Page 40 - BFSI CHRONICLE 10 th Issue (2nd Annual Issue ) 23062 COPY.indd

BFSI Chronicle, 2 Annual Issue, 10 Edition July 2022
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Financial Crisis’. Other event viz., military implications of interstate relations and cross
actions and central bank / regulatory actions border macroeconomics, regulatory and
can also be considered as geopolitical events sovereign actions and dictates of individual
besides cyber-attacks ,trade wars and climate countries besides study of historical,
change can have global financial impacts. socioeconomic and cultural factors that may
or may not be congenial to a foreign entity to
With the proliferation of faster and easier engage in specific local socio-economic climate.
communication and travel global access and
interconnectedness have been increasing over Geopolitical risk escalated sharply during the
the time. In this milieu geopolitics reflects how World War I and World War II. It increased in
people across nations reach out to each other the early 1980s, and has moved upward since
through international relations (war, conflict, the beginning of the 21st century. Present day
diplomacy, competition etc), governance, scenarios are more eventful and fraught with
institutions, trade and coalescing cultures. heightened uncertainty and crowded by rising,
Today’s geopolitical terrain is not bounded declining, failed and rouge states besides non-
by proximity. Events occurring in a nation state actors viz,. cyber pirates and terrorist
have far reaching ramified implications which groups.
may be more pronounced and significant in
geographically distant nation than on the With the escalation of political frictions within
neighbourhood. and among regions the likelihood of global
enterprises’ operations, performance, or people
Geopolitical Risk being unfavourably impacted tends to increase.
Geopolitical risk has been assuming High geopolitical risk dampens real sector
increasing importance in risk analysis. It can activities, reduce stock returns, and divert
be simplistically defined as the exposure of capital flows towards advanced economies
one or more countries to political action in away from emerging economies. Studies
other countries .Geopolitical risk is the risk have revealed that escalation in geopolitical
entailed in events like wars, terrorist acts, and risk triggers persistent drops in industrial
frictions between states that tend to vitiate the production, employment, and international
congeniality and smoothness of the course of trade. Further both economic policy
international relations. Geopolitical risk may uncertainty and consumer confidence amplify
be viewed as the potential for political, socio- the propagation of shocks of geopolitical risk.
economic and cultural factors to impact both
domestic and cross border business operations, The elasticity of stock market response to
geopolitical risk found to be significantly
profitability, stability and wellbeing. It covers varying across industries. While the defence
every episode in which acts of violence were
sector accrued positive excess returns, sectors
carried out by political organizations to bolster exposed to the broader economy (viz.,
religious, economic, or revolutionary objectives.
It may be mentioned that this definition of steelworks and mining) suffered set back of
negative returns. The studies have revealed
geopolitical risk is not exhaustive.
that while perceived geopolitical threats tend
Geopolitical risk analysis focuses to trigger protracted escalation in volatility
comprehensive attention to the business and uncertainty leading to perceptible decline
in real sector activities, actual occurrence

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