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EXCEL International Journal of Multidisciplinary Management Studies
Vol.1 Issue 2, November 2011, ISSN 2249 8834 Online available at http://zenithresearch.org.in/
IMPACT OF RBIs CREDIT POLICY AND STANDARD &POORs RATINGS ON BANKEX STOCKS: AN EVENT STUDY
DR. D. MAHESHWARA REDDY*; K.V.N.PRASAD**
*Assistant Professor, ITM Business School, Warangal, Andhra Pradesh, India. **Assistant Professor, ITM Business School, Warangal, Andhra Pradesh, India.
ABSTRACT The capital market is a major part of Indian economy. As such whatever the national and international events (natural and man acts) happened that they had an impact directly on the Indian economy and indirectly on the capital markets of respective countries. The latest events like, RBIs credit policy rates on 26th July 2011 and S&Ps ratings on 8th August, 2011 on US government credibility are the major events which were affected the Indian capital market adversely. In this juncture, an attempt is made to assess the banking sectors price trends i.e. which bank stock prices got much affected and which are least affected. This study will be useful to know the implications of the events on stock prices and to make wise and rational investment decisions. KEYWORDS: Bankex stocks, FPO, Paired t test, RBI, S&Ps . ___________________________________________________________________________ INTRODUCTION The Indian economy and the Indian capital markets are exposed as vibrant ones in the global market after the implementation of economic and financial sector reforms in 1991. Then onwards the Indian economic and GDP growth rates have been increasing exponentially and became an ideal capital market for FIIs and FDIs. From the large research studies, pertaining the Indian economy and capital markets, it is observed and proved that the Indian economy is highly pool proofed and has resisted to the great economic recession (i.e US economic slowdown after the bankruptcy of Lehman brothers and Merry Lynch Ltd) without much impact on any segment of the economy. As RBI projects inflation will moderate to 6 percent by end-March 2012, it has raised its key rates for the twelve times since March 2010 whereby it has pushed up the repo and reverse repo rates to 8.25% and 7.25% respectively on 16 th September 2011. The RBI is playing a vital role in regulating the money supply in the market in order to ensure price stabilization. In achieving this, The RBI has been constantly reviewing and revising the credit policy rates without disturbing the growth rate. In this juncture, an attempt is made to assess the banking sectors price trends i.e. which bank stock prices got much affected and which are least affected. This study will be useful to know the implications of the events on stock prices and to make wise and rational investment decisions. Event study methodology is based on Efficient Market Hypothesis developed by Fama et al. (1969) and Fama (1970). According to this a market is efficient if , prices fully reflect all available information . One important assumption is that capital markets are sufficiently efficient to react on events (new information) regarding expected future profits of affected corporations.
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In the study of stock markets reaction to sporting results of European listed foot ball clubs, Benkraiem, Louhichi, and Marques(2009) shows that sporting results after both the abnormal returns and the trading volume around the dates of matches. They studied 745 matches played by Europeon listed football clubs. Their findings also show that market reactions differ according to the nature of the result (defeat, draw or win) and the match venue ( home or away). From the findings, they conclude that the success of investments in listed foot ball clubs requires a regular follow-up of their sporting performances. Event studies make it possible to examine the financial market impact of any event viewed significant. Brown and Warner (1980, 1985) were pivotal in formulating conventional event study methodologies in a simulation study. In spite of non synchronous trading often en counted with daily data, they conclude that both monthly and daily data offer sufficient ability to identify