Insight into the Influence of Economic Policy Uncertainty on the Indian Nifty 50 Index

Abstract

Objective: Existing literature attests to the longstanding global concern regarding Economic Policy Uncertainty (EPU), recognizing its impact on economic growth, employment, and investments. Despite its acknowledged influence, studies on EPU in India have been comparatively limited. This paper addresses this gap by utilizing 83 months of data (from January 2017 to November 2023) from the recently formulated EPU Index of India and monthly closing values of the Nifty 50. The objective is to find if there is an influence of EPU on the stock markets in India. Method: The study employs correlation analysis, Ordinary Least Squares (OLS), and Quantile regressions, to investigate the relationship between EPU and the Nifty 50, representing the Indian Stock Market. Result: While overall findings indicate a low correlation, year-wise analyses reveal a notable negative correlation in specific years, notably during the COVID year. OLS and Quantile regressions further affirm a negative impact of EPU on Nifty 50, particularly evident in lower quantiles, with the effect diminishing in higher quantiles. Conclusion: The study indicates the limited effect that EPU has on the stock market. Though there is a negative association, it could be temporary and a short-term variation. Given the novelty of the EPU index and limited studies in India, this paper contributes significantly to the existing literature, particularly in the Indian context.