12.7 Transmission channels: how geopolitics reaches Indian prices

12.7.1Commodity supply and chokepoints#

A minimal price-impact model Let short-run supply and demand be isoelastic, with supply elasticity $\epsilon_s\ge0$ and demand elasticity $-\epsilon_d<0$. A disruption removes a fraction $\phi$ of supply at every price:

Market clearing gives

Short-run oil elasticities are small: published estimates are often around 0.1 or below for each, but they are model-dependent. With $\epsilon_s+\epsilon_d=0.2$, a 10% net supply loss raises log price by 0.5, a factor of 1.65. Buffers reduce the net $\phi$: strategic stock releases, spare capacity elsewhere, bypass pipelines and demand destruction. That is why the same gross disruption produces very different price moves.

Chokepoints

• Strait of Hormuz.
  • In 2024 it carried about 20 mb/d, about 20% of global petroleum-liquids consumption and more than a quarter of seaborne oil trade. 84% of the crude and condensate and 83% of the LNG went to Asia. Bypass pipelines (Saudi East–West, UAE Habshan–Fujairah) could reroute about 2.6 mb/d¹.
  • In March–May 2026 flows reportedly fell to about 2.7 mb/d².
  • Plugging the 2026 numbers into (12.21) shows why the price response was large: a gross loss of more than 15% of world supply, against a 400 mb strategic release covering only about 20 days of lost supply [IEA news release, 11 Mar 2026, for the 400 mb; the 20-day comparison is from press coverage].
• Bab-el-Mandeb / Red Sea. About 8.7 mb/d of oil passed in 2023, falling to 4.0 mb/d in January–August 2024 as ships rerouted around the Cape of Good Hope³.
  • Rerouting is not a supply loss. It lengthens voyages, ties up tankers and raises freight and insurance.
  • So the price effect shows up in freight rates and delivered prices, not much in benchmark crude. In (12.21), $\phi\approx0$ but transport costs rise.

India's exposure India imports close to 90% of the crude it processes (PPAC's monthly Snapshot of India's Oil and Gas Data, https://ppac.gov.in; check the current edition). A large share comes from the Gulf: "nearly 60%" of petroleum imports by one secondary source [S]. After 2022 the Russian share rose from under 1% to around 40% at peaks [S], which reduced Hormuz dependence. This was itself a geopolitical choice enabled by sanctions discounts. The oil channel to the rupee, inflation and the RBI is M11 · 11.11.

12.7.2Risk premia#

A geopolitical shock raises the equity risk premium and implied volatility before any cash flow changes. In the Gordon model (M11 · 11.4), a rise of $\Delta$ in the discount rate lowers value by about $\Delta/(r-g)$. A 50 bp jump in the equity risk premium on an index with $r-g=4\%$ is a 12.5% fall, of the order of a bad war week. Risk-premium shocks mean-revert when uncertainty resolves, which is why "buy the invasion" has often worked: the premium peaks around the onset, when uncertainty is greatest, not when damage is greatest. That is a historical tendency, not a law. 1990 and 2022 fit it. Long wars with real supply losses (2026) are where it fails.

12.7.3Sanctions, trade and tariffs#

Sanctions re-route trade flows. They create discounts for sanctioned barrels (Russian Urals after 2022) and premia for compliant ones, and they open arbitrage for third countries. India's refiners captured the Urals discount after 2022. Sanction waivers became market events in 2026: a US waiver on Russian oil was renewed for 30 days in April 2026, and an Iran waiver was revoked on 8 Jul 2026⁴.

Tariffs are a tax on trade, with incidence split by elasticities. The April 2025 shock (12.8) was a policy-uncertainty event: equities fell on the expected profit hit and on uncertainty about the endgame, and rebounded on the 90-day pause.

12.7.4Capital flows and the currency#

Global risk-off triggers FPI outflows from EMs regardless of country exposure, through redemptions and VaR limits. For India the flow channel compounds the oil channel: the rupee falls, the dollar return to foreign holders falls (M11 eq. 11.24), and outflows accelerate. Defence and upstream energy stocks can rise on the same day the index falls. In a geopolitical event study, sector dispersion is the signal and the index move is partly noise. The Nifty India Defence index closed at 9,012.05 on 5 Nov 2026, −1.69% on a day the Nifty rose 2.40%⁵. Its history around May 2025 and 2026 is left to the lab because no verified series was available this session.