abnormal patterns. Examples of studies that have used various event study methodologies to examine abnormal financial market patterns include Kim and Verrecchia (1991), Bamber and Cheon (1995), Graham, Nikkinen and Sahistorum (2003). In the study, S.Dinesh(2011) A study on pricing behavior in the Indian capital market with reference to power grid corporation of India limited , concluded that, the security prices reacted to the announcement of FPO. In the above back drop, the present study needs, to assess the impact of RBIs credit policy announcement and S& Ps ratings on US government creditability on Bankex stock prices. RESEARCH METHODOLOGY: The present study adopts analytical and descriptive research design. A finite sample of seven public and seven private sector banks of bankex stocks selected for the purpose of the study. The data of bankex stock prices for a period 25th July 2011 to 28th July 2011 (before and after two days of announcement of RBIs credit policy) and for a period 4th august 2011 to 8th august 2011(before and after two days of announcement of S&P ratings on US economy), have been collected from www.bse.com. While analyzing and interpreting the results, the statistical tools used are arithmetic mean, standard deviation and paired sample t test using spss 19. RESULTS & DISCUSSIONS www.zenithresearch.org.in The Reserve Bank of India is the central banking institution of India and controls the monetary policy of the rupee as well as US$300.21 billion (2010) of currency reserves. The institution was established on 1 April 1935 during the British Raj in accordance with the provisions of the Reserve Bank of India Act, 1934 and plays an important part in the development strategy of the government. It is a member bank of the Asian Clearing Union. The organization structure of RBI can be seen in the table: Established Governor Currency 1935 Duvvuri SubbaRao INR
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RBI is an apex bank in the Indian banking industry. Its main responsibility is to make sure that the orderly growth and development of banking coupled with protection to the all customers and public. Further the RBI has to ensure the stable prices in the economy. For that purpose it has been doing a robust exercise to review and control the money supply in order to arrest the running inflation in the country by means of triggering the policy rates. The latest policy rates of RBI(As on 26 July,2011) were depicted in the following table: RBI Policy rates Bank Rat Repo Rate Reverse Repo Rate Cash Reserve Ratio (CRR) Statutory Liquidity Ratio (SLR) Base Rate Savings Bank Rate Deposit Rate Source: wikipedia.org/wiki/Reserve_Bank_of_India The imapct of RBIs credit policy rates on Bankex stocks analysed and discussed below. IMPACT ON PUBLIC SECTOR BANKS The average stock price for public sector banks before and after the announcement of RBIs credit policy was Rs.845.3929 and 810.3929 with standard deviations 773.64693 and 740.70382. To test the impact of RBIs credit policy on public sector banks paired sample ttest applied as indicated in table 1.1 and tested under the following hypothesis. H0: The stock prices of public sector banks does not differed significantly before and after the announcement of RBIs credit policy. www.zenithresearch.org.in H1: The stock prices of public sector banks differed significantly before and after the announcement of RBIs credit policy. Per cent age (%) 6.0% 8% 7% 6.0% 24.0% 9.50%10.75% 4% 8.50%9.50%
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TABLE 1.1: PAIRED SAMPLES TEST FOR PUBLIC SECTOR BANKS Paired differences 95% confidence Mean psbs prior psbs post 35.00000* 35.24491 14.65019 55.34981 3.716 0.003 S.D Lower Upper t Sig.value
