KATHMANDU: Nepal’s stock market reacts swiftly to uncertainty surrounding government and regulatory policies, with the Nepal Stock Exchange (NEPSE) index potentially falling by as much as 10% following a significant policy shock, according to a new study by the Nepal Rastra Bank (NRB).
The study, titled “Macroeconomic Effects of Economic Policy Uncertainty: Evidence from Nepal,” published by the NRB’s Economic Research Department in July 2026, concludes that the capital market is the most sensitive segment of the economy to economic policy uncertainty.
According to the research, a one-standard-deviation shock in economic policy uncertainty causes the NEPSE index to decline by around 5% immediately, with the maximum negative impact reaching approximately 10%. However, the researchers stress that this should not be interpreted as a prediction that the market will inevitably fall by 10%. Rather, it reflects the average historical response of the stock market to unusually large policy uncertainty shocks. The study also finds that such declines are generally temporary, with the market often rebounding and eventually trading above its pre-shock level.
Unclear policies trigger immediate investor anxiety
The study finds that investors are highly sensitive to uncertainty surrounding the national budget, monetary policy, taxation, interest rates, credit policy, import-export regulations, and other regulatory measures. When policy uncertainty rises, investors quickly reassess corporate earnings prospects, future economic conditions, and market direction, resulting in an immediate reaction in the stock market even before broader economic indicators begin to deteriorate.
Researchers note that the absence of policy guidance, inconsistencies between policy announcements and implementation, conflicting messages from regulators, and frequent regulatory changes can heighten investors’ perception of risk. As a result, investors may postpone new investments, sell shares, or adopt a wait-and-see approach, placing downward pressure on the market.
The study recommends that the government, Nepal Rastra Bank, the Securities Board of Nepal (SEBON), and other regulatory agencies clearly communicate the objectives, implementation plans, and timelines of new policies to avoid unnecessary market volatility caused by unexpected decisions.
Broader economy affected with a delay
While the stock market responds immediately, the study finds that the impact on the real economy emerges more gradually.
A one-standard-deviation increase in policy uncertainty is estimated to reduce Nepal’s gross domestic product (GDP) by up to 2%, with the effects beginning in the second quarter, peaking in the third quarter, and remaining statistically significant through the fourth quarter.
The research also estimates that real imports could decline by as much as 15%, while real private-sector credit could contract by around 5%. The negative impact on private-sector lending is expected to begin in the third quarter and persist until the sixth quarter.
According to the study, rising policy uncertainty can lead businesses to postpone new investment projects, banks to tighten lending, investors to avoid risk, and consumers to reduce spending. As both credit demand and supply weaken, imports, production, and overall economic activity come under pressure.
The study found no statistically significant impact of policy uncertainty on inflation.
Measuring economic uncertainty through Google searches
Researchers Birendra Bahadur Budha, Rohan Byanjankar, and Swastik Nepal constructed Nepal’s Economic Policy Uncertainty Index using Google Trends data covering the period from January 2011 to April 2026.
The index was built using search intensity for 56 keywords related to fiscal policy, monetary policy, and trade policy, with “Nepal Rastra Bank” serving as the benchmark search term.
The underlying assumption is that households, investors, and businesses search online more frequently for information related to interest rates, taxes, credit, exchange rates, budgets, inflation, and trade when uncertainty about future economic policies increases.
The researchers also tested an alternative index based on 95 policy-related keywords and a broader uncertainty index using 201 keywords covering elections, national security, wars, health crises, earthquakes, the COVID-19 pandemic, cooperatives, and microfinance issues. Despite using different methodologies and indicators, the findings remained broadly consistent, strengthening the robustness of the study.
Uncertainty peaks around the budget and monetary policy
The study found that Nepal’s policy uncertainty index typically rises around the announcement of the national budget and the annual monetary policy issued by Nepal Rastra Bank.
It also recorded elevated uncertainty during the 2022 foreign exchange reserve pressure, national elections, the 2015 earthquake, and the COVID-19 pandemic and lockdowns.
The findings suggest that not only policy decisions themselves but also speculation, public debate, rumors, and a lack of clear information before major announcements can influence investor behavior and economic activity. The researchers conclude that alongside sound policymaking, clear and transparent communication is a crucial tool for maintaining economic stability.
