% -11.05% -8.93% -10.64% -10.94% 3.25% -12.581 0.000 -22.29% -5.05% -8.10% -0.86% -7.48% -5.12% 4.29% -4.461 0.001 -27.40% 3.78% 5.83% 3.11% 9.31% 4.92% 2.00% 9.226 0.000 -22.48% -2.85% -1.81% 1.08% -5.43% -0.23% 4.76% -0.183 0.858 -22.71% 3.88% 0.01% -4.12% 7.11% 4.51% 4.61% 3.655 0.003 -18.21% 7.29% 11.35% 7.63% 13.28% 6.67% 3.57% 6.998 0.000 -11.54% 7.26% 6.39% 8.46% 7.70% 7.62% 3.80% 7.500 0.000 -3.92%
33
For most of the pre event period, the average abnormal returns are significantly different from zero. In the post event period, from day + 2 onwards, the average abnormal returns are significantly different from zero. This can be attributed to the fact that the rate decrease came as a surprise. Moreover, the rate was slashed for the first time since March 2004. However, on the day of the event, the average abnormal returns are not significantly different from zero.
34
Event: Rate decrease 21/04/2009
DATE 0.44% 3.82% 3.37% -0.95% -2.16% -2.07% -1.76% -0.95% -1.66% 4.36% 3.15% 2.96% -1.07% 1.68% 0.37% -5.06% 1.59% -1.40% 2.09% 0.21% -3.80% -9.96% -8.08% 2.00% -1.85% 0.99% 1.08% 2.06% -1.79% -1.64% 1.36% 0.37% 1.69% 3.70% 2.23% -0.70% -3.14% -2.43% 0.21% -3.87% 3.82% 6.83% 0.62% 2.02% 5.31% -0.96% -2.43% -1.51% -2.41% 1.18% -0.14% -2.89% 4.10% 0.28% 1.10% 6.37% 3.46% -1.71% -2.69% -3.39% 1.76% 2.82% -0.85% -0.98% 9.08% -3.80% 0.20% 2.01% 1.54% 5.21% -2.37% 5.88% 4.32% -2.00% -5.25% 5.52% 4.79% 0.34% -4.60% -0.12% 1.59% 5.33% -3.66% 3.39% -2.43% -3.64% -3.97% -2.54% 1.70% 1.06% 0.19% 5.81% 0.90% 1.37% -1.58% -0.37% -0.41% 0.81% 0.89% -0.94% 0.78% -3.73% -0.67% 3.19% -4.24% 1.14% -0.45% 0.18% 2.48% 0.89% -2.80% -0.28% 0.00% -0.80% -1.03% 1.89% -0.55% -0.04% -1.11% -0.92% 1.66% -0.34% -1.17% 1.26% -0.21% -1.49% 2.91% -0.60% -3.32% 0.32% 2.33% 1.73% 2.22% 1.08% 2.89% 5.04% -1.12% 4.04% -0.62% -0.30% -3.29% -0.15% 11.34% -5.23% -2.62% 1.51% -3.87% 5.36% -2.97% 0.83% -1.75% -3.09% -4.99% 1.56% 1.39% -0.79% 4.42% 1.93% -2.27% 0.41% 0.79% -2.23% 6.47% 1.32% 2.35% 3.79% 1.06% -4.56% 2.26% 6.51% 3.80% -3.58% -0.50% 0.39% -2.76% -1.79% -3.11% 2.40% 6.53% -1.07% 1.74% -0.23% -2.38% -1.74% -2.40% -0.27%
DAY
ICICI
AXIS Bank
Bank of Baroda
Bank of India
Canara Bank
Federal Bank
IndusInd HDFC Bank IDBI Bank Kotak Bank
25-Mar-09 26-Mar-09 27-Mar-09 30-Mar-09 31-Mar-09 01-Apr-09 02-Apr-09 06-Apr-09 08-Apr-09 09-Apr-09 13-Apr-09 15-Apr-09 16-Apr-09 17-Apr-09 20-Apr-09 21-Apr-09 22-Apr-09 23-Apr-09 24-Apr-09 27-Apr-09 28-Apr-09 29-Apr-09 04-May-09 05-May-09 06-May-09 07-May-09 08-May-09 11-May-09 12-May-09 13-May-09 14-May-09
-15 -14 -13 -12 -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
-0.43% -3.33% 2.10% -4.79% -4.04% 1.78% -4.20% 1.02% -2.75% 4.59% 1.97% 2.04% 0.73% 2.31% -2.87% -5.46% 1.40% 1.07% -0.79% 7.47% -1.07% 2.81% 0.43% 7.56% -2.82% -0.77% -2.16% 3.02% 0.13% 0.08% -0.54%
4.09% 1.42% 1.65% -1.74% 2.33% -1.83% -0.65% -3.15% -0.90% -0.65% 1.96% 5.28% -2.87% 6.08% 1.74% -2.34% -3.44% 2.51% 2.89% 4.89% -0.71% -0.06% 1.23% 3.08% -1.83% 1.42% -0.27% 3.75% 2.85% 1.70% -3.40%
-2.45% 1.77% 4.72% -3.72% 0.65% -2.74% 1.84% -3.12% -0.04% 4.45% 4.04% 1.79% 4.55% 1.94% -0.67% -3.67% 2.35% 1.26% 0.78% 2.43% 0.57% 3.15% -5.72% -1.08% -0.91% 2.80% -1.16% 4.42% -2.42% 2.86% -0.10%
