An uneasy ceasefire in West Asia has nudged global markets into a fragile and potentially unstable equilibrium, according to a report by SBI Capital Markets Limited, with investors grappling with persistent inflation risks, capital outflows and uncertainty over energy supplies.
The report said that while the announcement of a temporary halt in hostilities briefly soothed financial markets, the failure of subsequent talks ensured that optimism remained short-lived, leaving investors caught between hopes of de-escalation and fears of renewed conflict.
“An uneasy peace directs global markets towards an unstable equilibrium,” the report noted, adding that it remains unclear whether the situation will evolve into a lasting resolution or escalate further.
The geopolitical tensions have raised broader questions about the global economic order, including the dominance of the USD and the risks associated with heavy reliance on imported energy. The report also flagged uncertainty over the future role of Gulf economies as trade and investment hubs, particularly in channelling petrodollar flows into Western markets.
Even if a durable peace is achieved in the coming weeks, structural damage to energy infrastructure in the Gulf could keep crude prices elevated for longer, the report said. Oil prices surged above USD 110 per barrel during the conflict before easing below USD 100 following the ceasefire announcement, but supply disruptions may prevent a return to pre-war levels anytime soon.
Higher energy costs, combined with existing tariff pressures, are likely to push inflation risks upwards globally, potentially forcing central banks to tighten monetary policy sooner than expected. The report said the balance of risks has “tilted to the upside on prices”, narrowing the window for rate cuts and increasing the likelihood of prolonged policy pauses or even hikes.
Market volatility has already manifested in capital flows. Foreign portfolio investors withdrew USD 16.6 billion from Indian markets in FY26, including a record USD 19.7 billion from equities, contributing to an 11 per cent depreciation in the rupee over the period.
The outflows, alongside declining mutual fund inflows, down 9.7 per cent year-on-year to Rs 7.4 trillion, show the nervousness among investors, the report said. Debt-oriented funds were particularly affected, witnessing an 84 per cent drop in inflows.
Bond markets have also reflected the strain. Corporate bond issuances fell 5 per cent year-on-year in FY26, marking the first decline in four years, as elevated yields deterred borrowing. Benchmark government bond yields, though off recent highs, are unlikely to return sustainably to pre-war levels due to persistent inflationary pressures.
On the fiscal side, governments face tightening constraints. In India, cuts in fuel levies to cushion consumers from rising crude prices could undermine revenue targets, even as expenditure pressures increase due to higher subsidies and potential stimulus measures. This combination risks widening fiscal deficits at both the central and state levels, the report said.
Despite the turbulence, India’s growth outlook remains relatively resilient, with real GDP projected to expand by 7.6 per cent in FY26, supported by strong consumption. However, the report cautioned that external headwinds, including supply chain disruptions and weaker export demand, could cloud prospects for FY27.
Globally, asset prices continue to exhibit heightened volatility, with equities under pressure and commodity prices fluctuating sharply in response to geopolitical developments. Input costs have surged to multi-year highs, further complicating the inflation outlook for major economies. The report concluded that restoring stability in financial markets will require a sustained period of geopolitical calm, warning that without it, episodic relief rallies are likely to give way to renewed bouts of uncertainty. |
