The Indian stock market has been under intense selling pressure amid the ongoing US-Iran war and the sharp rise in crude oil prices, which has heightened concerns over imported inflation in the Indian economy.
Crude oil prices in the international markets have surged again towards the $100 per barrel mark following a significant escalation of the conflict in the Gulf region and supply disruptions caused by the effective closure of the Strait of Hormuz — a key chokepoint for global oil shipments.
The benchmark Nifty 50 has fallen over 4% in one week, and is down by 8% in one month, weighed down by sustained foreign institutional investor outflows.
According to Vinod Karki, Equity Strategist at ICICI Securities, the Nifty 50 could correct up to 10% from its pre-conflict level if crude oil prices remain above $100 per barrel for an extended period.
Karki noted that crude oil prices and Nifty 50 returns have exhibited a curvilinear correlation in the past. At sub-$90–$100 per barrel levels, oil prices and the Nifty’s performance tend to move in tandem, as crude prices often act as a barometer of global demand conditions.
“The fundamental underpinning for the above behavior is most likely that within a normal supply-side environment, rising/falling crude oil prices reflect a rising/falling aggregate demand environment, which provide bullish/bearish signals for equities,” Karki said in a note.
However, this relationship reverses once crude prices move beyond the $90–$100 per barrel range. At that point, higher oil prices significantly increase India’s import bill and often signal supply shocks triggered by geopolitical crises or macroeconomic disruptions — factors that can weigh on global growth expectations.
A sharp rise in crude oil prices above the $100 per barrel mark would be an indication that the severe oil supply disruption could continue for a longer period of time.
“In such an environment, Nifty 50 could potentially drop by ~10% from the pre-conflict-day level of 25,178; and, Nifty 50’s P/E ratio could drop to ~18x which is closer to the lowest levels in the post-COVID era,” Karki said.
This would imply a potential downside for the Nifty 50 to around 22,660 if crude prices remain elevated.
In such a scenario, the earnings yield could rise to about 5.6%, the highest in the post-pandemic period, while the spread between bond yields and earnings yield could narrow to around 100 basis points, improving the relative attractiveness of equities over bonds, assuming bond yields remain stable.
Karki also expects the market-cap-to-GDP ratio to move closer to 110%, as mid-cap and small-cap stocks could witness sharper corrections than large-cap stocks.
The last instance of the negative correlation of crude prices and Nifty 50 was witnessed in 2022, when oil prices spiked beyond $100 per barrel for 3–4 months driven by Russia’s invasion of Ukraine.
The spike in oil prices triggered market volatility and led to a roughly 10% decline in the Nifty 50, which eventually laid the groundwork for the strong equity rally witnessed in CY23.
Sectoral Impact
Higher crude oil prices could have a direct impact on sectors where oil or its derivatives are key inputs, including automobiles, aviation, oil marketing companies (OMCs), city gas distributors (CGDs), building materials, consumption, and industrials.
In addition, other high-beta sectors that are sensitive to macroeconomic conditions — particularly those with export exposure to the Gulf region — could also face pressure. These include financials, real estate, discretionary consumption, and industrial companies with Gulf-linked exports.
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Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
