Will Sensex, Nifty react amid escalating Middle East war after Khamenei’s killing?

Indian benchmark indices Sensex and Nifty will remain in focus tomorrow, as the war in the Middle East flared up after the killing of Iran's Supreme Leader Ayatollah Ali Khamenei. Analysts expect Indian markets to see a gap-up opening tomorrow, noting that the long-term view remains constructive with crude oil prices being the key monitorable factor.

Khamenei's death, which was confirmed by Iranian state media earlier today, triggered warnings about sharp retaliation from Tehran. US President Donald Trump announced that the 86-year-old leader had been killed on the first day of what he described as massive joint airstrikes.

Khamenei's death can be seen as a massive development in the ongoing war in the Middle East. This opens up a period of uncertainty about Iran’s leadership, and worries around strong retaliation and rise in global tensions.

What to expect from markets tomorrow?

Sunny Agrawal, Head of Fundamental Retail Research at SBI Securities, sees the rising geopolitical tensions as a marginal negative for markets tomorrow, and doesn't expect a knee-jerk reaction. The news around Khamenei's death and possible retaliation can lead to a minor gap down opening on Monday. “After that, the uncertainties should normalise,” he said, adding that the ultimate monitorable will be crude oil prices.

In case the oil prices remain calm, Agrawal doesn’t think markets will react majorly, and feels how markets will react in the longer term will be influenced by more developments in the future.

Kranthi Bathini of Wealth Mills Securities meanwhile said that nobody expected the expanding tensions in the Middle East, especially in UAE. So this will bear a negative impact on the financial markets in the short-to-medium term. “But as far as Indian markets are concerned, how crude oil performs will remain the key monitorable,” he added.

Bathini explained that one good thing is that India has been taking advantage of crude oil’s recent consolidation. "But if crude goes above $80 per barrel, this can create an inflationary pressure on the market,” he said.

“So one needs to watch how the crude is going to behave in the next few days,” Baithini said, adding that India’s domestic fundamentals remain strong. “Markets are definitely in a downturn at this point of time, driven by various reasons. So definitely it is going to have an impact from the wars in the short-to-medium term, and not in the long-term,” he added.

Manoranjan Sharma, Chief Economist at Infomerics Ratings, also noted that for India, which relies heavily on imported crude oil, the immediate consequence has been rising inflationary pressure triggered by higher energy prices.

“Indian equity markets have already responded with risk-off sentiment. Benchmark indices are expected to open lower, accompanied by heightened volatility as investors reassess geopolitical and commodity-related risks. A short-term correction of approximately 1–1.5% is possible, with sectors such as automobiles, financials, and FMCG facing downward pressure. In contrast, IT companies and select export-oriented businesses may find relative support amid global risk aversion and a strengthening US dollar,” he said.

Nachiketa Sawrikar, Fund Manager, Artha Bharat Global Multiplier Fund, explained that equity markets were already fragile in February, with the S&P 500 and the Nasdaq Composite declining in the USA, and India’s Nifty 50 down on a year-to-date basis. “Against this backdrop, a USA and Israel attack on Iran would likely trigger broad selling of risky assets across both the developed and emerging markets,” he said.

“We would expect the ongoing rally in US treasuries, oil, gold, and silver to extend. For India, the impact is typically magnified: higher crude oil prices widen the current account deficit, stoke domestic inflation, pressure the rupee, and could lead to FII outflows as global investors reduce risk exposure,” he further said.

What should investors do?

Agrawal explained that 25,000 was a very strong support for Nifty for the last few months, and is expected to remain so in the near term. “If markets can hold on to the level, I don’t see any sharp reaction in the markets,” he said.

On being asked which sectors will likely react to the uncertainties the most, the analyst said that oil-linked stocks will remain in focus tomorrow. Oil marketing companies (OMC) stocks may see some downturn, while oil refineries may see an uptick in stock prices if oil prices rise. Paint, tyre and other stocks will also be in focus.

Investors should use any dip driven by the uncertainties as an opportunity to accumulate, Bathini meanwhile said. “When the Russia-Ukraine war started, Nifty 50 fell below 22,000. But after several years, markets ignored the factor and rebounded,” he added.

The analyst further said that as long as India’s trade is not disrupted, equity markets are going to recover losses after some time, he further said.

“Overall, markets remain highly sensitive to geopolitical risks and sector-specific pressures, driving investors toward defensive, domestically focused segments,” said Vinod Nair, Head of Research, Geojit Investments Limited.

Indian stock markets declined sharply to close at near one-month low levels on Friday, with Sensex falling nearly 1,000 points and Nifty closing below the 25,200 mark. The selloff wiped off more than Rs 5 lakh crore in investors’ wealth, dragging down the total market capitalisation of all BSE-listed firms to around Rs 463 lakh crore.

The Indian benchmark indices extended losses for the second consecutive session, led by decline in realty, financial, auto and FMCG shares due to multiple factors. Sensex declined more than 961 points to 81,287, while Nifty 50 fell around 318 points to 25,179. Notably, Friday marked the first time since February 2 when Sensex closed below the 82,000 mark and Nifty 50 closed below the Rs 25,200 mark.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)