Fed rates and movement of bank stocks in India

Abstract

The purpose of this paper is to identify the changes in the stock market prices of banks in India with changes in FED rates in long run.Using both bivariate granger causality and ANOVA along with binomial logistic regression the influence of changes in FED rates on stock market prices of both major public sector and private sector banks have been derived.Private banks with higher shareholding of Foreign Institutions investors are influenced significantly as compared to public sector banks.The changes in FED rates and its influence over the stock prices are related directly to the shareholding pattern of Foreign Institutional Investors. The results suggest that changes in the FED rates have a direct impact on the financial sector stock prices, where a positive relationship is observed.For investors this provides a decisive signal for market-related investments in public sector vis-a- vis the private sector banks and for the policy makers this may open the door for policies related to foreign investments as well as policies related to managing liquidity positions.By using real datasets and granger causality analysis this paper will help in understanding the relationship between the banking stocks in India and changes in FED rates.