*mean difference significant at 0.05 level of significance Source: secondary data processed through spss 19 The mean difference between the public sector banks stock prices prior and post announcement of RBIs credit policy is 35 with t-value 3.716 and p-value 0.003 therefore the null hypothesis is rejected at 0.05 level of significance .i.e. the mean difference is significant. It can be concluded that the stock prices of psbs decreased significantly after the announcement of RBIs credit policy IMPACT ON PRIVATE SECTOR BANKS The average stock price for private sector banks prior and post announcement of RBIs credit policy was Rs.630.8607 and Rs.613.9179 with standard deviations Rs.384.78379 and 374.49511. The impact of RBIs credit policy on private sector banks tested under the following hypothesis employing paired sample-t-test as indicated in table 1.2 H0: The stock prices of private sector banks does not differed significantly before and after the announcement of RBIs credit policy. H1: The stock prices of private sector banks differed significantly before and after the announcement of RBIs credit policy. TABLE 1.2: PAIRED SAMPLES TEST FOR PRIVATE SECTOR BANKS Paired differences 95% confidence Mean prsbs prior prsbs post 16.94286* 14.26827 8.70461 25.18111 4.443 0.001 S.D Lower Upper t Sig.value www.zenithresearch.org.in
*mean difference significant at 0.05 level of significance Source: secondary data processed through spss 19 The mean difference between the private sector banks stock prices before and after the announcement of RBIs credit policy is 16.94286 with t-value 4.443 and p-value 0.001
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therefore null hypothesis is rejected at 0.05 level of significance .i.e. the mean difference is significant. It can be inferred that the stock prices of private sector banks decreased significantly after the announcement of RBIs credit policy IMPACT ON BANKEX STOCK PRICES The mean stock price of bankex prior and post announcement of RBIs credit policy is 738.1268 and 712.1661 with standard deviations 609.4263 and 584.5416. The impact of RBIs credit policy on bankex stock prices tested under the following hypothesis and the results are given table 1.3 Ho: There is no significant difference between bankex stock prices before and after the announcement of RBIs credit policy H1: There is a significant difference between bankex stock prices before and after the announcement of RBIs credit policy TABLE 1.3: PAIRED SAMPLES TEST FOR BANKEX STOCK PRICES Paired differences 95% confidence Mean bankex prior bankex post 25.96071* 27.94399 15.12517 36.79626 4.916 0.000 S.D Lower Upper t Sig.value
*mean difference significant at 0.05 level of significance Source: secondary data processed through spss 19 The mean difference between bankex stock prices prior and post announcement of RBIs credit policy is 25.96071 with t-value 4.916 and p-value 0.000 therefore null hypothesis is rejected at 5% level of significance. We conclude that bankex stock prices decreased significantly after the announcement of RBIs credit policy. S&P RATINGS Standard & Poor's (commonly known as S&P) is a business segment of publishing house McGraw-Hill. It has been started the operations in more than 20 countries. The company provides the investment community with independent credit ratings on financial vehicles such as stocks, mutual funds, corporate bonds, and municipal bonds. In addition to its credit ratings, risk management, investment research, data, and valuations, Standard & Poor's is known for its indexes, including the S&P 500 index. The company's roots reach back to 1860; S&P was acquired by McGraw-Hill just over a century later. S&P has been actively involving in financial industry and credit services. DBRS Limited Fitch Ratings Inc. Moody's Corporation (mco) are its top competitors. The organizational structure of S&P is depicted in the following table: www.zenithresearch.org.in
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President VP Corporate Communications Manager
Deven Sharma Chris Atkins Taiwan: Simon Chen,
The S&P has announced the credit ratings for US Economy on 5th August, 2011. The ratings of US Economy were downgraded from AAA to AA+. The Bankex stock prices prior and post announcement of S&Ps ratings on US economy is depicted in table 3 & 4 and discussed below. IMPACT ON PUBLIC SECTOR BANKS he average stock price for public sector banks before and after the announcement of S&P ratings was Rs.769.9357 and Rs.767.6500 with standard deviations Rs.703.84315 and Rs.700.10664. To test the impact of S&P ratings on public sector banks paired sample t- test applied as indicated in table 3.1 and tested under the following hypothesis. H0: The stock prices of public sector banks does not differed significantly before and after the announcement of S&P ratings on US economy. H1: The stock prices of public sector banks differed significantly before and after the announcement of S&P ratings on US economy. TABLE 3.1: PAIRED SAMPLES TEST FOR PUBLIC SECTOR BANKS Paired differences 95% confidence Mean psbs prior psbs post 2.28571 17.94887 -0.807766 5.65102 0.476 0.642 www.zenithresearch.org.in S.D Lower Upper t Sig.value