Cumulative Standardized Union Bank Average PNB SBI Yes Bank Average Abnormal Returns SD of Abnormal returns Average Abnormal p value of India Abnormal Returns Returns 0.95% 6.69% -0.76% 1.42% 2.58% 0.89% 2.33% 1.427 0.177 0.89% 1.36% 2.48% 0.47% -0.12% 4.37% 1.02% 2.35% 1.627 0.128 1.91% 2.10% 5.28% 2.32% 5.92% 2.50% 3.37% 2.30% 5.480 0.000 5.28% -4.97% -6.05% -4.30% -3.75% -3.32% -2.75% 2.24% -4.591 0.001 2.54% 3.58% 2.10% 2.74% 2.44% -1.89% 0.23% 2.37% 0.356 0.727 2.76% 3.46% -3.24% -1.47% -1.91% 1.05% -0.44% 2.16% -0.755 0.464 2.33% 7.91% 1.88% 1.87% 1.22% -1.84% 0.32% 3.00% 0.404 0.693 2.65% 6.85% 3.11% -3.39% 1.60% -1.66% 1.05% 3.42% 1.149 0.271 3.70% -5.43% -1.84% -2.59% -0.54% 2.47% -1.41% 2.33% -2.259 0.042 2.29% 2.04% 0.65% 0.79% 1.24% 10.32% 2.87% 2.96% 3.630 0.003 5.17% 6.06% -1.92% 5.14% -1.21% 7.71% 3.42% 2.72% 4.715 0.000 8.59% 2.81% 2.64% 3.28% 0.37% 4.14% 1.84% 2.61% 2.645 0.020 10.43% -3.17% 4.57% 0.40% -0.62% -4.40% -0.69% 3.16% -0.816 0.429 9.74% 0.15% 0.73% 2.73% 1.93% 2.67% 2.64% 1.98% 4.990 0.000 12.38% 0.30% -1.13% -0.47% 1.48% 5.60% 1.02% 2.76% 1.378 0.191 13.40% -2.35% -3.68% -2.45% -2.56% 9.26% -1.03% 3.96% -0.972 0.349 12.37% -3.15% 1.51% -1.13% 2.34% -2.88% -0.96% 2.54% -1.419 0.179 11.41% 2.05% 2.13% -0.45% -0.92% -7.79% -0.54% 2.65% -0.757 0.462 10.87% -0.44% 3.69% 1.43% -0.23% 1.80% 1.82% 3.03% 2.241 0.043 12.69% -1.22% 0.54% -2.44% 0.27% 2.81% 0.87% 3.44% 0.944 0.362 13.56% -3.42% -7.01% 0.00% -2.00% -2.29% -2.25% 1.92% -4.376 0.001 11.31% 1.22% -2.14% -0.85% -3.12% 0.22% -0.28% 3.66% -0.284 0.781 11.03% 2.22% -0.19% 0.17% 0.22% -0.26% -0.84% 3.11% -1.007 0.333 10.19% 7.01% 0.02% -1.71% 0.87% 1.40% 2.00% 3.47% 2.150 0.051 12.19% -4.53% 1.40% -0.04% -1.35% -3.15% -1.20% 2.72% -1.648 0.123 10.99% 1.83% 2.24% 1.76% -7.10% 3.09% 0.62% 2.79% 0.830 0.421 11.61% 1.39% 2.28% -1.09% 1.75% -1.28% -0.17% 1.51% -0.422 0.680 11.44% 3.48% -0.29% -3.25% -0.55% -1.95% 0.37% 2.75% 0.510 0.619 11.81% 4.37% 2.37% -1.56% 1.13% -1.91% -0.51% 2.56% -0.742 0.471 11.31% 1.74% 2.53% -1.47% 2.90% 12.17% 1.89% 3.70% 1.907 0.079 13.19% 4.54% 1.70% 1.63% 4.89% 9.56% 1.84% 3.04% 2.263 0.041 15.03%
35
The average abnormal returns are significantly different from zero for a few days in the pre event period nearing the event date. However in the post event period, barring three days, the average abnormal returns are not significantly different from zero. So we can say that in this case the market has factored in the information of rate decrease into the stock prices before the actual rate announcement.
36
Event: Rate increase 24/01/2006
DATE
DATA NOT AVAILABLE FOR FULL ESTIMATION WINDOW. DATA AVAILABLE ONLY FROM 12 JULY 2005
DAY 0.53% -0.61% 3.26% 1.96% -0.61% 0.19% -0.53% 1.04% -3.07% 0.55% -1.87% 0.90% -2.64% -0.62% 0.94% -1.44% 3.03% 1.68% -0.33% -4.26% -3.29% -2.16% 2.29% -3.89% -1.16% 2.50% -0.76% 0.29% -0.25% -1.80% -0.15% 7.49% 1.08% 0.31% -0.49% -0.35% -0.73% -0.27% -0.04% 1.71% 2.09% 0.69% 2.27% 1.100 -1.57% -1.65% 2.91% 7.40% -3.23% -0.85% 2.43% 0.30% -0.42% -1.31% -3.14% -1.13% -0.61% -0.85% 4.01% -2.19% -6.01% 4.28% -2.67% -0.88% -2.62% -2.21% -1.59% -2.07% 4.92% -0.38% 3.76% 0.18% 2.83% -5.01% -0.73% -0.70% 1.49% 1.37% -2.04% -1.01% -0.12% 1.94% -0.28% -1.49% -2.63% 1.51% -2.13% -1.36% 4.35% -0.98% -4.54% 6.29% -0.10% 2.00% -3.21% -1.28% 1.02% -3.01% -0.16% 2.31% 9.32% 7.81% -3.10% -0.76% -0.72% 0.08% -1.10% 3.31% -1.92% 0.17% -0.55% -0.80% -1.03% -0.51% 2.25% 2.50% -0.01% 2.66% -2.77% -1.76% -4.71% 2.57% -2.12% -0.73% -1.04% -0.48% -0.43% -2.12% -0.50% 0.97% 1.65% 0.53% -0.53% -1.37% 1.44% 1.45% 0.96% 5.17% -0.86% -1.41% 1.08% 0.74% 0.00% -2.56% -3.99% -0.74% 0.80% 0.90% -0.15% -2.83% -3.08% -0.76% -4.47% -0.99% -1.05% -2.38% 0.75% -2.79% 2.73% 0.15% -0.02% -1.95% 1.63% 1.49% 1.70% 1.33% -4.35% 2.61% -1.93% -0.16% 1.34% 0.62% -1.32% -0.18% -4.57% 