Why did global trade come to a halt?

In today's episode of the Daily Brief, I'll talk about two interesting stories. I'll first talk about marine insurance and what's happening with it right now. And then I'll talk about RBI facing a monetary policy dilemma. Welcome back to the Daily Brief Show by Zeroda, where our aim is to simplify the biggest news in the financial markets in a way that's one level deeper as compared to news channels. I'm your host Krishna and today is Friday 6th of March. Earlier this week when bombs fell in the portion gulf, one of the first things the market was worried about was oil. After all the state of hormones handles more than a quarter of all seabone oil trade and roughly a fifth of the world's LNG. We covered this a few days back. But what actually stops oil-lidenships from moving isn't missiles as much as it is. Quite literally a piece of paper or more precisely the absence of one. Perhaps the saying, "The pen is my tear than the sword" couldn't come any closer to being real than this. Now that piece of paper is marine insurance and we found that what is otherwise a set of financial and legal jargon is worth its own daily brief story. So let's dive in. You see a ship doesn't move just because there's cargo to carry. It moves because an entire chain of promises holds together. The ship owner promises the charter the cargo will arrive safely. The charter gives their word to the cargo owner that the goods are predicted and the cargo owner assures the bank financing the trade that the shipment is covered. Insurance is what makes all of these promises believable. Now without all of these the chain falls apart. If the cargo isn't insured, banks won't issue the letters of credit needed to guarantee payment in global trade. Poets won't let uninsured vessels dock. Even the ship's own crew can refuse to sail. It's not so different from how you can't drive a car without motor insurance except the stakes are vastly higher and the rules much stricter. Every moreover marine insurance unlike health or a term plan isn't one policy. It's a stack that covers various things. Now at the base you have hull and machinery insurance which covers the ship itself think of it as a vehicle's own insurance. Then there's cargo insurance which protects the goods being shipped. Now on top of that sits protection and indemnity or P&I. If the ship causes pollution, injures, crew or damages someone else's property, P&I covers it. Interestingly, P&I isn't run by for profit insurance firms but by mutual clubs that are run by ship owners or ship operators themselves. 12 major clubs who collectively call themselves the international group cover roughly 90% of the world's ocean going to niche. And then layered on top of everything is what's extremely relevant today. War risk and political risk insurance. You see in normal times, war risk is part of the package. You pay a modest annual premium and your ship is covered for missile strikes, mines and other hostilities. But there's a catch. War risk policies come with a cancellation clause. Typically insurers can pull the cover with just 7 days notice. In situations involving a major military power like say the US, that window can shrink to as little as 72 hours. Now this might sound unfair but think about it from the insurers perspective. War is not the same as a sea storm that might leave a single ship stranded. If a conflict breaks out near a major shipping lane dozens or hundreds of ships are exposed simultaneously. A single event could trigger billions in claims all at once. No insurer can stomach that kind of concentrated risk for long. So the deal is pretty simple. During peace time will cover for you. But the moment things escalate, we reserve the ride to walk away. And that's exactly what happened recently. In late of February 2026, military escalation between the US, Israel and Iran sent shockwaves through the Gulf. The state of Hormuz that narrow corridor between Iran and Oman through which a staggering volume of the world's energy supply flows became in the eyes of insurers a place where the risk calculus had changed overnight. Now most marine insurance deals are brooked in what's called the London market. Think of it as a specialist hub where insurers and re-insurers handle big complicated risks. If a ship is insured, chances are the deal passed through this market. Inside the market sits the joint war committee, a group of representatives who will underwrite marine hull war risks. This committee maintains a list of areas considered high risk. When missiles started flying, the designated list expanded. Waters around Bahrain, Kuwait, Oman and Qatar were added to the list. Now that designation matters enormously because it triggers a separate pricing regime. Instead of paying just your annual premium, any ship entering a listed area now has to pay an additional war risk premium. Typically quoted as a percentage of the vessels insured value. And those premiums moved fast. Ensuring a hundred million dollar vessel for a Gulf transit reportedly jumped from around $250,000 to $375,000 per voyage. Now that's a 50% hike and in some cases, quotes were even higher. But beyond the price increases, cancellations took place left and right. Several major insurers like guards, curled London P&I Club and so on cancelled or paused war risk cover for vessels in or near Iranian waters effective March 5. Japan's MSNAD suspended underwriting for war risk policies across the region entirely. One insurer mentioned a buyback option, meaning you could get your cover reinstated but at a significantly higher price and/or tighter terms. Over 