Some random thoughts

 West Asia crisis

In June 2026, the US and Iran signed an agreement to extend their ceasefire by 60 days. This gave both sides time to negotiate a lasting solution to a long conflict. Most West Asian countries seemed to support this process. But Israel, the most important player in the region, kept its distance and did not fully sign on to the terms.

This week, Iran held the funeral of Ayatollah Ali Khamenei, its Supreme Leader, who was killed in joint US-Israel air strikes in February 2026. Leaders from several countries attended the long-delayed funeral, and millions of Iranians came out on the streets of Tehran to mourn him. His son, Mojtaba Khamenei, has since taken over as Iran's new Supreme Leader.

Even as the funeral was underway, the fragile ceasefire came apart. In the past two days, Iran attacked commercial ships passing through the Strait of Hormuz. The US responded on 7 July with what it called “powerful strikes,” hitting more than 80 targets inside Iran, and reimposed the oil sanctions it had lifted as part of the ceasefire deal. Iran, in turn, said it would deliver a “crushing response” and struck US bases in Kuwait and Bahrain on 8 July. On the same day, speaking at the NATO summit in Ankara, President Trump said he now considers the ceasefire “over” and a “waste of time.” Oil prices jumped sharply on the news.

Looking at the mood of the Iranian people, the stance of Iran's leadership on its right to enrich uranium and control the Strait of Hormuz, and Israel's position on Iran's rights, it seems to me that this conflict is far from over. This week's exchange of fire, coming barely three weeks after the ceasefire was signed, confirms that hoping for a lasting solution within the 60-day window was always more wishful thinking than realistic expectation.

A more likely path over the next couple of years could involve four things. First, Iran may push ahead with building a nuclear deterrent against Israel and prepare to avenge the killing of its former Supreme Leader. Second, GCC countries may continue to keep an equal distance from Iran, Israel and the US, even as some of them, like Kuwait and Bahrain, get drawn into the crossfire. Third, Israel may keep trying to weaken Iran's ability to strike it. And fourth, the US may keep swinging between war and peace, as it has done again this week.

Ethanol blending

The government's policy of blending ethanol with petrol has drawn sharp criticism from citizens. There have been complaints of vehicle damage and lower mileage due to blended fuel. Several environmental groups have also opposed the E20 policy, saying it uses too much water to produce ethanol.

The government has strongly defended the E20 policy, pointing to its environmental, agricultural and economic benefits. Automobile companies have also said that E20 fuel does not damage modern, compatible vehicles. A review of thousands of service records suggests there is no widespread evidence of engine damage, wear and tear, or corrosion caused by E20 fuel.

Even so, opposition parties and civil society groups have turned E20 into a popular campaign against the government. They allege that the blending policy mainly benefits the family of a minister who is in the ethanol production business.

This could well become a major election issue. It is not clear how the government will restore public trust in blended fuel and put this controversy to rest. If I were asked for a suggestion, I would say the government should make blended fuel optional rather than mandatory, and offer incentives such as a lower price for blended fuel or a subsidy on insurance premiums.

Infra construction quality

Poor quality of infrastructure, especially roads, along with allegations of large-scale corruption in awarding and executing key infrastructure projects, has become a common topic on social media.

While corruption cannot be ruled out, a more likely reason for the poor condition of newly built roads is rushed construction to meet deadlines, which are often set for political reasons. Poor design and inadequate safety audits are also major concerns for road quality in India.

Whatever the reason, the fact remains that India spends much more than the global average to build its highways, yet the quality of these highways remains poor in terms of design, durability and comfort.

It would help to open up infrastructure construction to global competition and make it mandatory for all projects above Rs 50 million to be awarded through global tenders.

It would also be worthwhile to set up a dedicated highway police force to ensure the safety and security of highway travelers and to quickly address complaints of damage and accidents.

 

After the ceasefire: Why the uncertainty does not end here

Markets appear relieved. The US and Iran have reached an understanding to pause the hostilities that escalated earlier this year, and negotiations for a formal peace treaty are expected to unfold over the next two months. The financial world is, for the moment, pricing in stability.

I would encourage caution. As I argued in an earlier post (Exercise Caution in the Peace Trade), the probability is high that markets have already priced in the bulk of the peace dividend. What lies ahead is not a clear road to recovery but a landscape with multiple overlapping sources of tension — geopolitical, structural, and domestic. Investors would do well to incorporate these into their thinking.

This post is not a forecast. It is a map of the risks I think are being underweighted.

The MAGA domestic pivot

A ceasefire in West Asia does not suit every political narrative. For the Trump administration, the outcome of a conflict in which Iran appears to have extracted meaningful concessions — sanctions relief, asset releases, recognition of Strait of Hormuz leverage — may not sit comfortably with the Make America Great Again agenda. With US mid-term elections approaching, the political incentive to redirect attention is strong.

The most plausible redirections include a reignition of the tariff war, confrontation with NATO allies who did not participate in the Iran campaign, or attempts to exercise influence over Cuba and other near-hemisphere targets. Any of these would reintroduce uncertainty into financial markets.

