Context:
A new study published in the RBI’s Monetary Policy Report 2025 sheds light on how geopolitical shocks such as wars, international sanctions, or global unrest impact stock markets, currency exchange rates, and corporate credit spreads, especially in emerging economies like India.
Key Findings
The study introduces a Geo-Political Risk (GPR) Index, used to quantify the intensity of geopolitical disturbances. Findings reveal both immediate and delayed effects, with second-month reactions more severe:
- In the 1st month of a 1 percentage point (pp) GPR increase:
- Stock markets drop by 0.25 pp
- Currencies depreciate by 0.16 pp
- Credit spreads widen by 1 pp
- In the 2nd month:
- Stock market declines deepen to 0.64 pp
- Currency depreciation rises to 0.32 pp
- Credit spreads further worsen by 1.2 pp
Understanding the Credit Spread
Credit spread reflects the risk premium investors demand for corporate bonds over safer government bonds. For example:
- India’s benchmark 10-year G-sec yield is 6.55% (as of April 9, 2025)
- A rising credit spread means higher borrowing costs for businesses, indicating reduced investor confidence.
Persistent Risks and Market Turbulence
Though the negative impacts of geopolitical events moderate over time, frequent or consecutive shocks create persistent volatility. The authors caution that:
- Financial markets remain sensitive to repeated shocks, keeping investor uncertainty elevated
- The uneven impact across sectors and regions reinforces economic instability
Strategic Implications for Emerging Markets like India
- Proactive risk management is critical: Currency reserves, policy buffers, and stable fiscal outlooks help weather shocks.
- Geopolitical foresight and global engagement: Diplomatic agility and diversified trade relations are vital.
- Need for robust market infrastructure: Ensures resilience in credit markets and investor confidence during external stress.
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