0.75% -1.09% -0.10% -0.87% -0.34% -5.15% 1.00% -1.67% -0.71% -1.11% -2.60% 6.25% -3.69% 0.03% -1.56% 1.21% 1.90% 0.59% -1.26% 0.49% 3.77% 0.54% 2.93% -2.25% 1.95% -0.46% -2.57% -0.85% -1.42% -0.41% -0.94% 0.04% 6.00% -0.79% -1.15% -3.13% 4.14% 0.16% -3.12% 0.42% -2.65% 2.61% 5.11% 4.13% -2.56% -4.55% 0.40% -1.03% -0.45% 1.50% -1.54% 1.02% 2.55% -1.10% -0.94% 0.21% -0.07% -0.55% -0.47% -0.21% -1.12% -2.43% -0.76% -0.10% 0.60% -2.72% 1.86% -1.55% 1.20% -2.17% 0.48% 0.65% -3.75% -1.23% 0.40% 0.49% -0.30% -0.17% -1.61% -0.20% -1.14% -0.62% 2.85% -0.42% -0.80% -0.12% 3.23% -0.94% 0.18% -1.31% -0.63% -0.98% -1.13% 0.12% -1.08% -3.45% 0.96% -3.05% -0.48% -1.28% -0.38% 0.25% -1.96% 0.09% 0.76% -0.72% -0.28% -0.75% -0.50% 0.88% -1.35% 1.83% 1.05% 3.66% -0.87% -0.01% 0.16% -1.69% 1.56% 1.21% -0.95% -3.04% -1.07% -0.30% -1.26% -0.83% 0.82% 1.10% 2.02% -2.80% -0.18% 0.44% -0.35% 2.82% -0.92% -0.75% -2.59% 0.74% -0.67%
ICICI
AXIS Bank PNB SBI
Bank of Baroda
Bank of India
Canara Bank
Federal IndusInd IDBI Bank Kotak Bank Bank
HDFC Bank
Union Bank of India
02-Jan-06 03-Jan-06 04-Jan-06 05-Jan-06 06-Jan-06 09-Jan-06 10-Jan-06 12-Jan-06 13-Jan-06 16-Jan-06 17-Jan-06 18-Jan-06 19-Jan-06 20-Jan-06 23-Jan-06 24-Jan-06 25-Jan-06 27-Jan-06 30-Jan-06 31-Jan-06 01-Feb-06 02-Feb-06 03-Feb-06 06-Feb-06 07-Feb-06 08-Feb-06 10-Feb-06 13-Feb-06 14-Feb-06 15-Feb-06
-15 -14 -13 -12 -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
0.53% -0.61% 3.26% 1.96% -0.61% 0.19% -0.53% 1.04% -3.07% 0.55% -1.87% 0.90% -2.64% -0.62% 0.94% -1.44% 3.03% 1.68% -0.33% -4.26% -3.29% -2.16% 2.29% -3.89% -1.16% 2.50% -0.76% 0.29% -0.25% -1.80%
0.75% -0.88% 1.22% 2.99% 2.91% 2.50% -0.90% 0.79% 1.22% 2.38% 0.21% -0.15% 0.34% 2.10% 9.67% -8.05% -5.73% 0.91% 0.27% 0.51% 0.33% 0.68% -2.04% -0.12% 3.06% -3.18% 1.67% 0.90% 3.61% -2.36%
Standardized Cumulative Average SD of Average Average Yes Bank Abnormal Abnormal p value Abnormal Abnormal Returns returns Returns Returns -1.26% 1.07% 0.26% 0.26% 0.868 0.401 -0.67% -0.19% 1.54% -0.454 0.657 0.06% 3.35% 1.06% 2.16% 1.765 0.101 1.12% 7.28% 3.34% 2.04% 5.905 0.000 4.46% -0.17% -0.66% 1.96% -1.210 0.248 3.80% -1.84% -0.22% 1.26% -0.636 0.536 3.58% 0.31% 0.17% 0.94% 0.637 0.535 3.75% 1.11% 0.58% 1.36% 1.534 0.149 4.33% -1.40% -1.03% 1.17% -3.185 0.007 3.30% -1.66% -0.34% 1.39% -0.878 0.396 2.96% -1.94% -1.41% 1.98% -2.557 0.024 1.55% -0.43% 0.04% 1.16% 0.110 0.914 1.59% -1.26% -1.21% 1.28% -3.393 0.005 0.38% -1.72% 0.26% 2.17% 0.436 0.670 0.65% 1.19% 1.25% 3.17% 1.421 0.179 1.90% 1.10% -1.60% 2.20% -2.625 0.021 0.29% -5.26% -2.96% 3.02% -3.540 0.004 -2.67% 1.86% 2.10% 1.85% 4.098 0.001 -0.57% -0.92% -1.21% 1.57% -2.770 0.016 -1.78% 0.06% -0.74% 2.08% -1.291 0.219 -2.52% -2.27% -1.80% 1.28% -5.050 0.000 -4.32% 0.71% -1.12% 1.31% -3.104 0.008 -5.44% 1.43% 1.07% 2.10% 1.841 0.089 -4.37% -4.22% -2.06% 2.52% -2.938 0.012 -6.43% 1.52% 1.16% 2.15% 1.948 0.073 -5.27% 0.08% 0.08% 1.82% 0.162 0.874 -5.19% 1.17% 0.90% 3.19% 1.019 0.327 -4.29% -5.65% 0.12% 3.01% 0.141 0.890 -4.17% 1.75% 0.39% 1.77% 0.794 0.441 -3.78% -0.97% -1.31% 1.46% -3.252 0.006 -5.09% 0.291 -4.40%
16-Feb-06
15
-0.15%
-1.51%
37
In the pre event period, barring four days, the average abnormal returns are not significantly different from zero. However, in the post event period, the average abnormal returns are significantly different from zero upto day +8 barring day +4 and +7. This shows that the event has had a substantial impact on the stock prices and also shows that the market does not exhibit semi strong form efficiency.
