- By Shefali Sahu
Any global geopolitical development creates an impact on capital markets across the globe, and India is no different. Registered as an emerging economic powerhouse and as a developing economy with a rapidly opening financial sector, India's stock markets, flows of foreign investment, bond yields, and currency valuation are all now transforming the influence of the new global order. Global geopolitical developments such as international wars, economic policies among major economies, global trade agreements, and international supply chain disruptions directly affect investor sentiments and financial stability.
For instance, India's Capital Markets have been well integrated into the world economy. They attract tremendous FPIs and FDI inflows. In the first two months of 2024 alone, foreign investors directed an inflow of close to $8 billion into Indian equities, demonstrating how the world's largest democracy has continued to attract investors despite looming global uncertainly. The reality, though, is geopolitics-from trade rows at the level of global superpowers to localized conflicts markets into volatile behaviour and shapes long-term trends. It would seem that India has stood the test of time where most external shocks are concerned, but it's very important that this country should come out with an ace in addressing the geopolitical risks to ensure sustained growth and investor confidence.
Geopolitical Scenarios and Their Impact on Indian Stock Markets
1. Middle East Conflict and Oil Price Volatility
Response of stock market: The Condition of Aviation, Transport, and Energy-Exhaustive Industries as Crude Oil Prices Rise Due to Tension in the Middle East with -5 to -8% Stocks for IndiGo and SpiceJet as Fuel Prices Go Up.
Impact on the Index: The Sensex fell 2% in February 2024 when Brent crude crossed $95 per barrel.
2. Russia-Ukraine War and Commodity Prices
The Indian metal and energy stocks have become volatile yet again cycle due to the worldwide disruptions in global supply chains. The stock fluctuated during the day for Hindalco and Tata Steel as prices continued to remain uncertain for aluminium and steel.
Impact on Index: Nifty Metal Index fell by 4.5% owing to increased geopolitical risks.
3. India’s Strategic Trade Alliances
Stock Market Reactions: The sentiment improved regarding manufacturing and defence stock on trade pacts with UK, European Union, and Japan. Bharat Electronics and HAL, in Q1 2024, rose by 10% due to enhanced defence investments.
Index-Level Impact: Nifty Defence and Infrastructure Index made by 6% from the trade deals.
Foreign Investments and Market Sentiment
Foreign investments have emerged as one of the clearest channels for investigating how global geopolitical factors impinge on the Indian market. Capital inflows into India depend on the economic policies adopted by the developed nations, risk perceptions regarding the extant geopolitical uncertainties, and adjustments in global supply chains. Whenever these foreign investors see instability in other markets, India often becomes the destination of choice for foreign investments in view of its economic prospects and a relatively stable policy environment.
Indexation of prominent national equity indices like the Nifty 50 and Sensex is typically reflective of capital flight from emerging markets during times of geopolitical tensions. Whenever risks heighten—be it via military clashes, sanctions, or trade wars—investors will be seen exiting their positions in volatile assets, thus triggering FPI outflows. Such outflows serve to depreciate the rupee and make the equities suffer. Therefore, in early 2024, the Nifty 50 index declined by 4%, reflecting the rising concerns of the Middle East and demonstrating the sensitivities of Indian equities to anything global.
There are geopolitical changes taking place at this moment and these tend to be in favor of India. Global supply chains that are currently on a trend of diversifying away from China have begun to attract investments into Indian equities, especially with regards to manufacturing, technology, and defense. These investments will strengthen manufacturing in India and bolster its alternative production hub status under the PLI scheme of the Indian government for an estimated ~₹2.5 lakh crores (~$30 billion) till February 2024.
Stock Market Volatility and Sectoral Impact
Indian stock markets have historically shown volatility under the self-imposed condition of geopolitical crises. Wars, global trade disruption as well as imposition of economic sanctions lead to panic selling in equity markets, even when India is not a direct participant in the conflict. The event climbs up with spikes in India VIX, indicating volatility during those times as it gauges the uncertainties prevailing in the market and normally mirrors worries of jittery investors.
Certain sectors are more vulnerable than others to geopolitical disruptions:
Oil and Gas: Over 85% of crude oil requirements are imported by India, making it highly sensitive to disruption in Supply chains. In such cases, escalation in the Middle East or conflict arising out of differences between two or more major oil-producing nations drives crude oil
prices higher, affecting companies like ONGC, Indian Oil, and BPCL. In early 2024, crude oil prices fluctuated in the range of $85-$95 per barrel on the basis of the supply concerns caused by geopolitical conflicts.
Information Technology (IT): India will benefit in instances when Western companies search for alternatives for Chinese outsourcing. With rising geopolitical tensions between the U.S. and China, there have been incidents of increased demand for Indian IT services, with Infosys, TCS, and Wipro being the clear beneficiaries. IT revenue growth could slow down if global clients tighten their spending due to economic slowdowns induced by geopolitical risks.
Defence and Manufacturing: The rise of self-reliance is an ever-increasing progressive habit and geopolitical tensions within which global arms trade. Indian defence firms like HAL and Bharat Electronics have been in the limelight of investors recently. In a historical move, the Indian government made a whopping allocation of ₹6.3 lakh crore, which is equivalent to $76 billion, into defence spending in the year 2024, a significant fraction of which will be directed towards domestic procurements.
Pharmaceuticals and Healthcare: The major exporter of generics in the world, the pharmaceutical market in India suffers due to various international supply chain disruptions and global regulatory policies. Trade wars and restrictions on access to critical raw materials from China detrimentally affect stock performance in this entire sector. Beginning from early 2024, supplies of active pharmaceutical ingredients (APIs) suffered disruption, affecting input costs by rising 12% for major pharma companies.
Conclusion
India's capital markets are organically intertwined with global geopolitics, impacting investments, trade balances, and currency stability. Although geopolitical risks create turbulence in the short term, India's economic resilience, flexibility in policy matters, and strategic reforms give it strong impetus towards long-term stability and growth. Investors and policymakers must remain keen to stave off the challenges of the future.
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