V2I9P1

Do Rate Cuts Calm Nifty? Insights from VIX and Inflation Dynamics in India

Dr.Tuhin Mukherjee^1*, Subhrajyoti Mandal²

Abstract

Monetary policy announcements, particularly changes in the repo rate, play a critical role in shaping investor sentiment and influencing market behaviour. While rate hikes are generally intended to contain inflation, their immediate impact on equity and volatility indices remains less predictable. This study analyses nine monetary policy events between 2020 and 2025, combining repo rate adjustments with corresponding Nifty index movements, VIX changes, and consumer price inflation (CPI). Descriptive statistics, trend line charts, correlation analysis, and regression were employed to evaluate the short-term effects of policy actions. The findings reveal that repo rate hikes were concentrated during high-inflation periods (6–7%) and were typically accompanied by negative Nifty performance, while cuts occurred in low-inflation phases (2–3%) with more varied market reactions. Correlation analysis showed a strong negative relationship between inflation and Nifty levels (r ≈ –0.77), and regression results indicated that inflation explained market behaviour more consistently than repo adjustments. Volatility responses, measured by VIX, were mixed, with weak correlations to repo changes. The results suggest that monetary policy effects on equity and volatility are conditional, with inflation expectations serving as the dominant factor driving investor sentiment in the short run. Repo rate changes alone do not uniformly dictate market direction, but their credibility and alignment with prevailing inflation trends are critical in shaping market stability.

Keywords:

Repo Rate, Inflation, Nifty 50, Market Volatility, Monetary Policy