38
Event: Rate increase 31/01/2007
DATE -0.02% -3.08% 0.19% -1.95% 3.73% -0.98% -0.03% -0.22% -0.92% -0.33% -0.92% 1.84% 4.24% 2.90% -2.67% 1.75% 1.06% -3.46% -1.08% 0.64% -0.89% -2.56% -0.63% 0.96% 0.21% -2.49% 0.22% -2.34% 0.28% 0.24% -3.02% -0.21% -3.66% 1.27% -1.06% 3.22% -2.32% -0.49% 0.02% 0.72% -0.77% 0.26% -2.51% -0.53% -2.02% -0.34% -0.48% 1.21% -2.25% -1.40% -0.56% -1.33% 0.16% -2.22% -1.13% 0.00% -3.78% 1.74% -0.13% 0.12% -1.32% -2.63% 3.53% -2.60% -3.83% -4.12% 2.01% -0.90% -0.78% 0.57% -0.68% -2.50% -0.26% -3.72% 0.61% -2.24% -0.62% -1.01% -0.34% -3.32% -0.34% 0.55% -0.43% -1.37% -1.65% -1.11% -0.22% -4.25% 0.31% 0.70% 0.09% -0.54% 0.35% 3.55% 0.83% 1.95% 3.04% 4.34% 1.18% 0.22% 2.70% -1.30% -1.51% -2.67% 1.70% -1.65% 0.86% -1.21% -0.79% -0.09% 4.28% -0.23% 0.30% -2.67% -0.04% -2.82% -2.92% 4.80% -2.49% -4.08% 1.40% -0.54% -1.41% 0.53% 1.80% -0.58% 5.11% 9.00% -4.21% 3.55% 4.66% 1.94% 2.10% 0.55% -3.96% -1.64% 1.45% 1.77% 8.79% -0.07% -1.36% -1.77% 6.11% 0.52% -2.85% 1.14% -7.41% -7.90% 3.39% 4.64% 3.58% -2.71% -0.30% 1.41% -0.99% 2.61% -1.84% 1.08% 2.23% -0.48% -0.91% 1.26% 2.97% -0.94% -0.63% -2.51% -1.46% 1.44% -0.58% -3.12% 1.28% -0.11% -1.28% -1.49% 1.72% 12.30% -1.90% -5.61% -3.75% -4.24% 2.89% 2.99% -2.06% -0.94% -0.30% 4.93% 2.54% -1.76% 1.09% -0.65% -1.04% 0.11% -0.58% 1.55% -1.65% 4.68% 7.62% -2.98% 1.35% -0.58% -0.19% -0.76% -1.93% 4.15% 2.40% 0.75% -0.99% 0.24% -0.87% -4.30% 1.20% 1.44% -1.95% 0.97% -2.45% -0.28% -2.85% 1.27% -2.27% -0.12% -2.24% 3.41% 0.29% -0.17% 1.13% -0.21% -1.27% 1.47% -1.05% -1.01% -0.09% -1.76% 1.38% 2.67% -2.66% 0.20% 0.16% -1.76% -0.36% -1.45% -0.22% -0.98% -4.17% -1.40% 0.20% 1.11% 0.15% -2.78% -1.41% -2.72% -2.09% -0.41% 3.97% -0.55% -1.00% 0.99% 0.22% -0.67% 0.05% -3.24% -0.49% -0.72% -1.39% -0.89% 4.73% -2.57% 0.68% 0.08% -0.83% 0.58% -0.02% 0.47% -0.27% -5.69% 0.08% 0.39% -1.40% 0.32% -1.55%
DAY
ICICI
AXIS Bank PNB SBI
Bank of Bank of Canara Baroda India Bank
Federal IndusInd IDBI Bank Kotak Bank Bank
HDFC Bank
08-Jan-07 09-Jan-07 10-Jan-07 11-Jan-07 12-Jan-07 15-Jan-07 16-Jan-07 17-Jan-07 18-Jan-07 19-Jan-07 22-Jan-07 23-Jan-07 24-Jan-07 25-Jan-07 29-Jan-07 31-Jan-07 01-Feb-07 02-Feb-07 05-Feb-07 06-Feb-07 07-Feb-07 08-Feb-07 09-Feb-07 12-Feb-07 13-Feb-07 14-Feb-07 15-Feb-07 19-Feb-07 20-Feb-07 21-Feb-07 22-Feb-07
-15 -14 -13 -12 -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
0.72% 1.19% -2.06% -0.48% 5.77% -1.79% 0.24% 2.54% -2.00% 1.56% -1.07% -0.31% 0.55% -0.06% -2.64% -0.94% 0.12% -1.69% -0.49% 1.27% 1.58% 1.46% 0.01% -0.79% -0.59% -3.67% 1.50% 2.76% -0.35% 0.76% -1.37%
0.37% 0.35% 0.16% 2.31% 1.12% 6.46% 3.34% -0.97% -0.73% -1.90% 1.65% -5.64% -0.55% 0.00% -1.67% 6.64% 0.40% 7.46% -4.56% -2.82% -0.20% 1.93% 2.34% -1.51% -5.82% 0.69% 2.88% 0.04% -2.20% 0.88% -1.91%
Standardized Cumulative Union Average SD of Average Average Bank of Yes Bank Abnormal Abnormal p value Abnormal Abnormal India Returns returns Returns Returns -1.36% 2.37% 0.57% 1.17% 0.0157 2.775 0.016 1.17% -1.00% -1.67% -0.04% -1.35% 0.0145 -3.463 0.004 -0.18% -0.22% 2.54% -0.55% 0.32% 0.0211 0.572 0.577 0.14% -1.66% -5.35% -0.45% -0.13% 0.0338 -0.141 0.890 0.01% 3.86% 0.37% 1.28% 1.95% 0.0256 2.862 0.013 1.97% 2.21% -0.71% 8.69% 1.02% 0.0309 1.241 0.236 2.99% 0.40% -0.85% 4.28% 0.75% 0.0185 1.515 0.154 3.74% -3.41% -0.32% -1.67% 0.56% 0.0174 1.202 0.251 4.30% -0.17% -1.11% -2.61% -0.66% 0.0114 -2.175 