A stronger Iran and a fragile West Asia

If early reports are accurate, Iran emerges from this episode with economic sanctions lifted and frozen assets released. More importantly, the conflict demonstrated to the world the latent leverage embedded in Iranian control over the Strait of Hormuz — leverage that Iran will not be inclined to relinquish quietly. How Tehran deploys this newfound strategic confidence will be critical to watch.

The two paths are clear. Iran pursues a Persian-imperial vision — enhancing support to Houthis, Hezbollah, Hamas and allied proxy networks — or it pivots toward economic pragmatism and regional co-existence. History suggests the former is more likely in the near term, even if the latter is in Iran's long-run interest. A rising Turkey, increasingly positioning itself as an alternative patron for these groups, complicates matters further.

On Israel, I will simply note what the June post observed: a meaningful and lasting peace requires structural change that goes well beyond a ceasefire. The depth of grievance on multiple sides — accumulated over decades and sharpened by recent events — means that conflict in the region will remain a background condition for years, not months.

Japan: The guilt fades, the ambition stirs

In November 2023, I wrote about the world shedding the guilt of the two world wars and gradually reverting to the competitive, nationalist norms that characterized the pre-1945 era. Japan is, in my view, one of the more significant expressions of this trend. There are faint but discernible signals that Japan — which carried the burden of WW2 guilt for eight decades — is beginning to reassert a martial identity. Shinzo Abe's assassination in 2022 accelerated political shifts in that direction; subsequent defence budget expansions and the revision of Article 9 constraints have continued that trajectory.

If Japan's strategic ambition continues to harden, the Indo-Pacific becomes a materially more volatile neighborhood. For India, which is simultaneously managing Chinese pressure on its northern and maritime borders, this is not an abstract geopolitical observation — it has direct implications for defence budgets, alliance posture, and the cost of maintaining strategic autonomy.

India's unfinished preparations

Near home, China continues to expand its presence in the seas around India, arming and supplying neighbours including Pakistan and Bangladesh. South Asia is unlikely to be a quiet region regardless of what happens in West Asia.

And India's own preparations for a more contested world remain incomplete. Energy security is a work in progress. Our external balances are heavily dependent on services exports and remittances from the West — both structurally exposed to disruption. We rely materially on China for critical chemicals, minerals, and APIs that underpin our pharmaceutical and electronics export industries. Defence indigenization, while underway and accelerating, is a decade or more away from delivering genuine self-reliance.

None of this is to be pessimistic about India's long-run prospects. It is to be clear-eyed about the gap between where we are and where we need to be.

What this means for investors

The short conclusion is this: a secular bull market in Indian equities is not around the corner. The macro environment will stay complex, headlines will remain stress-inducing, and the temptation to make large directional bets on peace, normalization, or a global risk-on cycle should be resisted.

That said, decent wealth compounding opportunities are always present, even in difficult markets. They are just not at the index level. The more productive approach is to focus on specific businesses with growth and earnings visibility that is not dependent on a benign macro outcome.

Volatility will stay elevated and stress inducing. Brace for it, and invest accordingly. 

Adapting Investment Strategies to a Changing Global Landscape

Investing has always involved uncertainty. But most investors manage that uncertainty using a set of well-tested rules — rules about which assets are safe, which markets will outperform, and which strategies hold up when things get rough. Over the past two years, many of those rules have been quietly breaking down.

This is not a temporary blip. The changes are structural. And if investors do not update their thinking, they risk making decisions based on a world that no longer exists.

Over the past year, the world has experienced significant shifts that have disrupted long-held assumptions and altered market dynamics. From evolving geopolitical tensions to changes in institutional effectiveness, investors are facing an environment of heightened uncertainty. To navigate these changes successfully, it’s essential for investors to reassess their strategies and adapt to the new reality.

The geopolitical safety net has frayed

For decades, US military presence in West Asia gave investors, businesses, and tourists a degree of confidence in the region. Countries like the UAE, Qatar, and Bahrain were widely seen as stable and secure — partly because of that umbrella of protection.

The escalating US-Iran tensions have complicated that picture significantly. The assumption that US backing means automatic regional stability has been tested in ways it had not been before. Businesses with operations in the Gulf need to factor in a wider range of scenarios than they did five years ago.

Separately, Israel's defense capabilities — long considered among the most advanced in the world — have been challenged in ways that surprised many observers. Iran's direct strikes have changed how analysts and governments think about deterrence in the region.

The geographic diversification strategies that once treated parts of West Asia as low-risk may therefore need revisiting.

Global institutions are losing their grip

The United Nations was designed with structural limitations — veto powers mean that major-power conflicts almost always escape meaningful intervention. But the past two years have made those limitations more visible than ever, across multiple simultaneous conflicts: Russia-Ukraine, India-Pakistan tensions, Israel-Palestine, Israel-Iran, and the wider US-Iran standoff.

Equally notable is NATO's response (or lack thereof) to the US-Iran conflict. Several NATO members declined to join the US militarily — a signal that the alliance is operating with more internal diversity of interest than its unified image suggests.

For investors, the signal here is not that institutions are disappearing. It is that they can no longer be relied upon to contain or resolve conflicts in ways that protect markets. Geopolitical risk needs to be priced more carefully, not assumed away.

The old market playbook is not working

This is where it gets most directly relevant to portfolios. Several long-standing market assumptions have either weakened or broken down entirely.

