Invest Guide November 2024

Understanding Geopolitical Influences -

Global economies are interconnected and geopolitical factors play a crucial role in shaping markets and investment landscapes particularly in emerging economies like India. They create significant risks to markets due to their potential to create uncertainty and volatility. Being strategically positioned in South Asia, India's economic trajectory is influenced by a variety of external and internal forces, including regional stability, trade linkages, and global economic conditions. Understanding and navigating this complex environment arising out of geopolitical developments, it becomes essential for investors to make informed decisions. This interplay of politics and economics not only affects market sentiment but also shapes the long-term growth prospects of various sectors within the Indian economy.

Russia - Ukraine War (2022) -

In April 2022, 2 months after the Russia- Ukraine war, India's retail inflation jumped to an 8 year high of 7.79% because of the supply chain disruptions and multiple sanctions on Russia.

India's Inflation rate spike as a consequence of Russia - Ukraine War (2022)

War led to inflation pressures -

Inflation has been a cause of concern for India since Russi's invasion of Ukraine in February 2022

Recent geopolitical developments in India, a 2023-2024 perspective -

Russia-Ukraine Conflict: It has been two years since Russia's unprovoked full-scale invasion of Ukraine on February 24, 2022. The war has contributed to volatile and increased commodity and energy prices, which aggravated food shortages and fuelling inflation in many regions across the world. The ongoing war has had significant consequences for India, affecting energy prices and food security. Although energy and grain prices subsided from their mid-2022 peaks, the possibilities for their resurgence remains and Europe may continue to see threats to its energy security.

One of the most common reactions to the war has been a drop in global investor sentiment. Apart from India, stock markets around the world experienced one of the most severe drops since the pandemic. The index crashed nearly 4000 points in the first 20 days of the war. However, timely policy measures have led to fast recovery and the BSE Sensex witnessed an upward trajectory from the 51000 level.

While India faces challenges from the ongoing conflict, its diverse economy and pro-active government measures, it is relatively well-positioned to weather the economic impacts for several reasons such as:

1. Diverse Energy Sources -
   India has been pro-actively diversifying its energy imports reducing the dependence on any singular nation. In the year 2024, India procures its crude oil from its two largest trading blocs, Russia and Middle East as well as the other regions like West Africa and North America.
2. Strategic Economic Initiatives -
   The "Make in India" initiative introduced in 2014 aims to reduce dependency on a single foreign supplier particularly during crisis and supply chain disruptions. This focus on self-reliance may help mitigate the impact of global supply chain disruptions.
3. Geopolitical Flexibility -
   India has adopted a neutral position in the Russia-Ukraine war allowing it to maintain relations with multiple global powers. This diplomatic flexibility helps India secure favourable terms in trade and defence agreements. India's approach to foreign policy is characterized by strategic autonomy which enables it to make decisions based on national interests rather than aligning with a single power bloc.

China-India Relations -

Less than a decade ago, economic ties between India and China were strengthening. The 21st century saw the emergence of two great powers as one of the biggest developments in global geopolitics. While geopolitical rivals have often surfaced the two countries, there are moments where the two countries have come together with "fight together" such as on climate change governance. China-India relations have been complex and multifaceted, characterized by cooperation, competition, and significant geopolitical tensions. Some key aspects of the relationship as of 2023-2024 are:

1. Border Disputes -
   The unresolved boundary disputes, particularly in areas like Ladakh and Arunachal Pradesh, are a significant source of tension between China and India. On June 2020, saw the Galwan Valley clash between China and India, a significant military confrontation. India and China have long-standing territorial disputes in the Ladakh region, which have led to tensions and occasional clash along the Line of Actual Control (LAC). The incident marked a significant deterioration in India-China relations, leading to increased mistrust and security concerns. The clash has prompted Indian industries to rethink on supply chains and diversification away from China and an increased scrutiny of trade and investments between the two regions.
2. Economic relations caused by Trade Deficits -
   The growing trade deficit with China has significant consequences for India's economy, influencing national security concerns, consumer sentiment, and government policy. However, the Government of India's sustained and continuous efforts to control excessive imports has narrowed the gap from 2014-15 to 2023.
3. Investment flows -
   Following the 2020 Galwan clash, the Indian government implemented several measures and amendments to the FDI policy urging government scrutiny. With the border tensions easing, India is aiming to see improved investment ties and curbs could be lifted which has earlier disrupted billions of dollars of investments halting planned projects including from Chinese automakers BYD and Great Wall Motor.

