Trade Policy Shocks and the Indian Equity Market: An Empirical Analysis of U.S. Tariff Changes and Sectoral Stock Returns

Abstract

This study aims to understand how major US tariff-policy announcements have influenced the prices of Indian equities. The study further explores conditional volatility and financial transmission channels from January 2018 to June 2026. This study employs a combined event-study framework. Generalized Autoregressive Conditional Heteroskedasticity (GARCH) volatility modelling along with a five-variable Structural Vector Autoregression (SVAR) was also used. The study was carried out for a 251 trading day estimation window and three event windows around six policy announcements. The reported results show a statistically significant negative response of the NIFTY 50, with a cumulative average abnormal return (CAAR) of −1.42% over the [−1,+1] window. Sectoral responses are heterogeneous: NIFTY Metal (−3.65%), and NIFTY IT (−2.84%) show larger negative responses, whereas NIFTY FMCG (−0.22%) is statistically insignificant. GARCH estimates indicate positive event-related variance shifts for NIFTY 50, IT and Metal, but not FMCG. Under the specified Cholesky identification, the 10-day forecast-error variance of NIFTY IT is associated with FPI-flow and USD/INR shocks accounting for 24.3% and 18.7%, respectively, while TPU shocks account for 29.1% of NIFTY Metal variance. The results showcase heterogeneous short-run responses across the selected sectors while the transmission estimates highlight conditionality on the specified identification structure. These findings indicate that U.S. tariff announcements are associated with heterogeneous short-run spillovers into Indian equities, with financial channels complementing direct trade exposure.