Gold is a reliable hedge against inflation and geopolitical shocks

Gold's short-term behavior has been more volatile than expected. When the US-Iran conflict escalated and energy inflation spiked, gold prices fell rather than rising — partly due to dollar strength, rising bond yields, and forced selling by leveraged investors. Gold's long-term store-of-value case is still alive, but its role as a near-term crisis hedge has become less predictable.

"Sell in May and come back in October" — markets weaken in summer and recover in autumn.

This seasonal pattern has been unreliable for several years now and has effectively stopped working as a strategy. With global, 24-hour markets and algorithmic trading, seasonal patterns erode as soon as they are widely known. Investors relying on calendar-based rules are finding them expensive.

In times of uncertainty, value stocks and blue-chip defensive companies outperform.

Over the past two years, value has severely underperformed growth. Defensive, dividend-paying companies have not provided the shelter investors expected. The factors driving markets — AI investment cycles, interest rate dynamics, geopolitical disruptions — do not fit neatly into the traditional defensive playbook.

Indian equities deserve a large premium over other emerging markets.

India's premium over other emerging markets — built on its large market size, strong regulation, and high growth — has steadily compressed as foreign investors have sold Indian securities consistently over the past two years. The premium is not gone, but it is smaller and less taken-for-granted than it was. Foreign investor patience with Indian valuations has limits.

India’s Equity Market: A Shift in Investor Sentiment

India has long been a favored destination for foreign investors, attracting capital due to its market size, growth potential, and strong regulatory framework. Historically, Indian equities traded at a premium to other emerging markets, supported by these favorable factors. However, in the past two years, this premium has diminished as foreign investors have been pulling capital out of Indian markets. The reasons behind this shift include global economic uncertainty, rising interest rates, and concerns about domestic political developments.

Despite this, India remains one of the fastest-growing major economies, and its long-term growth prospects are still strong. However, the recent decline in foreign investment highlights the need for investors to reconsider their assumptions about the Indian market and adjust their strategies accordingly.

So what should investors do?

The honest answer is that there are no easy replacements for the rules that are breaking down. But there are some clear principles for navigating a more uncertain world.

The world has not become unnavigable. But it has become less predictable. Investors who acknowledge this — and build it into their process — are better placed than those who wait for the old rules to start working again. The defining skill of the next decade may simply be the willingness to stay curious, stay humble, and keep questioning what you think you know.

Treat volatility as the baseline, not the exception. For many years, low volatility was the norm and spikes were temporary. That may be reversing. Portfolio construction, position sizing, and risk management should all be built around the assumption that high volatility is here to stay.

Question every "always works" rule. If a strategy or correlation is part of conventional wisdom, it is worth asking: does the logic still hold given today's market structure? The worst time to find out a rule no longer works is after it has cost you money.

Diversify across scenarios, not just assets. Traditional diversification — across stocks, bonds, gold, and geographies — assumed those assets would behave in known ways relative to each other. Many of those correlations have shifted. Think about scenarios, not just asset classes.

Reassess geopolitical risk regularly. The geopolitical map is being redrawn. Assumptions about safe regions, stable alliances, and reliable institutions need to be reviewed more frequently than they used to be.

Where India stands in the Iran war

India's stance in the ongoing Middle East conflict is shaped by two core realities: acute economic exposure, particularly to energy supplies and markets, and the need for deft foreign policy maneuvering to maintain strong relations with the United States, Israel, and Iran without alienating any key partner.

Though not a direct participant, India has deep strategic and economic stakes that have drawn New Delhi into active diplomacy with all sides. The government has pursued a classic hedging strategy—balancing deepening security and technology ties with the US and Israel, while preserving longstanding energy and connectivity links with Iran and engaging Gulf allies such as the UAE, Saudi Arabia, and Oman.

New Delhi has avoided full alignment with any camp, consistently calling for de-escalation, dialogue, and the unimpeded flow of trade through critical routes like the Strait of Hormuz to safeguard its energy imports. This reflects India's broader evolution from strict non-alignment to flexible multi-alignment, forging partnerships with major powers while safeguarding strategic autonomy.

Economic Impact

The conflict is already imposing significant costs across several channels.

Energy Security Risks

India relies on imports for about 85–88% of its crude oil needs, with the Middle East traditionally accounting for roughly half (though recent diversification has routed ~70% of crude outside the Strait of Hormuz). For LPG, around 60% of consumption is imported, with ~90% of those volumes transiting Hormuz—primarily from Qatar and other Gulf states. Any prolonged disruption or blockade could sharply curtail supplies of crude, LPG, LNG, and key chemicals/aluminum/ feedstocks, threatening energy security.

Sustained high oil prices (currently above $100 per barrel, with Brent around $104) are fueling inflation, widening the current account deficit, and exerting downward pressure on the rupee. Industrial sectors dependent on imported raw materials—chemicals, fertilizers, and others—face production bottlenecks, while agriculture could suffer from higher input costs. LPG shortages would hit millions of households and small businesses that rely on it for daily cooking.

Financial Markets and Investor Confidence

Equity markets have declined amid the uncertainty, with foreign portfolio investors accelerating outflows that were already underway. The rupee has weakened to multi-year lows (around ₹92.50–92.60 per USD in mid-March), amplifying import costs and debt-servicing burdens.