India's exports to China in 2023-24 stood at USD 16.65 billion, while imports aggregated at USD 101.75 billion, leaving a trade deficit of over USD 85 billion.

Middle East Dynamics -

While the Russia-Ukraine and Israel-Hamas confrontations persist, increasing tensions between Israel and Iran have created fresh sources of fear and uncertainty in the region and around the world. The rapidly growing tensions between Israel and Iran may have serious economic and geopolitical ramifications worldwide, with huge effects on commerce and the global economy.

Some key areas of economic impact are -

1. Crude Oil Prices -
   

   Iran's missile retaliation on Israel on October 1 sent prices of crude oil soaring in several worldwide indices causing a source of anxiety to India which imports 85% of its crude oil mostly from West Asia. The rise in crude oil prices has cascading effects across various sectors of the Indian economy, from manufacturing and aviation to overall inflation and economic growth.

   The Reserve Bank of India (RBI) has revised its crude oil price projection for the second half of the financial year 2024-25, bringing it down to $80 per barrel from its previous estimate of $85, made in April. The reduction in crude oil prices in the recent weeks due to high US production has rekindled hopes for a reduction in prices for petrol and diesel.

2. Trade Relations -
   

   The recent Iran-Israel war has heightened the possibility of economic disruptions. Rendering the vital Red Sea shipping route inaccessible to global shipping lines for an extended period of time can potentially leading to uncomfortably high freight charges. The conflict's impact is already being seen, with Indian exporters suffering a 9% drop in shipments in August, owing primarily to a 38% decrease in petroleum exports due to deteriorating margins and increased shipping costs.

   However, India's trade with neutral regional players such as Saudi Arabia, the UAE, Kuwait, and Qatar has been the silver line. With these GCC countries trade increased by 17% between Jan and July 2024 as compared to 2023.

3. Impact on stock Market and Investor Sentiments -
   The Israel- Iran conflict led to increased volatility shifts in investor sentiment on the BSE Sensex. Both the Sensex and the Nifty clocked significant losses in October 4 trading session. The Nifty 50 closed 0.81% lower at 25,014 on rising concerns that Israel may retaliate against Iran by targeting its oil facilities. Foreign portfolio investors (FPIs) were the most significant sellers withdrawing nearly Rs30,000 crore from Indian markets in 3 days.

Escalating Middle East tensions significantly impacted the Indian market, resulting in substantial losses for the Nifty 50 and Sensex. The Nifty 50 saw a weekly drop of 4.45%, with real estate stocks hit hardest, while rising oil prices add further economic pressure.

These developments illustrate the complex geopolitical landscape in which India operates, influencing its economic policies, security strategies, and international relations. The interplay of geopolitical elements profoundly influences markets and investor sentiments. Ongoing tensions, particularly with neighbouring countries, can create uncertainty, affecting investor sentiment and market stability. Shifts in global trade policies and energy prices also play critical roles, impacting inflation and economic growth.

The good story of geopolitical changes in India -

The Indian economy continues to grow at a healthy pace despite challenging global conditions, according to World Bank's latest India Development Update: India's Trade Opportunities in a Changing Global Context. But to reach its $1 trillion merchandise exports goal by 2030, India needs to diversify its export basket and leverage global value chains. The India Development Update (IDU) observes that India remained the fastest-growing major economy and grew at a rapid clip of 8.2 percent in FY23-24. Growth was boosted by public infrastructure investment and an upswing in household investments in real estate. On the supply side, it was supported by a buoyant manufacturing sector, which grew by 9.9 percent, and resilient services activity, which compensated for underperformance in agriculture.

Furthermore, India's strategic connections with large powers can boost foreign investment opportunities, while regulation reforms motivated by geopolitical concerns may help specific sectors, such as defense, infrastructure and green energy. Investors must remain vigilant to changes in regional stability, foreign relations, and global economic conditions, and navigate potential risks and make the most of opportunities in this ever-evolving market landscape. Keeping an eye on changing government policies such as foreign investment regulations, tariffs, or trade policies, preparing for market volatility, and collaborating with market analysts and advisors who can provide valuable insights can help investors navigate the complexities of geopolitical developments and pave the way for emerging opportunities and growth.