Source: secondary data processed through spss 19 The mean difference between the public sector banks stock prices prior and post announcement of S&P ratings is 2.28571 with t-value 0.476 and p-value 0.642 therefore null hypothesis can not be rejected i.e. the mean difference is not significant. It can be concluded that the stock prices of psbs not decreased significantly after the announcement of S&P ratings on US economy. IMPACT ON PRIVATE SECTOR BANKS The average stock price for private sector banks prior and post announcement of S&P ratings on was Rs.589.3893 and Rs.574.2714 with standard deviations Rs.97.72270 and Rs.93.84671. The impact of S&P ratings on private sector banks tested under the following hypothesis using paired sample t test as indicated in table 3.2.
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H0: The stock prices of private sector banks does not differed significantly before and after the announcement of S&P ratings H1: The stock prices of private sector banks differed significantly before and after the announcement of S&P ratings. TABLE 3.2: PAIRED SAMPLES TEST FOR PRIVATE SECTOR BANKS Paired differences 95% confidence Mean prsbs prior prsbs post 15.11786* 16.39613 5.65102 24.58470 3.450 0.004 S.D Lower Upper t Sig.value
*mean difference significant at 0.05 level of significance Source: secondary data processed through spss 19 The mean difference between the private sector banks stock prices before and after the announcement of S&P ratings is 15.11786 with t-value 3.450 and p-value 0.004 therefore null hypothesis is rejected at 0.05 level of significance .i.e. the mean difference is significant. It can be inferred that the stock prices of prsbs decreased significantly after the announcement of S&P ratings. IMPACT ON BANKEX STOCKS The mean stock price of bankex prior and post announcement of S&P ratings is Rs.679.6625 and Rs.670.9607 with standard deviations 557.98468 and Rs.552.32235 The impact of S&P ratings on bankex stock prices tested under the following hypothesis and the results are given table 3.3. Ho: There is no significant difference between bankex stock prices before and after the announcement of S&P ratings. H1: There is a significant difference between bankex stock prices before and after the announcement of S&P ratings. TABLE 3.3: PAIRED SAMPLES TEST FOR BANKEX STOCK PRICES Paired differences 95% confidence Mean Bankex prior bankex post 8.70179* 18.08988 1.68726 15.71631 2.545 0.017 S.D Lower Upper t Sig.value www.zenithresearch.org.in
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*mean difference significant at 0.05 level of significance Source: secondary data processed through spss 19 The mean difference between bankex stock prices prior and post announcement of S&P ratings is Rs.8.70179 with t-value 2.545 and p-value 0.017 therefore null hypothesis is rejected at 5% level of significance. We conclude that bankex stock prices decreased significantly after the announcement of P&S ratings on US economy. CONCLUSION The basis of event study is to examine the returns derived from the stock prices of the relevant stocks both before and after the event. The present study reveals that After the announcement of RBIs credit policy, the stock prices of bankex is affected more, when compared to public or private sector banks individually. It is clear that there is a high risk involved in the combination of public & private sector banks. Further it is infer that the risk involved in private sector banks is high, when compared to public sector banks. After the announcement of S&P ratings on US economy, the stock prices of private sector banks affected significantly, when compared to bankex and public sector banks. Further it is infer that, there is no impact of S&P ratings on public sector banks. On overall basis, it is concluded that, the risk involved in private sector banks is high, when compared to public sector banks. REFERENCES Broen, S.J & Warner, J.B.