The policy response to COVID‐19 pandemic and its impact on the equity market sentiment: The Indian experience

• Published date: 01 February 2023
• Author: Nayanjyoti Bhattacharjee,Anupam De
• Date: 01 February 2023
• DOI: http://doi.org/10.1002/pa.2823

RESEARCH ARTICLE

The policy response to COVID-19 pandemic and its impact

on the equity market sentiment: The Indian experience

Nayanjyoti Bhattacharjee

1

| Anupam De

2

1

Department of Management Studies,

Bodoland University, Assam, India

2

Department of Management Studies, NIT

Durgapur, West Bengal, India

Correspondence

Nayanjyoti Bhattacharjee, Department of

Management Studies, Bodoland University,

Assam, India.

Email: nayanjyotibhattacharjee@gmail.com

We examine the dynamics of the impact of the evolving policy response during the

COVID-19 pandemic on the equity market sentiment in India. We operationalise our

study by examining the India VIX, the fear gauge of the Indian equity market as an

indicator for the market sentiment, and the country level Government Response

Index of the Blavatnik School of Government, Oxford University as an indicator for

the policy response. The relation is examined through the Markov-switching model

using high-frequency daily data from January 30, 2020, to May 31, 2021. The evi-

dence suggests that the policy response has a positive impact on the market senti-

ment when the market is fearful. Further, the evidence suggests that both the high-

fear state and the low-fear state of the market sentiment given by the model are

short-lived indicating heightened volatility and possible speculation during the ongo-

ing pandemic in the Indian equity market.

KEYWORDS

COVID-19, equity market sentiment, government policy response, India, Markov-switching

model

1|INTRODUCTION

The COVID-19 pandemic which qualifies as a ‘Black Swan Event’

(Antipova, 2021; Morales & Andreosso-O'callaghan, 2020)has

caused unprecedented challenges on the policy front concerning

health, social, political and economic imperatives. Governments

around the world have adopted diverse policy initiatives in the

form of social distancing norms, closure of work places, restric-

tions on large public gatherings and public events, restrictions on

domestic and international travel, stay at home norms and total or

partial lockdowns to contain the virus outbreak during the ongoing

pandemic (Cheng et al., 2020; Hale et al., 2021). Of course, this

has come with a huge economic cost (Phan & Narayan, 2020). To

address the economic challenges, governments have resorted to

initiatives in the form of income support and cash transfers to

households and stimulus packages through use of fiscal and mone-

tary policy to get economies back on track in the wake of the eco-

nomic devastation caused by the pandemic. In this context, the

study of the impact of the evolving policy response by govern-

ments on different institutions critical to health, social and

financial systems during the pandemic seeks attention of

researchers to guide informed policy action.

The pandemic has led to heightened uncertainty around the globe

concerning health, social, political and economic imperatives.

Although the uncertainty due to the pandemic did not originate in the

financial sector but the severity of the crisis in the real economy has

led to the transmission of the crisis in the financial system (Buszko

et al., 2021; Goodell, 2020; Ito, 2020). The uncertainty has impacted

global equity markets also. The pandemic had led to fear and financial

hardships among investors (Frazier, 2021). In the early days of the

pandemic, equity markets around the world went into a freefall

(Bora & Basistha, 2021; Morales & Andreosso-O'callaghan, 2020). To

put things into perspective, we take the reference of the MSCI indi-

ces

1

for the developed, emerging and frontier market economies.

Between January 1, 2020 till its March, 2020 lows, the MSCI World

1

MSCI stands for Morgan Stanley Capital International. The MSCI indices are popularly

tracked by industry practitioners for global equity investment decisions. The World index

relates to the performance of 23 developed markets. While the Emerging market index

reflects the performance of 27 emerging markets. The Frontier Market index reflects the

dynamics of 28 frontier markets.

Received: 22 June 2021 Revised: 13 February 2022 Accepted: 18 May 2022

DOI: 10.1002/pa.2823

J Public Affairs. 2023;23:e2823. wileyonlinelibrary.com/journal/pa © 2022 John Wiley & Sons Ltd. 1of9

https://doi.org/10.1002/pa.2823