US-China geopolitical tensions and Indian stock market dynamics: evidence from NARDL and wavelet coherence

The geopolitical tension between China and the United States have increasingly shaped global financial markets; the exact impacts on emerging economies like India remain poorly explored. This study examines the impacts of changes in US-China tension on the Indian stock market based on the use of nonlinear Autoregressive Distributed Lag (NARDL) modeling and wavelet coherence analysis. With monthly observations and the newly developed U.S.-China Tension Index (UCT), the study finds asymmetric short-run effects: heightened tensions are likely to dampen sentiment and reduce returns, whereas reduced tensions offer limited relief. Interest rates are a key determinant in both the short run and long run, underscoring their inherent role in determining capital flows. Wavelet analysis captures a change in the nature of the relationship, from persistent co-movement in the early period to more prompt, temporary responses in subsequent years. These results underscore the growing significance of geopolitical attitudes to market action, especially for economies that are increasingly open to international capital flows. The novelty of the paper arises from the application of a novel geopolitical risk metric (UCT) to an untapped economy (India) through a hybrid econometric-time-frequency method that captures hitherto unseen asymmetric and dynamic market responses.