Remittances and Employment

The Gulf hosts millions of Indian workers, whose remittances—exceeding $50 billion annually—bolster India's external accounts. Instability risks job losses, reduced flows, and safety concerns for the diaspora. Indian companies with substantial revenue from Gulf markets (goods, services, construction) are seeing contracts delayed or canceled.

Potential Role in Reconstruction

India's established presence in the region positions it well for post-conflict infrastructure and energy rebuilding projects, though it will face stiff competition from China.

Net Economic Impact

The combined pressures—inflation, currency depreciation, trade disruptions, and remittance risks—threaten to dampen growth. Rough estimates suggest that every $10 per barrel increase in crude prices widens the current account deficit and inflation by 40–50 basis points while shaving 30–40 basis points off GDP growth.

Foreign Policy Implications

India's strategic autonomy is under real test. Stronger security and technology cooperation with the US and Israel coexists with the need to protect historic ties with Iran—vital for energy diversification, Chabahar port access, and regional connectivity.

Stability remains paramount: safeguarding the diaspora, keeping sea lanes open, and preventing logistics breakdowns all require nuanced diplomacy rather than picking sides in a polarized conflict.

Which Outcome Serves India Best?

A diminished US role in the region could, in theory, foster greater autonomy among Gulf states, open East-West trade corridors, and reduce over-reliance on any single superpower.

Yet such a shift carries risks: a power vacuum might breed instability, empower non-state actors, and drive even higher energy prices—outcomes that would harm India's interests far more than any short-term geopolitical gain.

Iran remains important for India's long-term diversification (potential oil/LNG supplies, Chabahar linking to Central Asia). A fractured Middle East would likely compound economic setbacks through sustained high oil prices and supply volatility.

In essence, India is wisely maintaining a neutral, diplomatic posture to protect its energy security, economic stability, and strategic flexibility. Prolonged instability would impose net costs far outweighing any hypothetical benefits from a weakened US presence or an Iranian setback. 

The war and beyond

For the past 17 days, a significant and highly intense conflict has unfolded in the Middle East. This war is multifaceted, encompassing military strikes, counterattacks, intricate narratives, and propaganda from all sides. The aggressors in this war are the United States of America (U.S.) and the State of Israel, while the defender is the Islamic Republic of Iran. While the U.S. is a secular state, under President Donald Trump, there have been calls to promote a stronger Christian identity. Israel, as a Jewish state, and Iran, an Islamic state, have starkly different ideologies but share a long history of religious and political conflicts rooted in their common Abrahamic heritage.

The relationship between Israel, the U.S., and Iran has been contentious for decades. A key event in this ongoing tension was the 2025 military confrontation between Israel and Iran. On June 13, 2025, Israel bombed Iran’s military and nuclear sites, killing several military officers, scientists, and civilians. After 12 days of intense fighting, the U.S. mediated a ceasefire.

However, the current conflict cannot be reduced to religious differences, counter-terrorism, or self-defense. Instead, it appears to be part of a broader U.S. strategy to:

·         Control the global energy market and key trade routes,

·         Maintain geopolitical and economic supremacy over Russia and China, and

·         Prevent the rise of autonomous economic powers in the Middle East.

With Iraq’s military power decimated and Pakistan’s strategic assets severely weakened during Operation Sindoor, Iran remains the only truly independent and potent military power in the region. The ongoing Russia-Ukraine conflict has also highlighted Western Europe’s energy vulnerabilities, further underscoring the importance of controlling energy resources and strategic trade routes such as the Suez Canal, the Strait of Hormuz, and China’s Belt and Road Initiative (BRI). Achieving this would give the U.S. a decisive edge in global geopolitics.

Despite the theoretical strength of this strategy, its implementation has not been without complications. The first major setback came when coalition forces killed Iran’s Supreme Leader, Ayatollah Khamenei, on the first day of the conflict. This act, combined with the bombing of a school that killed 160 young girls, has galvanized Iran’s resolve and transformed the war into a religious struggle. The death of Khamenei has united the Iranian people under the banner of Islamic radicalism, while also making Arab support for the U.S.-Israel coalition increasingly uncertain. Meanwhile, the attack on the school has severely damaged international opinion, particularly in Europe, where anti-coalition sentiments are rising. Even President Trump faces mounting criticism domestically. Most NATO allies have so far refused to join the war despite repeated calls by President Trump.

The Current State of Affairs

As of now, the war shows no signs of de-escalating soon. While the intensity of attacks may subside as military resources dwindle, the broader conflict appears far from resolution. Additionally, several key trends are emerging:

·         Global Economic Crisis: The war threatens to spark a global economic crisis, driven by energy inflation and severe logistical bottlenecks reminiscent of the economic disruptions seen during the Covid-19 pandemic.

·         Middle Eastern Impact: Countries like Qatar, Bahrain, UAE, Kuwait, and Iraq, caught in the crossfire, are witnessing widespread infrastructure damage and suffering reputational harm as secure havens.

·         Israel’s Vulnerability: Israel, long considered militarily invincible, has reportedly sustained significant losses to both its infrastructure and military forces, leading to a reassessment of its invulnerability.