0.049 3.64% 0.25% -0.59% 2.26% -0.06% 0.0180 -0.131 0.898 3.58% -1.09% -0.69% -2.23% -0.31% 0.0267 -0.436 0.670 3.27% -1.50% -0.21% 0.14% -1.47% 0.0199 -2.758 0.016 1.80% 2.04% -1.09% -1.30% 0.36% 0.0157 0.863 0.404 2.16% 0.02% -3.63% -0.04% -0.31% 0.0157 -0.752 0.466 1.85% -0.53% 0.69% -0.29% -0.50% 0.0278 -0.668 0.516 1.35% 2.45% 0.15% -2.47% 0.45% 0.0214 0.781 0.449 1.80% 1.18% 0.30% -0.47% 0.53% 0.0160 1.229 0.241 2.32% -0.55% -2.05% -0.91% -0.47% 0.0319 -0.554 0.589 1.85% -1.02% -0.71% -0.56% -0.18% 0.0226 -0.294 0.774 1.67% -1.06% 0.39% 1.12% 0.22% 0.0108 0.756 0.463 1.89% 0.15% -1.42% 3.94% 0.33% 0.0371 0.333 0.745 2.22% -0.08% -0.68% -4.04% -0.40% 0.0157 -0.946 0.361 1.82% 1.39% 0.95% -1.41% -1.39% 0.0252 -2.061 0.060 0.44% 0.29% -1.37% -1.71% -1.79% 0.0224 -2.980 0.011 -1.35% -1.42% 4.55% -2.84% -0.16% 0.0293 -0.205 0.841 -1.51% -4.75% -3.44% 4.75% -1.45% 0.0346 -1.568 0.141 -2.96% 0.46% 0.90% -0.26% 0.50% 0.0199 0.935 0.367 -2.46% -1.19% -0.53% 0.90% -0.11% 0.0148 -0.288 0.778 -2.58% 0.31% 1.06% -1.48% -0.48% 0.0106 -1.684 0.116 -3.05% -1.03% -1.74% 5.35% 0.18% 0.0169 0.394 0.700 -2.88% -1.69% -2.47% -1.93% -1.24% 0.0201 -2.311 0.038 -4.12%
39
The average abnormal returns are significantly different from zero for 5 days in the pre event period. In the post event period, the AAR is significantly different from zero for only 2 days. This shows that this interest rate announcement has not had a significant impact on the BANKEX or the information of rate increase has already been factored into the stock prices.
40
Event: Rate increase 25/06/2008
DATE -1.02% 4.74% 0.11% -0.44% 0.42% 4.94% -2.02% -4.63% -6.60% -8.85% -3.79% 8.49% 3.21% -7.38% -3.30% -7.92% 11.00% 1.61% 1.54% 2.55% 0.64% 4.49% 0.59% -6.61% 0.57% 2.08% 1.45% 0.28% 4.49% -0.98% 0.04% -2.69% -4.24% -0.80% -3.82% 1.96% -0.10% 0.47% 0.25% -0.27% -1.31% -4.68% -0.26% 0.14% -1.58% 0.65% -4.79% -0.38% -0.96% 2.14% 2.10% 3.86% 3.92% -3.14% -3.27% -5.59% -2.95% -0.45% 5.16% -2.13% -0.59% -0.43% 3.87% -1.29% -0.25% -3.65% -1.88% 3.51% -1.94% -4.11% 3.73% -2.12% -3.44% 1.76% 3.87% -2.81% -3.16% -0.61% 0.45% -2.91% 0.78% -2.21% -2.07% -0.70% -2.19% 3.17% -1.96% 0.29% 0.25% -0.06% 3.58% -0.43% 1.05% 0.02% 2.77% -1.90% 0.07% 5.44% -0.85% -2.03% -3.39% -3.31% -2.67% 0.75% -1.90% -2.41% -3.88% -5.26% 3.35% 0.63% 3.67% 2.16% -0.17% 3.80% -1.34% 3.77% -1.39% 2.31% 5.60% -4.29% 2.28% -2.74% -2.07% -3.19% -4.43% -3.47% -3.73% -2.72% -6.95% -1.54% -0.80% 1.99% -3.84% -0.13% -4.08% 0.37% 2.18% 8.88%
DAY
ICICI
Bank of AXIS Bank Baroda
Bank of India
Canara Bank
Federal IndusInd HDFC Bank IDBI Bank Kotak Bank Bank
10-Jun-08 11-Jun-08 12-Jun-08 13-Jun-08 16-Jun-08 17-Jun-08 18-Jun-08 19-Jun-08 20-Jun-08 23-Jun-08 24-Jun-08 25-Jun-08 26-Jun-08 27-Jun-08 30-Jun-08 01-Jul-08 02-Jul-08 03-Jul-08 04-Jul-08 07-Jul-08 08-Jul-08 09-Jul-08 10-Jul-08
-11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11
-1.93% 0.43% -0.13% 3.21% 3.78% 1.77% -3.44% -3.07% -0.88% -0.92% -1.64% -1.45% -0.67% -4.39% -2.36% -4.72% 3.12% -5.94% 3.36% 0.25% -1.04% 2.54% -0.71%
-3.23% 2.81% 1.48% -1.70% 4.13% 7.40% -5.04% -4.48% -1.42% -0.72% -2.83% 0.89% -1.95% -6.46% -3.79% -1.44% 6.31% -8.31% 2.80% 0.31% 0.96% 9.17% 1.26%
-1.97% 3.68% 3.16% -2.06% 3.37% 5.03% -3.54% -1.56% -5.34% -5.36% -0.51% 0.34% -1.23% -1.32% -0.67% -2.96% 3.16% 3.90% -2.21% 1.16% 2.51% -0.04% -1.30%
