With the Sensex and the Nifty 50 already down nearly 4% so far in 2026, a sharp escalation in the Israel–Iran conflict has added a fresh layer of uncertainty for Indian equities. Following preemptive strikes by Israel on Iran and heightened involvement of the U.S., the markets are bracing for a gap-down opening and elevated volatility as global risk sentiment turns cautious.

The flare-up has once again put crude oil prices at the centre of market concerns. Direct military engagements in and around the Strait of Hormuz — a critical artery for global energy supplies — have disrupted oil shipments and pushed prices higher. For energy-importing economies like India, the trajectory of crude will be the single most important trigger for markets in the coming week, say experts.

Nachiketa Sawrikar, Fund Manager at Artha Bharat Global Multiplier Fund, noted that markets were already fragile in February, with the S&P 500 and the Nasdaq Composite declining in the U.S., while the Nifty 50 remained negative on a year-to-date basis. Against this backdrop, any direct U.S.–Israel attack on Iran could trigger broad-based selling across developed and emerging markets.

He expects safe-haven assets such as U.S. Treasuries, gold and silver to extend their rally, while emerging markets like India could face amplified pressure through foreign institutional investor (FII) outflows.

Oil shock and global market reaction

Over the past five decades, oil prices have often surged 25-300% during geopolitical crises, even when actual supply disruptions proved temporary. As highlighted by analysts at Equirus Securities, crude typically reacts first by embedding a geopolitical risk premium before gradually adjusting as trade flows reroute and fundamentals reassert themselves.

At the start of the Russia–Ukraine war, crude briefly spiked above $120 per barrel amid fears of prolonged supply disruption. However, prices eventually retraced as Russian exports were redirected and alternative supplies stabilised the market. Today, oil trades closer to underlying fundamentals, and oil marketing companies have recovered significantly from their crisis-implied lows.

The current concern is the Strait of Hormuz, through which nearly 20% of global oil and a significant share of LNG trade passes. Although Iran’s direct share in global oil production has declined to roughly 2.5%, its strategic geographic position gives it disproportionate leverage over supplies from Saudi Arabia, Iraq, Kuwait, and the UAE.

Crude prices have already firmed by about 10% since the U.S. began positioning military assets in the Middle East, reflecting a headline-driven risk premium.

Impact on India: Inflation, CAD, and fiscal stress

For India, the implications are immediate and tangible. Higher crude prices raise import costs, widen the current account deficit (CAD), and add inflationary pressures. A sustained oil rally could also complicate the Reserve Bank of India’s rate trajectory and put depreciation pressure on the rupee. Increased subsidy burdens — especially if the government moves to cushion consumers — could strain the fiscal deficit.

The Indian equity markets have responded with a clear risk-off bias. Analysts expect heightened volatility and the possibility of a short-term correction of 1–1.5% if crude continues to climb.

Sectoral impact 

The sectoral impact of escalating geopolitical tensions is expected to be uneven. Automobiles may come under pressure due to higher fuel costs and rising input inflation, while financial stocks could face selling amid risk aversion and potential FII outflows. FMCG companies may see margin compression from elevated logistics and packaging expenses. Energy-intensive sectors such as aviation, logistics, paints and chemicals are also likely to grapple with cost escalation if crude prices remain elevated.

On the other hand, IT services could show relative resilience, supported by a stronger U.S. dollar and defensive investor flows. Export-oriented sectors may also benefit from currency depreciation, while upstream oil producers stand to gain from higher crude realizations. Broader risks include capital outflows, rupee weakness, and rising freight and insurance costs for exporters, though India’s diversified trade relationships could help cushion part of the external shock.

How deep could the correction be?

History suggests that while oil spikes can initially rattle markets, the long-term damage depends on the duration of disruption. The real forecasting challenge lies not in predicting the initial spike but in assessing how long the geopolitical premium remains embedded in crude prices.

If tensions de-escalate quickly and shipping lanes remain operational, markets may stabilise after a knee-jerk reaction. However, if disruptions to the Strait of Hormuz persist, the impact could be more structural — with prolonged pressure on inflation, the rupee, and fiscal balances.