·         U.S. Economic and Security Costs: The U.S. has sustained considerable losses, both in terms of military assets and economic costs. The long-term implications could be far-reaching, with the U.S. facing higher security risks for years to come, as Islamic radical groups seek to avenge Khamenei’s death.

·         Iran’s Dilemma: Iran has lost many key leaders, faced substantial infrastructure damage, and alienated long-time allies like India and Pakistan. Meanwhile, the Iranian prince in exile has called for a popular uprising in Iran, hoping to restore his regime.

·         Russia and China’s Restraint: Surprisingly, both Russia and China have refrained from directly entering the conflict on Iran’s side, although there are reports suggesting they may be providing covert support through ammunition and technology.

Potential Endgames: How Will the Conflict End?

Admittedly, I do not possess even basic qualifications to forecast the outcome of this war. Nonetheless, like any aware citizen, I find it relevant to stay aware of the current situation and make an assessment of the likely outcomes based on my understanding of the various contemporary issues and readings.

In general, wars can end in four main ways:

1.    Aggressor Victory: The aggressor achieves its objectives, replaces the existing regime with a puppet government, and extracts reparations from the defeated enemy. A historical example would be the U.S. victory in Iraq.

2.    Defender Victory: The defender manages to repel the aggressor’s forces, captures or kills key military leaders, and emerges with a strengthened position. Examples include World War II and the 1971 Indo-Pakistani War.

3.    Truce: Both sides agree to a ceasefire, with the aggressor retreating and both parties finding a negotiated resolution. An example of this would be Operation Sindoor.

4.    Stalemate: Neither side wins, but the fighting continues at low intensity, with no formal end to the conflict. The Russia-Ukraine conflict serves as an example.

U.S.-Israel Alliance Victory (Aggressor Wins)

A U.S.-Israel victory could lead to the following outcomes:

·         Regime Change in Iran: Iran’s Islamic regime is overthrown, and a new, U.S.-friendly government is installed.

·         Enhanced U.S. Control over Arab States: The U.S. solidifies its influence in the region, ensuring strategic dominance over vital energy resources and trade routes.

·         Expansion of Israel’s Borders: Israel may continue its aggressive policies in Palestine, potentially annexing more territory and solidifying its position as a regional superpower.

·         Strengthened Economic Sanctions on Russia: With enhanced energy security in Europe, the U.S. could ramp up its sanctions on Russia.

·         Shift in U.S.-China Relations: The U.S. could gain an advantage over China, particularly in the economic and trade spheres.

·         Stabilized Energy Markets: As the conflict subsides, energy prices may stabilize, albeit at a higher baseline.

Iranian Victory (Defender Wins)

An Iranian victory could result in:

·         Revenge for Khamenei’s Death: Iran avenges the death of its leader by targeting top figures in Israel and the U.S.

·         Iran’s Rise as a Regional Power: Iran assumes a dominant role in the Middle East, uniting other Islamic nations and taking control of energy resources and trade routes.

·         Peace with Palestine: Israel may be forced to negotiate with Palestine, leading to a resolution of the longstanding conflict.

·         Empowered Radical Groups: Groups like Hamas, Hezbollah, and the Houthis could gain territorial control in key areas such as Palestine, Lebanon, Yemen, and Syria, destabilizing the region further.

·         U.S. Withdrawal from Iraq: The U.S. could lose its influence in Iraq and be forced to pull its military out of the region.

·         China’s Rising Influence: China may step in as the new protector of the region, offering military and economic support to rebuild Iran and other conflict-ravaged nations.

·         Surging Energy Prices: Iran’s control over energy routes could send oil prices skyrocketing, triggering a global economic crisis.

·         Ukraine yields to Russia’s demands: The NATO funding of Ukraine defense comes under pressure. Ukraine is forced to strike a deal and yielding control of some territories to Russia.

Truce (Mutually Agreed Ceasefire)

A truce could result in:

Restoration of the Status Quo: The parties agree to a ceasefire, and the conflict ends without significant territorial changes.

Continued Tensions: While fighting ceases, the underlying tensions remain high, and the region faces ongoing risks of further conflicts.

Shift in U.S. Influence: U.S. influence in the region may diminish, while Israel faces increased diplomatic isolation.

Regional Reconstruction: Reconstruction efforts in Israel, the UAE, Bahrain, Qatar, Iran, and other affected countries would begin.

Stabilized, Yet Elevated, Energy Prices: Although energy prices may stabilize, they will likely remain elevated due to increased security risks.

Stalemate (Low-Intensity Conflict)

A stalemate would lead to:

Continued Uncertainty: The conflict would drag on at a low intensity, with no clear victor.

Weakened U.S. Alliances: U.S. allies in the Middle East may begin to distance themselves from Washington, seeking their own political and economic strategies.

U.S.-Russia Diplomacy: With the conflict unresolved, the U.S. could seek a diplomatic resolution with Russia, easing tensions in other areas.

Pressure on NATO: The U.S. and NATO’s support for Ukraine may dwindle, leading to concessions with Russia over disputed territories.

While it is impossible to predict the exact outcome of this war with certainty, the evolving situation requires close monitoring. This war could potentially be the most defining moment in post-WW2 history.

I encourage readers to share their predictions and continue to stay informed.

 

Tomorrow: Where does India stand in this conflict

 

US, China, and the myth of a new cold war

The rivalry between the United States and China is often described as a new Cold War. While the comparison is tempting, it is also misleading.

