From what I've studied, the Indian Ocean was a Mare Liberum of rich trade and culture for over a thousand years. What was the initial fallout when European explorers and traders started establishing their own trade routes? Did they have any understanding of the region's history or culture?
Regarding your second question, Europeans had an extensive misunderstanding of the region's history and culture. Many believed in the mythical Eastern kingdom of Prester John, a Christian Emperor who could field an army of a million men. Vasco Da Gama believed the first Indians he encountered upon his voyage in the late 1490s to be Christians because he supposedly heard them shout "Christ! Christ!" after firing a parting salvo, when in fact the Indians had been chanting Krishna. Though an isolated Nestorian church was discovered in Persia shortly after, it was not the vast Christian Empire the Europeans had expected to find. Europeans also believed in the existence of fantastical human races somewhere in India, including Cyclopes, Centaurs, and Sciapods (Who only had one leg ending in an enormous foot).
And to partially address your first question, Vasco Da Gama again serves as an instructive example. Gama's relationship with the Zamorin of Calicut, the Indian magistrate from whom he was hoping to obtain a trade treaty, became increasingly antagonistic over time. The initial trouble came from Gama's overestimation of the value of European textiles as a trading good, which were not particularly coveted by the Indians, resulting in his gift to the Zamorin being viewed as insultingly paltry. Through the stubbornness of both men, the situation deteriorated, with the Zamorin later taking several members of Gama's crew hostage in order to force him to unload some of his cargo, and Gama eventually bombarding the Zamorin's palace as retribution for previous insults. Things came to a head during Gama's second voyage in 1502, when sixteen Portuguese ships squared off against a fleet of larger Arabian dhows (accounts differ on the size of the Arab fleet, it was somewhere between 30 and 40 ships), who were understandably unwilling to allow Europeans to usurp their westward trade monopoly on the Indian subcontinent. The Portuguese heavy cannons ultimately proved to be the deciding factor, and Gama returned to Lisbon with a fleet laden with Indian trade goods, having dealt a heavy blow to his major competitor.
Source (My edition is titled The Last Crusade, but it's the same book): https://openlibrary.org/works/OL16175797W/Holy_war
Full Disclosure: This is my first post on AskHistorians, so I apologize if I have made any missteps here
Not the exact same thing but I asked a similar question to this a few months ago and got some good answers that might help you, although it deals with Ottoman reactions and not necessarily Indian Ocean merchants.