Abstract: From April, 2012-March, 2017, the 5 years Government Bond rised by 200 basis points and is continuing to rise from thereafter. Many banks have profited handsomely from this rise in interest rates. Since, interest rates cannot continue to rise indefinitely, there can be a question. Is the banking system adequately prepared for a scenario with change in interest rates? In this study, investigation has been made on the effects of interest rates volatility on stock market returns using daily returns on stocks of 20 selected commercial banks which includes public sectors and private sector banks over the period from 1st April, 2012 -31st March, 2017. In this study, ‘augmented market model’ has been used to estimate, the elasticity of returns on the stock against returns on the stock market. To estimate short and long term zero coupon bonds among variables, weekly data for the period ranging from April, 2012 to March, 2017 have been analyzed by applying GARCH Model. The repressors used in this model can be interpreted as the return on a portfolio where the long bond is purchased using borrowed funds at the short rate. The return on selected banks and market return required for the study are obtained from the NSE website. We created time-series of notional bond returns on the 28 days and the 10 year zero coupon bond, priced off the NSE zero coupon yield curve for short term and long term returns, respectively. The results indicate that interest rates have a strong positive power for stock returns and weak predictive power for volatility by using GARCH Model. It has been found that out of 20 banks in our sample would be gained or lost 30% of equity capital in the event of a 200 bps move in the yield curve. The stock market sensitivities suggest that there is strong heterogeneity across banks in India in their interest rate exposure. The stock market is unaware of interest rate risk when valuing bank stocks.