200 vessels ended up anchored in or near the straight waiting. And here's the cruel irony. If a zone is dangerous and your insurance just got cancelled, wouldn't you just leave? But you can't. You see, sailing out means transiting through the very waters your insurers has declared too dangerous to cover. If something happens during that exit, a missile, a mine, even accidental damage, the ship owner is fully exposed. No one's taking that gamble with a vessel worth tens or hundreds of millions of dollars. And even if a ship made it out safely, ports wouldn't accept vessels without valid insurance documentations. Banks won't honor letters of credit if the paperwork is out of order and the act of sailing through a war zone without a war risk cover could void the ship's other insurance policy entirely. So ships sat there burning money on fuel and crew cost, unable to move until cover was reinstated or the situation changed. The traffic through the Hormous trade collapsed. Freight rate surged as VLCC, very large crude carrier charter rates to China reportedly exceeded $4,000 per day. Now it's important to note that insurers who cancelled covered and necessarily want to. Many of them were forced to because the layer behind them re-insurance was pulling back. Now re-insurance is insurance for insurers. It's the mechanism that allows an insurance company to write a $100 million policy on a ship without bearing the entire risk itself. The re-insurer takes a position of that risk of the insurers book, which gives the insurer the capacity to cover more ships. Now this arrangement is powerful but also has a dependency. When re-insurers get nervous and the war risk is exactly the kind of unpredictable exposure that makes re-insurers nervous they string their capacity. And when re-insurance capacity strings, insurers have no choice but to raise prices, tighten terms or cancel out trade. Take what GICRE, a state owned Indian re-insurer did. It pulled back from its marine hull war risk cover from multiple high risk zones from Mars 3 effectively, including the Persian Gulf Gulf of Oman and parts of the Indian Ocean. And it didn't stop at the withdrawal. GICRE warned that any vessel, translating, calling at or even dry-docking in specified zones after the cutoff date would be treated as a breach of warranty. In insurance terms, a breach of warranty means your cover ceases to exist. All those marine insurance companies that were being re-insured by GIC are now left on their own. Now this starts an unstoppable chain of events where one topples over another. Ship owners won't risk sending a vessel worth tens or hundreds of millions of dollars into a zone where they are uninsured. Charters can't fulfill contracts. Banks won't finance shipments without valid insurance documents. As ships pile up outside the affected zone, ports start congesting. Great rates spike because available shipping capacity shrinks. Commodity prices rise because the delivery timelines become uncertain. And then the cycle feeds on itself. Higher values at risk and greater uncertainty make insurers even more cautious which further restricts capacity which pushes more ships to the sidelines. Now it wouldn't be wrong to say this also trickles down to inflation in commodity prices eventually and this makes trade prohibitive. Now this all isn't theoretical. We have seen this pattern play out before. For instance during the Iran-Ikren tanker war in the 1980s commercial tankers were repeatedly targeted and insurance markets responded with sharply higher premiums. And in late 2023 in the Red Sea, Houthi attacks pushed war risk premiums. And when attacks escalated further, premiums reportedly hit 1% of the ship value, meaning a million dollars per voyage for a hundred million dollars ship. The traffic didn't stop but it collapsed just enough for carriers to re-root around the Cape of Good Hope, adding weeks and enormous cost to the journeys. Now President Trump has reportedly proposed offering government-backed political risk insurance and financial guarantees to shipping companies operating in the Gulf. This echoes historical precedents in the Iran-Irakwar, for example the US Navy escorted and protected tankers through the Gulf. But there's an important distinction here that's easy to miss. And risk insurance covers government and sovereign actions. Things like expropriation, political violence or currency transfer restrictions. War risk insurance covers missiles, mines and direct hostilities. They're not the same product and a political risk policy may not substitute wholly for war risk cover. This perhaps is why insurance costs searched two or a time even after the Trump guarantee. Now even if the backstop is structured correctly, there are practical questions. Does it cover all vessels or only US-flagged ones? Does it apply to PNI liabilities or just hull damage? Can it be activated quickly enough to matter given the cancellation notices are measured in ours? And critically, we'll re-inshawters to eat a government guarantee as sufficient to restore their own appetite or will they remain cautious regardless. Now a state backstop helps at the margin, but it doesn't get the market to flip on their consensus that the new risk is too correlated and too volatile to bear. You see, marine insurance is invisible when it works, but catastrophe when it doesn't. And war is a risk like no other. The crisis in the Gulf has shown how thin private risk appetite can be. But in some ways it is justifiably so. Because how do you put a price to the war? And even when the immediate military tension reduces, the question won't be