Cumulative Standardized Union Bank Average PNB SBI Yes Bank Average Abnormal Returns SD of Abnormal returns Average Abnormal p value of India Abnormal Returns Returns -0.85% 1.16% -0.74% -1.41% -2.79% -1.67% 2.64% -2.370 0.034 -1.67% 0.46% -1.11% 1.58% 4.42% -3.13% 1.17% 2.39% 1.835 0.090 -0.50% -2.93% 0.23% 2.06% 0.57% 2.40% 0.79% 1.87% 1.583 0.137 0.29% -1.16% -2.64% -0.34% 0.94% -0.44% -0.06% 2.49% -0.084 0.934 0.23% 2.24% 3.26% -1.18% 3.08% 2.11% 1.51% 2.29% 2.469 0.028 1.74% 6.45% 2.94% 3.79% 4.51% 3.32% 4.29% 1.53% 10.479 0.000 6.03% -3.60% -2.53% -2.08% -3.04% -2.62% -2.24% 2.07% -4.045 0.001 3.79% -4.67% -4.51% -3.02% -2.01% -4.24% -3.04% 1.40% -8.104 0.000 0.75% -1.80% -0.16% -2.99% -3.74% -2.23% -2.74% 1.78% -5.750 0.000 -1.98% -4.61% -1.81% -2.82% -4.73% -3.32% -3.59% 2.38% -5.636 0.000 -5.57% -3.96% 0.25% 0.94% -1.47% 4.83% -1.50% 2.37% -2.367 0.034 -7.07% -2.98% 0.12% -1.10% -2.62% -3.02% -0.56% 3.12% -0.668 0.516 -7.63% -2.07% -0.83% 0.50% -1.32% -0.37% -0.32% 2.29% -0.518 0.613 -7.95% -4.01% -3.45% -3.34% -1.53% -4.24% -3.56% 2.20% -6.062 0.000 -11.50% -4.66% -5.88% -3.26% -1.02% -7.95% -2.79% 2.35% -4.457 0.001 -14.30% -2.15% -5.96% -6.59% -8.05% -2.41% -3.62% 2.78% -4.870 0.000 -17.91% 6.01% 8.72% 3.32% 4.54% 1.08% 4.24% 2.96% 5.355 0.000 -13.67% -9.32% -0.07% 3.45% 6.62% -7.32% -1.65% 4.82% -1.283 0.222 -15.33% 3.53% 0.21% 1.29% -2.08% 4.78% 0.87% 2.67% 1.213 0.247 -14.46% 2.91% -0.71% 3.64% 0.11% 0.87% 0.39% 2.21% 0.668 0.516 -14.07% 4.35% -2.84% 3.16% 0.19% 4.46% 0.77% 2.17% 1.330 0.206 -13.30% 5.46% 1.63% 1.11% 3.47% 1.97% 2.95% 2.56% 4.306 0.001 -10.35% -0.40% 2.36% -0.34% 0.18% 0.25% 0.55% 2.64% 0.779 0.450 -9.80%
41
The AAR is significantly different from zero from day – 7 to day – 1. In the post event period, from day +2 to day +5, the AAR is significantly different from zero. This shows that the market began reacting to an expectation in interest rate hike prior to the actual event and then continued beyond the event as well.
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DATE
DAY
ICICI
AXIS Bank
Bank of Baroda
Bank of India
Canara Bank
Federal Bank
IndusInd HDFC Bank IDBI Bank Kotak Bank
Event: Rate increase 27/07/2010
06-07-2010
07-07-2010 08-07-2010 09-07-2010 12-07-2010 13-07-2010 14-07-2010 15-07-2010 16-07-2010 19-07-2010 20-07-2010 21-07-2010 22-07-2010 23-07-2010 26-07-2010 27-07-2010 28-07-2010 29-07-2010 30-07-2010 02-08-2010 03-08-2010 04-08-2010 05-08-2010 06-08-2010 09-08-2010 10-08-2010 11-08-2010 12-08-2010 13-08-2010 16-08-2010
17-08-2010
-15 -14 -13 -12 -11 -10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
0.65% -0.31% 0.37% -0.43% 1.19% 0.61% -0.50% -0.79% 1.93% -0.02% -0.83% 0.68% -0.44% 0.12% 1.34% 0.42% -0.68% 1.61% -1.40% 2.15% 2.09% -0.01% -1.12% -0.23% 1.84% 1.40% -0.64% -0.79% 0.42% -0.98% 0.32%
-0.05% -0.61% -0.63% 0.83% 0.74% 0.51% 1.18% 2.38% 0.64% 0.17% 0.90% -2.53% 0.35% 1.73% 0.04% -0.60% -1.78% 0.58% -0.62% -0.99% 0.22% -2.69% -1.00% -0.37% -1.11% -0.73% 0.18% 1.95% 0.20% 1.03% -0.44%
-1.05% 0.69% -0.82% -1.10% -0.87% -0.56% 0.13% 0.21% 1.10% 0.53% -0.22% -1.19% -0.80% -0.41% -0.19% -0.33% -0.63% 2.18% 2.86% 0.46% 1.19% -1.38% -0.52% -1.02% 0.77% -1.29% 0.59% 1.07% 0.19% 1.29% 6.00%
1.54% -0.91% -0.80% 0.92% -1.65% 1.88% 1.21% 2.59% 0.75% 0.01% 1.64% 1.82% -1.64% -0.17% -1.77% 0.46% 2.22% 1.96% 0.50% 6.04% -0.73% -0.47% 0.29% -0.41% 0.20% -0.31% 1.12% 5.94% -0.36% 0.92% 0.86%
