Monetary Policy is the process by which the Central Bank or Reserve Bank of India controls the money supply because of which stock market also gets affected. Every year Central Bank changes the cash reserve ratio (CRR), statutory liquidity ratio (SLR), Repo Rate and Reverse Repo Rate to control the money supply of the country. In this paper attempt is made to understand the relationship between RBI Policy key rates with Bank Nifty and also the reaction of investors to such changes in Bank Nifty. With the help of partial correlation the relationship is shown between the variables and also the percentage change is calculated. To do this we have taken database of different variables in the study. The analysis explained that there is a positive correlation of Bank Nifty with Repo Rate and Reverse Repo Rate while the correlation was negative with Cash Reserve Ratio and Statutory Liquidity Ratio and it was also found that the investors did react to changes in Bank Nifty. The reason behind investor’s over reaction to change in Bank nifty is the human psychology and emotions which controls his economic decision making process. The term ‘Behavioural finance’ also emerges in this context. There is further scope to study different components of Behavioural Finance that are yet to be considered in this study.