whether the shooting has stopped. It will be whether the joint war committee still lists the area is high risk, whether the re-inshawters are willing to restore capacity and whether premiums come down enough for the economics of transit to work again. Until all of those boxes are ticked, trade through the Gulf stays frozen. You see, India's economy has always been and still is founded on the base of its banking system, unlike in advanced economies like the US or Singapore where capital markets play an outsized role. Even a business in India needs to raise funds, it walks into a bank balance first. So if there's any decision to be made on monetary or fiscal policy, the central bank of the government largely expects our banks to cooperate. When RBI makes the rate cuts, for instance, the expectation is that the banks will pass those cuts on, making credit cheaper and more plentiful. Rather, they don't always have the incentive to do so. We have covered before about how even after the RBI's rate cuts, transmission to actual lending rates was sluggish. We've also explored how high inflation expectations can blunt the effect of rate cuts. But what about the banks themselves? What makes some banks more responsive to RBI's signal and others less so? A paper by researchers at Indra Gandhi Institute of Development Research, Rajeshwari Singh Gupta, Harshwardan and Akileshwurma, digs into one specific factor that shapes how well monetary policy works. The capital is sitting on a bank's balance sheet. Their findings reveal an interesting dilemma in the Indian banking. So let's dive in. When the RBI raises a short term rate in an attempt to control bank lending, well capitalized bank don't respond strongly. In fact, they continue lending at strength. But before we get into all of this, what does it even mean to be well capitalized bank? Now think of a bank's capital as a financial cushion. It's the money that belongs to bank shareholders as opposed to what it owes to depositors or bondholders. This also includes retained earnings or reserves that the bank has created. Another simplest way to measure this is the bank capital ratio or BCR. It is the ratio of a bank's capital and reserves to its total assets. A bank with a higher capital ratio has a thicker cushion to absorb losses. More easily and is therefore less likely to fail. Now that sounds like an unimiguously good thing and for financial stability it is. But the IGIDR researchers argue that this stability comes with a contradiction. Today the RBI is worried that banks are doling out loans are little too much. And to cool down the economy from overreating, the RBI raises rates. Higher rates mean that borrowing costs rise for banks and therefore lending. But a well capitalized bank has a buffer. It can absorb the higher cost of funds without panicking. It doesn't need to cut back lending just because rates went up. It has the financial strength to keep the credit tabs open. A weekly capitalized bank on the other hand doesn't have that luxury. In the rates rise, it feels the squeeze immediately, its margin shrink, its risk appetite contracts and it pulls back on lending, exactly as the RBI intended. In an interesting paradox, well capitalized banks are far less sensitive to rate increases, while banks with thinner capital cushions respond more sharply as per the RBI's expectation. And India banks that are often well capitalized tend to be among India's biggest most important banks. This role as a banking regulator, the RBI does want banks to be well capitalized. That's what keeps the system safe. But as a monetary policy maker, the RBI also needs the big banks to respond to rate changes. Strong banks are stable, but they're also stubborn. Now to test this, the researchers assemble data spanning between 2002 to 2018 from 18 Indian commercial banks, both public and private. They track the relationship between short term interest rates and how much credit banks supply. The key question, does a bank's capital ratio change how sensitive it responds to monetary policy? A hundred basis point increase in the short term rates, specifically the weighted average call rate or WSER, leads to roughly a 1.1% point decline in credit growth across the banking system. Now that's a monetary policy working as intended, but banks with higher capital ratios show significantly less sensitivity to rate hikes. For every percentage point increase in a bank's capital ratio, the negative impact of a rate hike on its credit growth is reduced by 0.03 to 0.05 percentage points. Now that might sound small, but when you consider that private banks in the sample had an average capital ratio of 11.7% while public sector banks average just 5.6%, the differences compound quickly. Real capitalized banks were essentially struggling of monetary tightening while their less capitalized peers were doing the heavy lifting of transmitting the RBI signals to the economy. Now to shop in the picture, the researchers split their sample into high capital and low capital banks. For well capitalized banks, the relationship between interest rate hikes and credit growth was insignificant. Rate changes barely moved the needle on their lending. For banks with low capital ratios, the relationship was strong and negative. When rates went up, these banks cut lending meaningfully. Perhaps the one thing that seems clear from this is that private banks with their higher capital ratios are far more insulated from rate hikes than public ones. The researchers found that for private banks their capital cushion were genuinely protecting their lending from rate hikes. For public sector