Oil shock from Iran war raises risks for India’s stock market; here’s how

Synopsis

Escalating Middle East tensions are pushing oil prices higher, significantly impacting India's beaten-up equities and widening their underperformance against global peers. Analysts warn of further downside for Indian assets due to the country's heavy reliance on imported energy, potentially driving inflation and weakening the economy and currency.

India’s beaten-up equities are widening their underperformance against global peers, as escalating tensions in the Middle East push oil prices higher and hurt importers, strategists say.

Indian companies may be among the most impacted in Asia by the Iran war, according to Goldman Sachs, which estimates a 20% rise in the price of Brent crude would cut regional earnings by 2%. Societe Generale expects India’s underperformance to deepen given its high dependency on imported energy, while Natixis labels the country’s assets “most at risk” for the same reason.

Local shares tumbled in on Wednesday as trading resumed after a holiday, with benchmark NSE Nifty 50 Index slipping as much as 2%, taking its slump this year close to 7%. India’s rupee weakened to a record low and bonds fell on concern about rising crude prices. A gauge of 30-day ahead volatility jumped above 20 to its highest level since May 12.

India’s $5 trillion equity market has lagged most major peers since late 2024, on weaker earnings growth and lack of exposure to artificial intelligence-related shares. The surge in the price of oil — the country’s top import — has dampened a nascent recovery in stocks since India’s trade deal with the US. Analysts expect it to drive inflation, and weaken the economy and currency.

“With Middle East tensions showing little sign of easing, supply risks remain high, leaving room for oil prices to move higher in the near term,” said Dilin Wu, a research strategist at Pepperstone Group. “India’s heavy reliance on imported crude — most of it from the Gulf — makes its market vulnerable. Prolonged higher oil prices could widen the import bill, strain the current account and rupee, and put additional pressure on equities.”

Bloomberg

The jump in Brent prices has pressured the Nifty Index in recent sessions and analysts expect such weakness may continue for some time. On Wednesday, bank shares weighed the most on the key gauge while engineering major Larsen & Toubro, which has significant exposure to the Middle East, dropped 7%.

The start of the Russia-Ukraine war resulted in the Nifty correcting by around 10% in the first half of 2022, Citigroup analysts including Samiran Chakraborty wrote in a note. “A 10% rise in oil prices leads to 30 basis points of upside pressure on inflation and 15 basis points downside on growth,” they said.

To be sure, some investors are more optimistic about India. BNP Paribas says Indian stocks should outperform in coming months as the risk/reward balance is skewed to the upside.

Still, more investors are seeking alternatives to Indian stocks. SocGen recommends going long Asia ex-Japan shares while shorting those from India, while Sanford C. Bernstein expects a drawn-out Iran conflict may continue to depress the index from its Monday close of 24,866.

A more prolonged escalation “could push the Nifty below 24,500,” Bernstein analysts including Venugopal Garre wrote in a note. “In particular, we see higher risk for energy, travel and trade-linked names, and construction companies with meaningful Middle East and North Africa exposure.”

...moreless

...moreless