War and it's impact on Financial Markets

Geopolitical shock has been driving financial markets since the US and Israel launched attacks on Iran at the end of February. Energy prices spiked, as did stock and bond market volatility, amid Iranian strikes on Israel and the oil-rich Gulf nations, and the de facto closing of the vital Strait of Hormuz to international shipping.

When headlines turn to war, concerns about economic disruption, energy supply and financial stability often come to the fore. History, however, suggests that the relationship between war and long-term equity performance is more nuanced than initial market moves might imply.

Don't worry about volatility in the markets.

Markets Tend to Stabilize Over Time

Looking across eight major conflicts over the past five decades, the S&P 500 was often volatile around the outbreak of hostilities. In several cases, markets fell in the initial days and weeks, reflecting uncertainty about the duration and potential economic spillover. Yet stocks frequently stabilized—and in many instances recovered—over longer horizons. On average, one year after the onset of conflict, the S&P 500 was up 7.0%, underscoring the market’s capacity to look through geopolitical shocks.

These historical observations come with some caveats. The sample size is small and each conflict unfolded within a unique macroeconomic and market backdrop. Some wars coincided with recessions or financial imbalances that amplified their impacts on asset prices. Others occurred during periods of economic resilience, allowing markets to absorb the shock. As a result, averages can mask meaningful dispersion in outcomes.

Impact on Energy Security

The most immediate effect of the conflict is on India’s energy security.

India imports about 80-85% of its crude oil requirement, and nearly 50-55% of crude comes from West Asia.

Disruption in routes like the Strait of Hormuz, through which around 40% of India’s crude imports pass, can push global oil prices upward.

Even fear of supply disruption increases Brent crude volatility.

Inflationary Pressure on Indian Economy

Higher crude prices can create cost-push inflation in India because fuel costs influence logistics, agriculture, and manufacturing.

Food prices may rise due to increased transportation and storage costs.

Although India’s inflation has recently remained within the RBI target band, global oil shocks can reverse this stability.

The Reserve Bank of India faces a policy challenge between controlling inflation and supporting economic growth.

Trade and Export Disruption

West Asia is an important export market for India, especially for agricultural products, pharmaceuticals, textiles, and engineering goods. Conflict in the region can disrupt normal trade flows.

War increases shipping costs as maritime insurance premiums rise and cargo vessels may have to take longer or safer routes.

Small and medium enterprises are more affected because higher logistics costs reduce already thin export margins and weaken global competitiveness.

Conflict also creates uncertainty in global supply chains. Delays in delivery, restrictions on movement, or changes in trade policies can reduce India’s export competitiveness. If the situation continues for a long time, India’s overall export growth may slow down.

Currency and Financial Market Volatility

Rising oil prices and geopolitical uncertainty can lead to capital outflows from emerging markets like India. This may weaken the rupee against the dollar.

A weaker currency increases import costs and can widen the current account deficit.

Foreign institutional investors often reduce risk exposure during geopolitical crises, increasing market volatility.... Read more at: https://vajiramandravi.com/current-affairs/impact-of-war-in-west-asia-on-india/