(1980). Measuring security price performance . journal of financial economics, Vol.8, No.3, pp 205-258 Broen, S& Warner, J.(1985), Using daily stock returns : The case of event studies , journal of financial economics, Vol.14, pp 3-31. Dinesh.S, A study on pricing behavior in the Indian capital market with reference to power grid corporation of India limited , Indian journal of finance ,Vol.5,No.7, pp 45-53. Fama .E.F (1970), Efficient Capital Markets: A review of theory and empirical work, journal of finance, vol.25, No.2. pp 383-417. www.bse.com www.sebi.gov.in www.invetopedia.com www.zenithresearch.org.in
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ANNEXURE TABLE 1 : BANKEX STOCK PRICES BEFORE AND AFTER RBIS CREDIT POLICY ANNOUNCEMENT Before Bank BOB BOI CB IDBI PNB SBI UBI AXIS FB HDFC ICICI INDUS KMB Yes 25.7.11 912.85 403.5 523.65 135.65 1197.20 2513.65 305 1337.2 457.7 505.1 1074.2 277.15 486.75 332.65 26.7.11 899.6 388.8 513.45 131.45 1164.85 2441.8 304.05 1319.85 448.75 497.85 1040.6 268.85 466 319.4 Change (%) -1.45 -3.64 -1.95 -3.10 -2.70 -2.86 -0.36 -1.30 -1.96 -1.44 -3.13 -2.99 -4.26 -3.98 27.7.11 875.4 390.4 496 132.8 1125.05 2403.3 297.45 1300.1 440.1 501.85 1024.75 271.85 463.65 312.7 After 28.7.11 870.1 397.8 478.35 129.9 1102.95 2356.45 289.55 1297.85 432.2 487.6 1017.55 275.2 459 310.45 Change (%) -0.60 1.895 -3.558 -2.183 -1.964 -2.034 -2.655 -0.173 -1.795 -2.839 -0.702 1.232 -1.002 -0.7195
Source: www.bse.com
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TABLE2: PAIRED SAMPLE STATISTICS FOR RBIS CREDIT POLICY Mean Pair1 Psbs prior Psbs post Pair 2 Prsbs prior Prsbs post Pair 3 Bankex prior Bankex post 845.3929 810.3929 630.8607 613.9179 738.1268 712.1661 N 14 14 14 14 28 28 S.D 773.64693 740.70382 384.78379 374.49511 609.42639 584.54169 Std.Error 206.76584 197.96142 102.83779 100.08803 115.17076 110.46800
Source: secondary data processed through spss 19 TABLE 3 : BANKEX STOCK PRICES BEFORE AND AFTER P&S RATINGS ON US ECONOMY Before After Bank BOB BOI CB IDBI PNB SBI UBI AXIS FB HDFC ICICI INDUS KMB Yes 04.08.11 874.9 368.7 433.4 122.9 1078. 2257.35 275.65 1285 401.55 476.7 993.1 264.2 451.7 302.9 05.08.11 863.4 362.25 433.75 119.7 1076.15 2232.85 280.1 1244.25 389.7 473.25 966.1 262.7 438.9 301.4 Change (%) -1.314 -1.749 0.080 -2.603 -0.171 -1.085 1.614 -3.171 -2.951 -0.723 -2.719 -0.568 -2.834 -0.495 08.08.11 856.85 356.75 433.45 119.2 1097.35 2218.25 282.85 1237 384.9 463 952.1 264.2 438.8 301.7 09.08.11 854.2 350.45 433.7 118.35 1116.05 2230.6 279.05 1210.5 383.95 466.25 940.95 256.1 448.4 291.95 Change (%) -0.309 -1.769 0.058 -0.713 1.704 0.557 -1.343 -2.142 -0.247 0.702 -1.171 -3.065 2.188 -3.232 www.zenithresearch.org.in
Source: www.bse.com
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TABLE 4 : PAIRED SAMPLE STATISTICS FOR P&S RATINGS Mean Pair1 Psbs prior Psbs post Pair 2 Prsbs prior Prsbs post Pair 3 Bankex prior Bankex post 769.9357 767.6500 589.3893 574.2714 679.6625 670.9607 N 14 14 14 14 28 28 S.D 703.84315 700.10664 365.64485 351.14224 557.98468 552.32235 Std.Error 188.10999 187.11137 97.72270 93.84671 105.44919 104.37911
Source: secondary data processed through spss 19
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EXCEL International Journal of Multidisciplinary Management Studies

EXCEL International Journal of Multidisciplinary Management Studies

EXCEL International Journal of Multidisciplinary Management Studies

EXCEL International Journal of Multidisciplinary Management Studies

EXCEL International Journal of Multidisciplinary Management Studies

EXCEL International Journal of Multidisciplinary Management Studies

President VP Corporate Communications Manager

Deven Sharma Chris Atkins Taiwan: Simon Chen,

EXCEL International Journal of Multidisciplinary Management Studies

EXCEL International Journal of Multidisciplinary Management Studies

EXCEL International Journal of Multidisciplinary Management Studies

EXCEL International Journal of Multidisciplinary Management Studies

EXCEL International Journal of Multidisciplinary Management Studies

Source: secondary data processed through spss 19

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