Electronic copy available at: http://ssrn.com/abstract=1743834
When the RBI wants to implement a contractionary monetary policy, it goes to the security market to sell government bonds for money thus decreasing the money stock or the money in circulation in the economy. Contractionary policy is used to combat inflation. Furthermore, monetary policies are described as follows: Accommodative, if the interest rate set by the central monetary authority is intended to create economic growth; Neutral, if it is intended neither to create growth nor combat inflation; or Tight if it is intended to reduce inflation. Having understood the meaning and types of monetary policy, it becomes expedient to give an explanation of stock markets for better understanding of stock markets’ behaviour and their reaction to