The Cold War (US vs USSR) was characterized by ideological separation (Communism vs free market), minimal economic interaction, and rigid alliances (NATO vs Warsaw). Present conditions are materially different.

The US and China are deeply economically intertwined. Trade volumes are substantial. Supply chains are integrated. Financial markets are linked. Neither side can afford full disengagement without significant self-inflicted damage.

What is happening instead is selective rivalry to gain advantage in the terms of trade and control over resources.

Both countries are focusing on the sectors they consider strategically sensitive, e.g., advanced technology, defense-related manufacturing, data infrastructure, and critical resources. In these areas, they are adopting a policy of control rather than cooperation. In other sectors, pragmatic engagement continues.

Indubitably, this selective approach is creating complexity for businesses and investors. Regulations are becoming unpredictable and volatile. Logistic problems are cropping up more frequently. Policies are being guided often by strategic compulsions rather than economic prudence.

Companies that operate across jurisdictions are required to navigate conflicting regulatory expectations. Investors face uncertainty that cannot be easily priced. Policies shift incrementally, often without a clear endpoint.

Unlike the Cold War, today’s competition lacks clear boundaries. There are no committed allies or adversaries. Countries chose sides based on issues and expediency rather than ideology or strategic commitments. Geopolitical alignments are temporary and vary by issues, sectors, and moment in time. This ambiguity in international relations is not accidental. It reflects deeper and wider mutual dependence and the high cost of confrontation.

Framing this rivalry as a Cold War simplifies reality but obscures risk. The real challenge lies in managing partial decoupling without triggering systemic instability. For markets, this means prolonged uncertainty rather than abrupt rupture. Understanding this distinction helps avoid overreaction to headlines while remaining alert to structural shifts.

India has traditionally followed a policy of non-alignment. It has mostly maintained good transactional relationships with the US, China, Japan, GCC and Europe. The relations with Russia (and erstwhile USSR) had been strategic without any commitment or ideological alignment. In the past 15 years this relationship has also become incrementally transactional.

The current trade negotiations with the US and other countries must be seen in this context. Tariff and non-tariff measures taken by the US, Mexico, Canada etc. are guided by the immediate considerations and are temporary. These do introduce some degree of uncertainty in business outlook, but treating them as permanent might be an expensive overreaction.

How the paradigm of power is shifting

For much of modern history, power was mostly measured by military strength. Borders shifted through conquest, and influence was enforced through force.

In the past couple of decades, there has been a gradual shift in this paradigm. While military capability still matters, the primary instruments of power today are economic and technology.

In the contemporary world, access to capital, technology, markets, and resources often determines outcomes more effectively than armies. Trade rules can shape behavior. Financial sanctions can immobilize economies. Control over technology standards can define the future of entire industries.

Unlike traditional warfare, economic power operates quietly. There are no declarations, no battlefields, and no formal endings. Yet its effects can be just as lasting. The latest events in Venezuela also need to be looked at from this Lense.

Export controls, tariffs, financial restrictions, and regulatory barriers are now routine tools of statecraft. They are justified as measures of national security or economic protection, but they also create dependencies and asymmetries. Countries that control key nodes—finance, energy, technology, or logistics—gain leverage over others.

This does not resemble old-style colonialism. There is no direct rule or occupation. Instead, influence is exercised through terms of access.

Who can trade? Who can borrow? Who can build?

From an economic perspective, intent matters less than outcomes. When countries or firms are forced to align behavior to retain access, power has been exercised—whether or not it is acknowledged as such.

The replacement of military power with economic power has not made the world more peaceful. It has made conflict less visible, more persistent, and harder to resolve.

Understanding this reality is essential for anyone trying to assess long-term risks in a changing global system.

For markets, this shift has important implications. Economic decisions are no longer evaluated purely on cost and efficiency. Political alignment, regulatory risk, and strategic sensitivity increasingly shape investment outcomes.

The conventional principles of economics that advocate efficient use of factors of production to maximize economic output are being overlooked for strategic reasons. The developed countries like the US, which outsourced manufacturing function to the more populous countries (lower wage cost) and resource rich countries (lower logistic cost) are aiming for relocating their industrial ecosystem onshore.

In view of this shift, India has two choices to make. One, to focus on fiscal discipline and compromise on capex or increase capex and let the deficit stay high. Two, carve out a space of its own in the emerging multipolar global order, or chose to become a vassal state of one of the major powers. These choices will define the investment opportunities available for the Indian investors.

Strategy review in light of the US tariffs

The US administration has announced imposition of 50% additional tariffs (25% reciprocal and 25% penal), over and above the regular/MFN tariffs that were already in place, on merchandise imports from India. Certain items, like pharmaceuticals, that are part of separate trade negotiations, and services are presently not part of the new tariff rates and continue to be charged at the extant rates.

This level of tariff is indubitably concerning, as it makes numerous Indian MSME businesses, especially those exporting textile, leather goods, small components, jewelry, carpets etc., incompetitive; and in many cases poses an existential threat to the exporting entities. For several MSME the US market contributes a substantial part of their revenue; and these entities were enjoying some advantage over competitors due to lower MFN tariffs. They not only lose this advantage, but become materially incompetitive due to these tariffs.

