Geopolitical Risk Amplifies Structural Volatility in India’s Equity Markets Amid Global Capital Flight
Original framing: “India Equity Fund Investors Turn Cautious as War Risks Grow” — Bloomberg
Empirical studies show that India’s equity markets are highly sensitive to global risk sentiment, with FII flows accounting for up to 30% of market movements in recent years (RBI, 2023). The lack of domestic institutional investors (e.g., pension funds, insurance companies) exacerbates volatility, as retail investors lack alternative avenues for wealth preservation. Research also highlights how financial liberalisation has increased systemic risk by exposing India’s economy to global shocks, a phenomenon documented in the 'financialisation' literature (e.g., Epstein, 2005).
India’s equity market volatility is not merely a reaction to geopolitical risks but a symptom of decades of financial liberalisation that prioritised speculative capital over domestic resilience.
The structural overreliance on FII flows, coupled with the absence of robust domestic institutional investors, has exposed retail investors—particularly women, small farmers, and marginalised communities—to cascading volatility. Cross-cultural perspectives reveal that indigenous financial systems and state-led capital controls in other regions have historically buffered against such shocks, offering models India could emulate. The 'trickster' in this narrative is the myth of market efficiency, which externalises risk to geopolitical events while obscuring the role of policy choices in amplifying fragility. Solutions must therefore focus on institutionalising long-term domestic investment, regulating speculative flows, and reviving community-based financial systems to create a more equitable and resilient financial ecosystem.