Opinion
Worsening Gaza crisis will keep foreign investors on edge, markets volatile
Summary
- Foreign investors are also likely to remain cautious until the Lok Sabha elections are completed and the next government is sworn in
Global events, especially the situation in Gaza, continue to stir anxiety across financial markets. The equity market has cracked – the Sensex lost more than 850 points on Thursday and is down to its lowest level in four months – as investors are nervous about how India would be affected by an escalation of the conflict between Israel and Hamas.
Israel's prime minister Benjamin Netanyahu has said preparations are being made for “a ground invasion" of the Gaza Strip. The fear is that this could lead to contagion, with Iran becoming more directly involved on behalf of Hamas and widening the arena of conflict. That in turn may cause Arab nations, which are major oil and gas producers, to use their “energy leverage", as they have in previous conflicts. In 1973, for example, Opec hiked crude and gas prices to punish Western nations that supported Israel in the Yom Kippur War.
The biggest worry is thus around the availability and prices of crude oil If the situation in Gaza is not resolved quickly. Iran is already under sanctions that reduce its ability to export oil and gas, and so is Russia thanks to the Ukraine war.
India is especially vulnerable as it imports roughly 85% of its crude and over 50% of its gas. While estimates at the time of the 2023-24 budget assumed that the Indian crude basket would average around $75 a barrel, the conflict has already pushed this over $90. There will inevitably be pressure on the rupee if energy prices lead to a bigger import bill. That would mean higher inflation across the economy, which would force the Reserve Bank of India to keep interest rates higher for longer.
Under normal circumstances the buffer for higher crude import bills are export earnings (including services exports) and higher hard-currency investments into India in the form of both FDI and portfolio investments. However, the global economy is weak at the moment, suffering from a combination of low growth and high inflation. This reduces investments into India and opportunities for exporters. The IT industry, for example, has seen poor growth and issued cautious advisories in the past two quarters.
High global inflation also means hawkish central banks. Currency pressures harm exporters’ prospects and also cause caution among portfolio investors. With rising uncertainty, global central banks are warning that interest rates could remain higher for longer, keeping the cost of capital high. This is causing dollar investors to pull their money out of emerging markets and seek refuge in US treasuries. The Indian equity markets haven’t been immune to this selloff.
Apart from this, investors will likely remain cautious until the upcoming Lok Sabha elections are completed and the next government is sworn in, and will closely track the outcomes of the state assembly elections due next month for cues. Political stability is among the most important factors for foreign investors looking to invest in emerging markets. Gaza has just added another layer of worries to the volatility caused by India’s electoral cycle.
