Editor’s Note
This analysis highlights the potential vulnerability of India’s high-performing stock market to geopolitical instability. While currently a top global performer, any escalation in regional conflict could trigger capital flight as investors seek safer havens, underscoring the market’s sensitivity to external shocks.
India is currently one of the best-performing stock markets globally and is consistently recognized as an emerging market. If the war escalates further, India could face significant challenges. One of these is challenges for the stock market. It is impossible to predict what will happen in the coming times. In such a scenario, foreign investors might withdraw their capital from Indian assets and invest in safer places, which would affect India’s market.
So far this year, Foreign Portfolio Investment (FPI) inflow into Indian equities has exceeded ₹1 lakh crore, reflecting global investors’ confidence in the economy. However, experts have warned that rising tensions in the region could reverse this situation, adversely impacting global trade dynamics and crude oil prices. A prolonged war could prompt foreign investors to pull capital from the Indian market and invest in more stable options.
An escalation of the Iran-Israel war will impact maritime routes. Rising tensions in the Red Sea could prove detrimental to India’s economy. The war will affect sea trade routes, making import-export difficult. Furthermore, the India-Middle East-Europe Economic Corridor (IMEC) project could also be impacted. The completion of this project would reduce India’s dependence on the Suez Canal, but given the current circumstances, only concerns are mounting. If the situation does not normalize, India’s shipping costs are likely to increase.
This year, gold prices have been soaring, outperforming other assets. Central banks have reduced their dependence on the dollar, and institutional investors are increasing their portfolios. Investors are particularly focused on investing in gold. As a result, gold has reached record levels. But now, in a war-like atmosphere, investment in gold could increase further, and the rise in its prices could spoil India’s major festivals.
India imports its oil from Iran. It is natural for the conflict between Iran and Israel to impact crude oil prices. Since Iran’s missile attack on Israel, crude oil prices have started rising. If crude oil prices increase, it will have a direct impact on petrol and diesel prices in India.
Whenever there is a war between two countries in the world, its impact is not limited to just those two countries but also affects others. For instance, the escalating conflict between Iran and Israel could significantly impact India’s economy. The biggest reason for this is the effect of this war on trade routes, which will directly impact imports and exports.
Amidst the escalating war between Iran and Israel, tensions have increased in the Middle East, raising concerns about a regional crisis. If the situation deteriorates, it will have a global impact. In particular, crude oil prices could be significantly affected, as Iran is one of the major oil producers.
An increase in oil prices will eliminate any hope of interest rate cuts from central banks, as high inflation could make economic recovery more difficult. A rise in crude oil prices could also heavily impact investor sentiment in emerging markets like India, which depends on imports for 80% of its oil needs.
Indian stocks are already trading at premium valuations. In such a scenario, a prolonged war could cause global investors to shift their focus away from India. India is currently one of the world’s top-performing stock markets. In such a situation, investors might move their money from risky assets like Indian equities to safer options like bonds or gold.
Geopolitical tensions in the Middle East have intensified rapidly as Iran recently launched nearly 180 ballistic missiles at Israel, specifically targeting military bases and security establishments. Iran has issued a warning to Israel and threatened further missile attacks if Israel retaliates. In turn, Israel is preparing for a major retaliatory strike, with potential targets including Iran’s oil production facilities and other key strategic sites.
Retaliatory airstrikes, secret operations, etc., are expected. President Joe Biden has confirmed his support for Israel’s right to defend itself. But the Iran-Israel war could create trouble for India. This war could have a direct impact on three aspects for India.