-1.13% 1.29% -0.90% -0.12% 0.83% -0.66% -0.56% 0.47% 0.80% 3.93% -2.30% -1.08% -0.74% -1.16% -2.17% -0.50% 2.59% 0.79% -0.69% 0.06% 0.94% -2.48% -0.59% -1.00% 1.26% -0.44% 0.65% 1.71% 1.45% 0.56% 2.42%
3.30% 2.10% -0.23% 1.24% -0.22% -1.01% -0.46% -0.88% 0.43% -0.21% 2.28% -1.62% -1.68% -0.54% -2.83% 0.43% -0.24% 2.41% -1.08% -0.64% -1.41% -1.86% -0.85% -2.30% 1.00% -1.17% -0.48% -0.90% 1.60% 2.53% 0.59%
1.60% -0.68% -0.51% 2.25% 1.54% 0.73% 1.20% -1.14% -1.53% 0.57% -0.19% -1.04% 0.45% -1.00% 0.97% 0.33% 1.40% 0.47% 1.60% -0.53% -0.81% -1.00% -0.59% -0.21% -1.36% 0.84% -0.11% -0.51% 0.10% 0.20% 1.76%
0.24% 0.35% 1.98% -1.13% 0.21% 0.50% -1.56% 1.02% -2.10% 0.64% -0.24% -0.44% -1.13% -0.76% -1.11% 0.39% -1.60% 0.83% 1.43% -0.55% 1.48% -1.40% -0.50% -1.21% 0.59% -0.83% 0.40% 0.89% 0.20% 3.47% 4.08%
0.48% 2.52% -3.04% -1.12% -2.15% -1.28% -0.67% 1.47% -2.20% 0.25% -1.83% -1.96% 2.91% -1.49% -2.18% 0.00% -1.16% 0.80% -0.76% 2.13% -2.48% 0.38% -1.51% 2.85% 2.21% 0.33% 1.40% -0.43% -0.96% -1.01% -0.27%
Cumulative Standardized Union Bank Average PNB SBI Yes Bank Average Abnormal Returns SD of Abnormal returns Average Abnormal p value of India Abnormal Returns Returns -1.16% -1.14% 0.45% -0.43% 1.44% 0.34% 1.31% 0.963 0.353 0.34% -0.76% -0.71% 0.52% 0.14% -1.31% 0.17% 1.16% 0.536 0.601 0.50% -0.30% -0.97% 0.91% -0.17% 0.40% -0.34% 1.13% -1.116 0.285 0.17% -1.02% -1.02% -0.86% -1.19% 2.07% -0.05% 1.26% -0.143 0.889 0.12% -1.28% -0.94% 0.47% -0.76% -1.06% -0.28% 1.13% -0.935 0.367 -0.16% 0.05% -0.34% 0.75% -0.41% 0.11% 0.06% 0.84% 0.278 0.786 -0.10% -0.69% -0.08% 1.72% 0.20% -0.91% 0.02% 0.97% 0.061 0.952 -0.08% 0.85% 0.75% -0.91% 4.47% 0.64% 0.79% 1.57% 1.889 0.081 0.71% 2.46% 0.30% -0.35% -0.14% 3.86% 0.42% 1.69% 0.943 0.363 1.13% 1.26% -0.50% 0.70% -0.05% -0.21% 0.51% 1.09% 1.740 0.105 1.64% -1.08% -0.16% -0.07% -0.08% -0.30% -0.18% 1.21% -0.549 0.592 1.46% -0.24% -0.48% -1.25% -1.06% -0.80% -0.80% 1.08% -2.764 0.016 0.66% -3.10% -1.20% 0.61% -0.52% -1.04% -0.57% 1.39% -1.527 0.151 0.10% -0.17% -0.78% 0.48% 0.39% 0.92% -0.20% 0.87% -0.868 0.401 -0.11% -0.07% -0.82% -2.78% -1.26% -0.56% -0.96% 1.31% -2.739 0.017 -1.06% 0.09% 0.99% 0.59% 0.38% -0.30% 0.17% 0.46% 1.360 0.197 -0.90% 0.49% 1.33% 2.20% -0.40% -1.98% 0.12% 1.58% 0.295 0.772 -0.77% -0.14% -1.17% -0.24% -2.04% -0.34% 0.55% 1.27% 1.617 0.130 -0.22% 1.29% 1.77% 1.99% 0.90% 1.54% 0.67% 1.34% 1.862 0.085 0.44% 0.18% 3.50% 1.51% 1.15% 1.74% 1.16% 1.92% 2.255 0.042 1.60% 1.92% -0.51% 0.52% -0.26% 0.78% 0.21% 1.32% 0.597 0.561 1.81% 2.07% -2.23% -1.13% -1.23% -2.50% -1.14% 1.31% -3.251 0.006 0.68% 0.21% 0.86% 2.20% -0.30% -1.54% -0.35% 0.99% -1.329 0.207 0.32% -1.13% -0.56% -0.90% -0.11% -1.02% -0.54% 1.13% -1.800 0.095 -0.22% -0.06% 0.14% 0.04% 0.62% 1.67% 0.56% 1.03% 2.029 0.063 0.34% -1.12% -0.38% -0.31% -0.43% -0.47% -0.35% 0.76% -1.733 0.107 -0.02% 0.68% 0.17% -0.15% 0.14% 0.21% 0.29% 0.57% 1.949 0.073 0.28% -0.43% 2.65% 6.80% 2.71% 1.33% 1.57% 2.38% 2.465 0.028 1.85% 2.74% 0.09% 1.61% 1.72% 3.89% 0.92% 1.31% 2.627 0.021 2.77% 0.40% 3.17% -0.33% 1.35% 0.03% 0.90% 1.39% 2.430 0.030 3.67% 0.75% 1.39% -0.16% 2.92% 2.62% 1.63% 1.83% 3.328 0.005 5.30%
43
In the pre event period, the AAR is significantly different from zero on day – 4 and day – 1. In the post event period, the AAR is significantly different from zero on day +4 and +6 and from day + 12 to + 15. This shows that the event has had a delayed impact on the market.
