War, Stock Market and the Indian Citizen

Gold prices have reached an all-time high, and rising crude oil prices have fueled speculation about a disastrous downturn in the markets.

Every Indian is closely monitoring the developing crisis in West Asia while also keeping an eye on the Indian stock market. Gold prices have reached an all-time high, and rising crude oil prices have fueled speculation about a disastrous downturn in the markets. The recent attacks by Jama’at Nusrat al-Islam wal-Muslimin (JNIM) in Burkina Faso have raised concerns about whether the terrorism crisis in West Asia is spreading, beginning with its neighbouring regions in Africa. This article addresses three critical questions that almost every Indian is pondering upon: Are these isolated incidents of terrorist violence linked to the West Asian crisis? Will these events affect crude oil prices? Is the bearish trend in the stock market indicative of a potential global recession?

Firstly, the poorest performance of India’s frontline indices last week since June 2022 can be attributed to several factors, primarily the Israel-Iran conflict, foreign investment outflows to China following its new stimulus measures, and the new SEBI regulations concerning F&O trading. While the latter two factors depend on the government’s fiscal and monetary prudence and will settle sooner, the war situation is beyond New Delhi’s control. Geopolitical dynamics will ultimately shape the long-term impacts on the market.

Secondly, the recent terrorist attacks across Africa are unlikely to be connected with the so-called “axis of evil,” which primarily includes Hamas, Hezbollah, and the Houthis. The Axis is a coalition supported by the Shia state of Iran, while JNIM, Boko Haram and other terrorist groups operating in the Sahel and East Africa are aligned with Al-Qaeda, a Sunni group. Fundamental Shia-Sunni differences influence not only their ideologies but also their operational methods and funding. The rise of terrorism in the Sahel and East Africa is an ongoing prominent issue that has gained attention due to volatile environment in its neighbourhood. But the attacks by such groups are sporadic and sponsored by a non-state actor in a localized manner and thus its effect on the global market is unlikely. This also leads to the important realization that not every terrorist incident results in increased oil prices and stock market fluctuations.

Oil prices in the upcoming weeks will primarily be influenced by how these three supposed events unfold: Israeli attacks on Iranian oil fields, assaults on maritime trade routes, and the stance of Organization of Petroleum Exporting Countries+ (OPEC+) on oil production cuts. The U.S. initially urged Israel to target Iranian oil fields instead of its nuclear sites as the last resort but later retracted this statement, calling for restraint instead. Although, Israel’s decision to ban the UN chief from entering its territory indicates its intent to dismiss outside suggestions in pursuit of its objectives.

In the worst-case scenario of such an attack, the responsibility would fall upon Riyadh. Fortunately, Saudi Arabia appears willing to abandon its goal of pushing oil prices to $100 per barrel and has announced plans to increase its oil production starting this December. A premature production increase from Saudi is also plausible, as it faces market share losses to other OPEC+ countries in current scenario. Speculation about rising crude oil prices may help alleviate the pessimism among OPEC+ nations regarding falling prices which prompted their decisions to implement production cuts in first place. This may lead to price stabilization. With historic rival Iran in picture, the Sunni Arab world is unlikely to impose 1973 style oil blockade due to Israeli actions, which had resulted in more than 100% increase in crude oil prices.

The security of sea lines of communication (SLOCs) is another critical consideration. Much depends on how the U.S. and its allies manage the Houthi rebels near the Red Sea, a route responsible for 10% of global oil trade. With Iran’s direct involvement in the conflict, the Gulf of Hormuz—through which 30% of the world’s oil trade passes—becomes a significant chokepoint of concern. Israel’s naval force is not as strong as its air and space defense architecture and may be overpowered by security actors present in the Indian Ocean. India’s positive relations with Iran may also enable cooperative efforts in the Ocean, protecting global oil trade from disruption. Recent maritime venture between the two countries can be a good start to the conversation on jointly providing security to these trade routes.

Currently, the crisis does not appear to be escalating into a dire market failure scenario. With India’s foreign exchange reserves reaching an all-time high of $700 billion and its cordial relations with nearly all the oil-producing nations, the country is better positioned to absorb potential shocks. While open markets can create volatility and flux in investments, they also dilute a single nation’s bargaining power which becomes particularly advantageous in the predominantly state-regulated oil sector. The game is no more solely geopolitical. It is geoeconomic as well. Saudi cannot afford to lose its oil market share and needs investment for its mega projects. Iran cannot afford to diversfy its operations in the countries where its proxies are not present. The US cannot sponsor more wars, it is overstretched. Overall, the market may find a balance sooner than we expect, unless something unexpected happens.

Aishwarya Acharya
Aishwarya Acharya
Aishwarya Acharya has completed her Masters in International Relations and Area Studies from Jawaharlal Nehru University, New Delhi and is currently working as a Research Intern at Institute of Chinese Studies. Her interests lie in Security, Political Economy and Tech Geopolitics. She has written articles for Financial Express, Lowy Institute etc.