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

Beaten-up Indian equities are likely to widen 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.

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.”

Stocks are likely to be under pressure Wednesday as traders return from a holiday. The jump in Brent prices already pressured the Nifty Index on Monday, and it closed down more than 1% that day. If history is a guide, that weakness may continue for some time.

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.”