Effect of geopolitical risks on emerging economies will be felt harder in the second month: RBI study-OxBig News Network

The adverse effect of geo-political risks on the stock market, foreign exchange market and the credit spread of emerging economies is more pronounced in the second month following the risk, according to a study by the RBI in the Monetary Policy Report-2025

The authors of the study constructed an index called the Geo-political Risk (GPR) index to measure the changes in the such risks. They found that a 1 percentage point difference in the GPR leads to a 0.25 percentage point (pp) decline in stock markets, currencies depreciate by 0.16 percentage points and credit spreads decline by 1 percentage point. Credit spread is the difference between the benchmark government bond yield (which in India’s case is the 10-year bond with 6.55% yield as of April 9) and the bonds issued by corporates. Yield is the interest paid by the issuer of the bond to the holder.

While this is significant, the study found that the effects of a 1 pp increase in geopolitical risk lead to stock markets shedding gains by 0.64 pp, currencies depreciating 0.32 pp and credit spread worsening 1.2 pp. Even though the effect wears out eventually, “ the repeated occurrence of such geopolitical shocks that impinges on the economy with differential impact has lent a persistence to the turmoil and uncertainty, keeping the risks elevated,” the authors said in the study.