Market News
3 min read | Updated on October 09, 2024, 21:54 IST
SUMMARY
This article examines how Indian markets react to wars, detailing trends of pre-conflict pullbacks, post-war rallies, and volatility fluctuations across significant events like the Kargil War, the Iraq War, and the Israel-Hamas conflict.
Influence of global conflicts on Indian financial markets: Trends from Kargil to the Israel-Hamas war
In recent years, multiple wars around the world have had a significant impact on economies due to the higher connectivity between countries. The financial markets have historically anticipated the fear of war, leading to pullbacks before the conflicts begin. In anticipation, financial markets have also experienced heightened volatility, due to the expectation of a negative event.
In the case of Indian markets, a similar trend has been observed. The markets often anticipate the fear of war and experience a pullback, along with heightened volatility in expectation of a negative event. But, once war is declared, there is typically a sharp decline in the markets.
Despite this initial drop, the months following the declaration of war have the markets consistently seen a bullish rally and low volatility, a phenomenon often referred to as the "war puzzle."
In 1999, as tensions escalated between India and Pakistan, the Nifty 50 index declined by approximately 13% before the conflict erupted. However, once the Kargil War commenced, the Nifty 50 surged by 41% during the conflict and continued to rally afterwards. The Indian markets appeared to anticipate the war, correcting themselves in advance while experiencing volatility that affected rallies both before and during the conflict. As the war drew to a close, the markets began to reflect this sentiment, sustaining their upward momentum.
The Indian market did not react significantly on the day of the war, closing positively, and the rally continued throughout the week with low volatility. But, over the month, the stock market experienced a pullback of -6.3% on the NIFTY 50 and -4.38% on the SENSEX, due to heightened volatility and uncertainty regarding the impact of global economies and fluctuations in oil prices, as the Middle East is a significant contributor to global oil supplies. Despite this, the market recovered and ended the quarter on a high note, maintaining a positive trajectory.
In 2020, Azerbaijani forces recaptured previously lost territories in and around Nagorno-Karabakh from ethnic Armenians. However, this conflict had no significant impact on Indian markets, which continued their rally throughout the month and week. The quarter ended on a positive note, with the NIFTY 50 closing at +24.42% and the SENSEX at +25.64%.
On the day the war between Ukraine and Russia began, Indian markets experienced a bloodbath, with headline indices Sensex and Nifty 50 taking their largest hit since May 2020 due to a global sell-off. The India VIX surged 32% higher to 30.3, peaking at nearly 34 during the session. Meanwhile, global benchmark Brent crude rose past $103 per barrel, its highest level since August 2014, reflecting concerns over supply disruptions, as Russia is the world's second-largest oil producer.
The surprise attack by Hamas on Israel, followed by Israel's declaration of war, had heightened geopolitical tensions in the Middle East. Despite this, the Indian stock markets remained resilient, showing no signs of panic sell-offs during the Israel-Hamas conflict. However, after one month of war, the Indian market experienced a slight decline due to rising oil prices and increased volatility in the rupee and bond yields. But, the market remained strong throughout the quarter, ultimately closing on a positive note.
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