Following the US’s expansionist actions against Venezuela and Greenland, the focus has now moved to Iran. The Middle East tensions are expected to have a limited impact on the Indian stock market and economy due to the relatively low total trade exposure of Iran to the world & its limited exposure to the oil trade. However, the global tensions are leading to increased volatility in crude oil prices, making sectors such as oil & gas, energy, and allied areas vulnerable in the short term. Given India’s sensitivity to crude oil imports, broader market sentiment is weighing in the interim.
Over the medium to long term, actual supply disruptions appear limited, with crude prices remaining relatively stable amid a well-supplied global oil market. Market stability is supported by maintained production from OPEC and the US, along with the reopening of the Venezuelan oil market, while global demand remains subdued.
However, the impact on geopolitical risk has worsened this week with elevated speculation in haven metals like gold and silver, both trading actively at all-time highs daily. Silver has crossed ₹4lac per kg in India, up 60% in 1 month, 150% in 3 months, and 300% in 1 year. Similarly, gold has risen 28%, 46% and 120% over the respective time periods. Crude prices crossed $70 last week in anticipation of probable military actions in Iran.
The commodity market continues to be optimistic given the rising geopolitical issues, supply bottlenecks, and trade control issues, while equities are underperforming. In that sense, while the Indian equity market was already underperforming, it is getting shattered.
A key factor affecting the performance of the domestic market is the lack of clarity over the US-India trade deal, the lack of a dual diplomatic relationship, and the deep depreciation of the INR, which crossed 92 last week. Moreover, currency depreciation is not only seen in INR but is also happening against the world’s strongest currency, like the USD. DXY (composite dollar index) had reduced to 96, from 99.5 a couple of weeks back. How much of this is due to de-dollarisation, the Fed rate cut issue, a rise in global bond yield, and geopolitical risk has to be understood.
The Indian market attempted to recover during the last 2 weeks, driven by positive global cues, moderation in Trump language and the estimation that geopolitical risk should not escalate further. However, the rebound proved short-lived due to sustained profit booking at higher levels and a rapid escalation in the Iran-related situation. Continued FII selling has added to the correction, as foreign investors reduced exposure to Indian equities while remaining constructive on other Asian markets such as Japan, China, and South Korea. Meanwhile, the US naval presence has increased in the Gulf region, US and European officials have put three high demands from Iran: a permanent end to all enrichment of uranium, disposal of ballistic missile stockpiles and an end to support to proxy groups in the Middle East.
Markets volatile
The domestic market exhibited volatility during the week, led by the monthly expiry day, global sell-off on Wednesday & Thursday due to below-estimated results from key IT players, inflationary & FED policy meet, and optimism surrounding the conclusion of the India–EU trade agreement. Auto and beverage stocks declined amid worries about increasing competition in the future, while strength was seen in Metals, CPSE, Capital Goods and Oil & Gas. Reality, Consumer Durables and FMCG stocks saw some profit-booking amid investor shift towards other cyclical sectors.
The full benefits of the India–EU FTA are likely to accrue from CY2027 onwards. While investors continued to assess ongoing corporate earnings, which have been marginally below estimates and offered limited scope for near-term upgrades due to one-time labor costs and high input costs.
In the near term, investors will hinge on whether the US-Iran situation further escalates and the Union Budget.
Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions.
