Interest Rate Movements and Stock Returns : A Panel Data Approach

The present study attempts to examine the relationship between interest rate movements and stock returns in India by using the methodology of panel regression. The study spans the period from 1st April 1996 to 30th August 2014. Sample used in the study consists of all financial and non-financial companies listed in the S&P CNX 500 index with continuous availability of share prices over the study period. Time series used in the present study is non-stationary; it was however found to be stationary at the first difference. Stock returns in India exhibit significant exposure with both market returns and interest rate changes. Both the financial sector and non-financial sector stocks are potentially affected by interest rate changes but the magnitude of impact varies widely. The impact of interest rate changes on common stock returns of financial institution is higher as compared to non-financial institutions. In case of financial firms, the impact of interest rate movements is higher on banking firms compared to non-banking financial firms. In case of non-financial firms, the moderate relationship is found between stock returns and interest rate changes for automobile, cement & cement products, chemical products, construction, consumer goods, energy, industrial manufacturing, IT, metal products and pharma sectors, whereas this relationship is found to be weak for fertilizer & pesticides products, health, media & entertainment, service, telecom and textile sectors respectively