India’s equity markets are likely to open gap down on Monday after US and Israeli forces targeted key Iranian sites over the weekend, triggering a sharp spike in crude oil prices and escalating tensions in the Middle East.
The conflict intensified after US officials described the operation as a preemptive measure against Iran’s nuclear advancements, which reportedly resulted in the confirmed death of Supreme Leader Ayatollah Ali Khamenei.
Iran responded with a barrage of ballistic missiles aimed at Israeli cities and key Middle East hubs such as Dubai, Kuwait and Bahrain.
The developments have already led to a surge in crude prices and fuelled fears of a broader conflict that could disrupt the Strait of Hormuz, through which nearly 20% of the world’s crude oil flows daily.
For India, this poses a significant risk as higher crude prices increase inflationary pressures. Rising inflation typically pushes up bond yields, and higher yields compress equity valuations, prompting investors to move away from equities.
Benchmark indices NSE Nifty50 and BSE Sensex had already fallen up to 2.5% during the trading week ended 27 February, amid persistent selling pressure.
Market experts expect investors to shift towards safe haven assets, boosting demand for gold, the US dollar and sovereign bonds. Sectors sensitive to rising oil prices and potential supply chain disruptions, including airlines, chemicals, transportation and fuel retailers, are likely to witness the sharpest outflows.
JM Financial said Indian markets are expected to open gap down with elevated volatility amid a global risk off sentiment. It noted that oil marketing companies, paints, tyres, aviation and chemicals could face margin pressure due to higher input costs.
“Upstream oil producers such as ONGC and Oil India may benefit from stronger realisations, while defence names including HAL and BEL could see sentiment support. Key monitorables include retaliation intensity, sustainability of Brent above USD 80/bbl and any disruption to Hormuz shipping, with crude emerging as the primary macro variable for Indian equities,” the domestic brokerage stated.
Vijayakumar, Chief Investment Strategist at Geojit Investments, said the near term impact on the market would be negative.
“Crude has spiked and if the crude price remains high for an extended period of time, our balance of trade and balance of payments will be impacted since we import around 85% of our oil requirements. OPEC Plus will scale up production and try to stabilise prices. If the Strait of Hormuz is closed (there are unconfirmed reports of this) the crude price can spike further,” he added.
It is to be noted that every $1 increase in crude raises India’s annual import bill by approximately $2 billion. Brent crude had already climbed to a seven month high of $72.8 per barrel following fears of strikes.
Analysts caution that prices could touch $100 per barrel in the event of a prolonged war.
“Scenario analysis suggests limited retaliation could add $5 to $10 per barrel; direct damage to Iranian oil infrastructure could add $10 to $12 per barrel; Hormuz disruption could push prices above $90 per barrel; and a broader regional war could drive crude beyond $100 per barrel. Nearly 20% of global oil flows through the Strait of Hormuz and over 40% of India’s crude imports transit this route, creating material exposure,” JM Financial said in a note.
Vijayakumar of Geojit added that the medium term impact would depend on the duration of the conflict. “We don’t know the answer to this question. After crippling Iran, the US and Israel may make a strategic withdrawal. The market will react very negatively. In a weak market, upstream oil companies and defence stocks will do well.”
Shashank Udupa, SEBI registered research analyst and fund manager at Smallcase, said that due to the geopolitical tensions it is most likely that India will see a dip on Monday morning, with metals rising and leading the pack.
“I believe that once the geopolitical problems cool down, India will start a good rally for the next three years on the back of consumption growth and rising government capex spending,” Udupa added.
On gold and silver prices, Jateen Trivedi, VP Research Analyst, Commodity and Currency, LKP Securities, said that as global equities and risk assets come under pressure, capital tends to shift into precious metals, which act as a hedge against uncertainty.
“Earlier moves have already pushed gold and silver prices higher in recent sessions, and this momentum could continue if the conflict intensifies further… However, the impact may not be uniform. If over the weekend there are diplomatic developments or indications of de escalation, precious metals could see profit taking after an initial spike of 3 to 6%,” Trivedi said.