These reciprocal and penal tariffs, in my view, tantamount to covert economic sanctions on India by the US. The reason cited for the penal tariffs is continued import of crude oil by Indian oil companies from Russia. The Indian government has clearly communicated to the US administration that this reason is not valid, as several other countries, including the EU, which also import crude from Russia are not subject to penal tariffs.

The situation is still evolving as the trade negotiations with the US are still under way, and these high tariffs are not permanent as of now. Nonetheless, the probability of these tariffs staying for a longer term is not zero. It is therefore important for everyone, including businesses, policymakers, and investors, to script a worse-case scenario for themselves and test their preparedness for such a scenario.

Notably, the present tariff action of the US administration is neither a surprise nor an isolated act of aggression against India. In the past 7-8 years there has been a pattern in the evolution of Indo-US relationships. Particularly since 2018, the US administration has been actively looking to base the mutual relationship on equality. President Trump seeking to rebase the relationship seeking full reciprocity from India on key economic, trade and technology issues is just a continuation of the evolving pattern. (Read more on this New chapter in Indo-US relations).

It is also pertinent to note that since 2018, the US has withdrawn the benefits under Generalized System of Preferences (GSP); materially tightened scrutiny on Indian IT and pharma compliance; persistently stalled progress on a bilateral trade deal; virtually downgraded the diplomatic status through exceptional delay in appointing an Ambassador to India (Indian mission of the US headed by an interim Chargé d'affaires during January 2021-March 2023 and January 2025 till present day; see details) and causing inordinate delays in grant of VISA appointments to Indians; disgracefully deported illegal Indian immigrants. These are some of the pointers towards the evolving pattern of Indo-US relations since 2018. The tariff spike is simply an extension of this pattern.

Some entrepreneurs, politicians, investors and thought leaders have called for a 1991 (balance of payment crisis) and 1998 like (economic sanctions post nuclear test) response to the situation. They have suggested that the government should use this opportunity to initiate some major reforms, like 1991 and 1998, to further strengthen the resilience of the Indian economy. Many of them see the current situation equivalent to economic sanction (through trade route) and suggest an appropriate response accordingly.

In my view, the Indian economy urgently needs several major reforms, regardless of the outcome of the present trade conflict with the US. The current situation does provide a catalyst and a valid excuse to implement these reforms that may cause some short-term pain to various stakeholders.

In the next few posts, I shall discuss my thoughts on the areas that need urgent reforms and changes, if any, required in the investment strategy in light of the latest US tariffs. Before that it is important to take note of the 1998 crisis, and how the situation in 2025 may be different.

Operation Shakti triggered global sanctions on India

India had maintained a policy of nuclear ambiguity since its first nuclear test in 1974 (Smiling Buddha). Over the years, global non-proliferation efforts intensified, particularly after the Cold War. On May 11 and 13, 1998, India conducted five underground nuclear tests in Pokhran, Rajasthan, codenamed Operation Shakti.

Operation Shakti, triggered a wave of economic sanctions from the US, Japan, Canada, the EU, and international financial institutions like World Bank, IMF and ADB. Notably, Russia, France, and Israel did not participate in sanctions. China issued strong condemnation but refrained from economic penalties.

Under the sanction, most of the non-humanitarian financial aid was suspended. Export of military and dual use technology to India was banned. All defense cooperation and technology transfer treaties were suspended. A freeze was put on loan guarantees and financial assistance. Lending to India by the World Bank, IMF, and ADB temporarily halted/slowed.

The extant government decided to take the global pressure head-on. It steadfastly refused to sign the Comprehensive Test Ban Treaty (CTBT) under pressure. The government also launched an aggressive diplomatic campaign to explain its position, emphasizing strategic necessity and national security concerns. Most importantly, the government unleashed several structural reforms to strengthen the domestic economy. Notably, the government divested its monopoly over core sectors like coal, power, telecom, oil & gas, civil aviation, etc. An ambitious national highway development plan (NHDP) was launched. Several fiscal incentives were provided to promote exports. A special economic zone (SEZ) policy was implemented. Several tax and other concessions were offered to the ITeS sector.

Consequently, the impact of the sanction remained contained. Reforms attracted material private capital flows from global investors. Turbulence in the market was short lived, and within a year the market scaled new highs. Sensex rose from ~3,300 in Jan 1999 to ~5,100 by March 2000, a jump of 50% in 15months.

Overall, the impact of sanctions was marginal.

The sanctions were lifted within two years as India materially helped the world in managing the Y2K crisis; unilaterally announced a “no first use” nuclear doctrine.

Situation in 2025 is different from 1998

The present situation is however materially different from the 1998 situation. First, the present trade action is limited to the US, unlike 1998 when a number of trade partners had imposed restrictions. Second, the Indian economy is now much stronger and materially more integrated into the global economy as compared to 1998. The impact of trade restrictions on the local economy, therefore, could be materially higher. Third, the political situation in India is much more stable now as compared to 1998, when the coalition was more fragile. Fourth, India has strengthened its global strategic position significantly in the past 27years. With several multilateral alliances (G-20, BRICS, QUAD etc.) and bilateral treaties, India has much stronger support from its global partners as compared to 1998.