44
Event: Rate increase 25/01/2011
DATE
DAY
04-01-2011 05-01-2011 06-01-2011 07-01-2011 10-01-2011 11-01-2011 12-01-2011 13-01-2011 14-01-2011 17-01-2011 18-01-2011 19-01-2011 20-01-2011 21-01-2011 24-01-2011 25-01-2011 27-01-2011 28-01-2011 31-01-2011 01-02-2011 02-02-2011 03-02-2011
Cumulative Standardized AXIS Bank of Bank of Canara Federal IndusInd Union Bank Average ICICI HDFC Bank IDBI Bank Kotak PNB SBI Yes Bank Average Abnormal Returns SD of Abnormal returns Average Abnormal p value Bank Baroda India Bank Bank Bank of India Abnormal Returns Returns -15 -3.03% 0.84% -2.82% -1.39% -2.17% -2.69% -1.82% -1.68% -3.41% 1.26% -0.08% -2.87% -2.63% -2.63% -1.79% 1.47% -4.570 0.001 -1.79% -14 -1.66% -1.73% 0.67% 0.45% -3.99% -2.23% -0.89% -1.68% -1.93% -1.48% -0.92% -0.40% -1.26% -3.57% -1.47% 1.29% -4.259 0.001 -3.27% -13 -0.77% -1.74% 1.09% -3.58% 0.65% -1.65% 1.26% -0.48% -1.54% 0.06% -0.58% -2.16% -1.14% -2.52% -0.94% 1.40% -2.507 0.026 -4.20% -12 3.16% -0.66% 2.66% 2.67% -1.03% 1.43% -0.60% 0.09% -3.18% 0.43% -0.25% 1.55% 2.70% -1.52% 0.53% 1.89% 1.052 0.312 -3.67% -11 0.33% -1.33% -1.08% 2.27% -1.78% 2.01% -3.14% 0.52% -1.40% -2.12% 0.47% 0.44% 0.30% -0.79% -0.38% 1.55% -0.916 0.377 -4.05% -10 1.06% -1.70% 0.83% 0.78% -0.60% 0.65% -0.37% -0.91% 4.39% 1.22% 1.74% 2.57% 1.35% 4.13% 1.08% 1.75% 2.305 0.038 -2.97% -9 1.78% 3.20% -0.79% -1.50% -0.85% -0.81% 1.22% 0.69% 2.06% -0.50% -0.43% 0.05% 2.18% -0.86% 0.39% 1.46% 0.996 0.337 -2.58% -8 -1.21% 0.48% -2.96% -1.63% -1.75% 0.11% -1.52% -0.56% -2.15% -1.97% -3.46% -2.08% -1.41% -0.77% -1.49% 1.08% -5.187 0.000 -4.07% -7 0.86% -2.37% -1.83% 1.05% -3.16% 0.41% -2.88% 0.72% -0.88% -0.23% -0.18% -0.58% -1.43% -0.74% -0.80% 1.37% -2.192 0.047 -4.88% -6 -1.19% -4.67% 4.00% 0.07% -4.24% -2.27% 0.89% -3.93% -1.08% 1.16% 1.35% 0.34% 0.44% -2.49% -0.83% 2.48% -1.252 0.233 -5.71% -5 -0.68% 0.16% -0.35% -2.92% 0.89% 0.17% 0.59% 0.60% 2.97% -0.89% -0.13% 0.30% -1.00% -0.35% -0.05% 1.29% -0.133 0.896 -5.75% -4 2.10% 4.86% -1.79% 2.04% 8.05% 1.84% -1.09% 1.15% -0.85% 2.77% -0.17% -1.33% 0.91% 5.66% 1.73% 2.88% 2.245 0.043 -4.03% -3 2.09% -1.47% 0.56% -0.05% 1.92% 0.08% 1.55% 2.99% 2.31% 1.11% -0.76% 0.56% 0.64% 0.74% 0.88% 1.23% 2.673 0.019 -3.15% -2 1.70% -0.10% 6.42% 1.10% 1.61% 0.10% -0.85% 0.93% -3.41% -1.04% -1.13% 2.61% 2.21% -0.82% 0.67% 2.31% 1.077 0.301 -2.48% -1 0.52% 0.39% 0.65% 3.78% -0.42% -0.91% 1.64% 0.13% 1.58% -0.57% 1.76% 2.75% 2.50% 4.12% 1.28% 1.59% 3.022 0.010 -1.20% 0 -2.81% 3.22% 0.49% 0.31% -0.79% -0.50% -2.17% 0.42% -2.28% -1.03% -0.60% 0.40% 0.33% -1.10% -0.44% 1.51% -1.082 0.299 -1.64% 1 0.17% -0.99% -0.98% -1.76% -0.96% -2.95% -0.53% -4.43% -3.02% -1.68% -0.78% 0.55% -1.87% -2.88% -1.58% 1.37% -4.316 0.001 -3.22% 2 2.30% -0.89% -4.15% 0.16% -3.75% -1.70% 1.47% 0.90% -1.48% -1.20% -1.03% 0.23% -0.56% -0.96% -0.76% 1.78% -1.601 0.133 -3.98% 3 0.81% -3.71% 0.33% 4.33% 7.06% 4.24% -0.55% 0.33% 3.78% 1.45% 0.90% 1.16% 3.88% 2.28% 1.88% 2.65% 2.655 0.020 -2.11% 4 2.57% 0.57% 0.41% -0.05% -0.80% 0.68% 1.14% -0.48% -0.98% -0.22% 0.86% -0.03% -0.40% 2.47% 0.41% 1.09% 1.406 0.183 -1.70% 5 -1.69% -2.36% 1.08% 0.68% -4.11% -2.07% -1.50% -0.73% 1.93% -1.04% -2.32% -1.37% -0.68% -0.69% -1.06% 1.55% -2.561 0.024 -2.76% 6 -3.11% 1.78% 1.57% -0.87% 0.74% -0.78% 0.38% 1.78% 0.16% 1.54% -0.96% 0.86% 0.44% 0.42% 0.28% 1.36% 0.777 0.451 -2.48%
45
From day – 10, the AAR is significantly different from zero barring a few days in between. Immediately post the event also, the AAR is significantly different from zero. This shows that the market does not exhibit semi strong form efficiency and rather reacts to rate adjustments instead of factoring it into the prices in the pre event period.
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