Effect of interest rate changes on stock returns of select Indian commercial banks

Banks in India are regulated and supervised the Reserve Bank of India, which is the central bank. RBI controls money supply in the economy by altering key policy rates from time to time and the commercial banks have to operate on the basis of these rates. Any modification in the interest rate has a direct impact on the net interest income and profitability of commercial banks. Eventually, it has an effect on the bank stock prices too. In this study the long-term effects of repo rate changes on seven public sector banks and six private sector banks were studied using regression technique. Banks with a market capitalisation of more than one hundred billion rupees were only considered for the analysis. Overall, the results indicate that any increase in the interest rate adversely affects the bank stock returns.