 

Also read

New chapter in Indo-US relations

Speculating Trump’s second term

Ambivalent

…to continue tomorrow

Markets Hold Firm Amid Global Unrest: Signal or Setup?

The Indian stock market has once again demonstrated its remarkable ability to weather turbulent times. Despite significant geopolitical headwinds, including the Indo-Pak tensions in April 2025 and the escalating Iran-Israel conflict in June 2025, the benchmark Nifty 50 has shown resilience, recouping losses swiftly and even posting gains. Month-to-date (MTD) in June 2025, the Nifty 50 has its ground firmly , despite threatening news flow, a weakening rupee, and surging oil prices. Trading volumes on the National Stock Exchange (NSE) have surged, even as foreign portfolio investors (FPIs) are only marginal net buyers and promoter entities offloaded over ₹400 billion in shares. Meanwhile, domestic institutional investors (DIIs) have though accelerated their buying and providing support to the market.

One may argue that this tendency to quickly overcome geopolitical shocks isn’t new. Over the past five years, the Nifty 50 and Sensex have delivered annualized returns of 10-12%, navigating challenges like the COVID-19 pandemic, global inflation, and geopolitical tensions.

Notwithstanding, this resilience raises two important questions: (1) Has the market fully priced in the short- to medium-term impacts of these geopolitical and economic challenges? And (2) IS the current investors positioning aligned with this collective wisdom, or are they holding back, waiting for clearer signals?

1.    Has the market fully priced in the short to medium-term impact of the current geopolitical and economic conditions?

The market’s muted reaction to rising oil prices and geopolitical escalation suggests that participants may indeed be looking past the immediate risks. Historically, sustained oil prices above $90/barrel tend to spook emerging markets, especially net importers like India. Yet, the INR and benchmark yields have only weakened modestly, indicating a lack of panic among both equity and debt investors.

There is also precedent for such behavior. During the Russia-Ukraine conflict in early 2022, the Nifty corrected nearly 10% in a month before stabilizing as investors shifted focus to earnings resilience and strong domestic demand. A similar pattern appears to be playing out in 2025, as the market leans on India's improving macro fundamentals: GST collections remain robust (₹1.72 lakh crore in May), credit growth continues to trend above 16%, and manufacturing PMI remains in expansion territory.

It is worth noting that the USDINR has depreciated less than 1% MTD, driven by risk-averse sentiment and dollar demand from oil importers. Crude oil prices, a critical factor for India (which imports over 80% of its crude), spiked over 10% to $76-77 per barrel following the Iran-Israel escalation, raising concerns about inflation and the current account deficit. However, retail inflation remains at a six-year low of 2.82% in May 2025, bolstered by a favorable monsoon and RBI’s recent rate cut, providing a cushion against these pressures.

Overall, the market seems to be assigning a lower probability to these conflicts escalating into scenarios that could derail India’s domestic growth story. The base case appears to be a temporary disruption with limited spillover effects—at least economically.

A prolonged Middle East conflict could disrupt oil supplies through the Strait of Hormuz, pushing Brent crude to $120 per barrel, which would strain India’s fiscal balance and reignite inflation. Similarly, sustained FPI outflows, driven by high valuations or cheaper Asian markets like China, could cap upside. Still, the market’s ability to hold above key support levels (24,700 for Nifty) and the absence of strong selling pressure suggest that investors are comfortable with current price levels for now.

2.    Are market participants aligned with this view—or are they still waiting for more evidence?

Positioning data tells a mixed story. While domestic institutions (mutual funds, insurance companies) have stepped up their buying—net purchases exceeding ₹600 billion in June so far—retail flows have plateaued. Systematic Investment Plans (SIPs) remain steady (₹20,900 crore in May), but net retail participation has softened somewhat in the derivatives and midcap space.

Moreover, futures & options positioning shows high open interest in index puts, suggesting that institutional players continue to hedge downside risks. Volatility, as measured by the India VIX, has edged up slightly (hovering around 14), indicating guarded optimism rather than outright bullishness.

Promoter selling—over ₹400 billion MTD—further complicates the narrative. While such activity isn’t uncommon ahead of Q2 fundraising or capital reallocation plans, it typically reflects either a valuation comfort zone or a strategic liquidity need. Given that this selling has not dented broader sentiment significantly, one could argue that other market participants are either confident in the underlying fundamentals—or are simply waiting for further clarity before making directional bets.

What does this mean going forward?

The current market resilience could very well be the product of a differentiated outlook: that India’s domestic story is strong enough to weather external shocks. But caution is clearly visible in the way participants are positioned—through hedges, elevated cash levels among HNIs, and selective buying rather than indiscriminate accumulation.

Until there is clarity on crude oil’s trajectory, the rupee’s stability, and the potential policy response from global central banks (especially the Fed’s July meeting), markets are likely to stay range-bound with a mild upward bias. Earnings upgrades in auto, banking, and infra sectors offer a supportive backdrop, but investors will want confirmation via Q1FY26 numbers before going all-in.

Conclusion

The collective wisdom of the market seems to have largely priced in current risks, but positioning suggests that investors are not fully aligned with this outlook—yet. Resilience, yes. Conviction, not quite. A ‘better than expected’ 1QFY26 performance could enhance conviction and pull the fence sitters in.