banks, though the effect was statistically insignificant. Now this makes intuitive sense. If you look at how these two types of banks raise funds, private banks go to the capital markets, typically raising large amounts at strategic intervals to sustain lending over 4 to 5 years. They tend to maintain capital ratios well above regulatory minimums. Public sector banks by contrast well on government capital injections which are just enough to keep them above the regulatory floor. During the 2014-2018 MPA crisis, for instance, the government poured around 4 trillion rupees into PSBs to prevent them from breaching minimum requirements. This was funding purely meant for survival. Now the story doesn't end there either. The researchers also found that a set quality dramatically changes the picture. Between 2002-2013 on a relative level, banks didn't have a lot of NPS and their books were relatively clean. That's when the capital buffer worked exactly as predicted, well capitalized banks absorbed rate hikes and kept lending. But between 2014-18, banks' balance sheets were burdened with NPS. This was a period when the banking system was rocked by debt crisis among many infrastructure players like Bush and Steel, SR Group, GP Group and so on. We also covered this crisis briefly with our story on DHFL. In this period, even well capitalized banks started pulling back. Now the reason is obvious. When a loan goes bad, the bank has to set aside provisions to cover potential losses which erodes it effective capital. During the NPS crisis, many banks reported capital levels overstated their true financial strength. The cushion was there on paper, but it was being consumed by bad loans and practice. There was hardly any space for the capital buffer to absorb monetary policy. So far, we have talked about what happens when the RBI raises rates to curb lending, but what about when the central bank cuts rates to simulate lending? A 2016 paper by researchers from the Bank for International Settlements sets lights on this. Their findings look like they flipped the first paper on its head, yet are actually consistent with the paper's finding. The BIS researchers found that well capitalized banks respond much more vigorously to rate cuts. A 1% point increase in the capital ratio was associated with 0.6% points of additional annual lending growth. The logic behind this is that better capitalized banks pay less for their own funding, roughly 4 basis points less for every 1% increase in their equity ratio. Depositors and bondholders see them as safer so they demand lower returns. Lower funding costs mean more room to lend. Now this was particularly relevant during the post-2008 period when central banks around the world were desperately trying to restart credit creation. The banks best position to expand lending when rates would fall were the well capitalized ones. The weekly capitalized banks burdened by losses and fearful of further deterioration wouldn't lend even as money became historically cheap. Now is this a contradiction with the IGIDR paper? Well not really. In fact they agree on the effect of a rate increase on well capitalized banks. The insight from Indian banks does to some degree apply internationally as well. But papers agree that either which way a bank's capital is an extremely useful buffer. Poor capitalized banks meanwhile cut lending when rates rise which is good transmission but they also fail to expand lending when rates fall which is bad transmission. But where the two papers differ in nuance is to subject of the analysis. IGIDR focuses entirely on India developing country with a financial system where banks dominate over capital markets. If the RBI's decisions aren't effectively transmitted through banks there are few avenues to ensure those transmission hook. In contrast in more developed countries if banks don't work, monetary policy can still channel its effect through capital markets. For emerging markets this represents a difficult trade off. As India grows economically the private sector will take up a larger role in the system. In turn that will mean that bank capital will become an increasingly more important factor in the monetary policy. Accordingly the RBI stool kit may need to adapt. It may have to rely less on the assumption that rate changes will automatically throw through the lending and more on complementary levels like liquidity management, macro potential regulation and so on. Monetary policy as we keep rediscovering is only as effective as the institutions that carry it out. Now coming to the tidbits. India's services sector growth eases in February the slowest growth pace in over a year. The HSBC India's services PMI slipped to 58.1 in February from 58.5. On the bright side international sales rose at their fastest pace since August and the composite PMI climbed to 58.9. The strongest private sector expansion in 3 months. China lowered its 2026 growth goal to a range of 4.5% to 5%. The first found on downgrade since 2023. This is China's lowest target since 1991 as it grapples with deflation of property slowed down and rising trade tensions. The budget deficit target stays at a record 4% of the GDP as the government expects to maintain its fiscal spending in order to support demand. PNG-RBE India's petroleum regulator is preparing to propose building storage facilities near India's 8 existing LNG terminals for both commercial use and strategic reserves during emergencies. The move comes as tanker traffic through the state of foremost has ground to a near halt following the Israel Iran conflict. That's it for this episode. See you in the next one.