THE WAR IN THE Middle East has entered the second month. Brent crude oil has hit a high of $117 a barrel. The rupee hit an all-time low of 95.22 to a dollar on March 30, before recovering. The equity indices, the NSE Nifty 50 and the BSE Sensex, are down about 15% year-to-date. For domestic investors, wearied by sustained foreign fund outflows and single-digit equity returns over more than a year, it is time to tighten their belts. But they stay interested.

Over the past few weeks, rising oil prices have raised inflationary pressures, current account deficit, weakened the rupee, and choked fuel supplies. This means that for the stock markets, even a short break in the conflict has been sold into. Traders who have leveraged positions have no option but to wind these up due to the lack of clarity. And investors do not have the financial might to continue to buy heavily and have locked in gains.

While U.S. President Donald Trump had offered a window of hope by declaring a ceasefire from March 23 (equities rose over 2% on the news), the situation stays fragile. Even if a complete ceasefire among all the warring nations were to be announced, it will take time to rebuild relationships. Plus, sanctions against Iran and Russia — critical oil resource nations — won’t be lifted in a hurry.

The Centre, meanwhile, has cut excise duty on petrol and diesel by ₹10 per litre, in a bid to ease the pressure on consumers.

Another story playing out is remittances, which in 2024 made up 3.5% of India’s GDP, according to World Bank data. India received about $135 billion in remittances in FY25, according to Reserve Bank of India data. One-third of this is estimated to come from the conflict-hit Gulf region, which is about $3.7 billion per month. More on this later.

For the Indian markets to get a fillip, it is imperative that the trade deal with the U.S. is sealed. And despite sustained buying from domestic institutional investors (DIIs), foreign funds provide the much-needed tailwind to drive the markets. But they are unlikely to be back till the rupee bottoms out against the dollar.

However, with falling stock prices, valuations have slightly improved, with the Nifty 50 price-to-earnings ratio (P/E) at 20 and a price-to-book (P/B) value ratio of 3.11.

Meanwhile, the Nifty VIX — a measure of volatility — was at 27.89 on March 30, its highest level since March 2020, indicating sustained uncertainty and increased risk aversion.

The correction

INDIA’S MARKETS have been in a price- and time-wise market correction for the past 18 months, after foreign funds started selling Indian stock due to higher valuations. As of March 30, 2026, DIIs continue to be net buyers with investments in equities worth ₹2.50 lakh crore, compared to FIIs which have sold stock worth ₹1.70 lakh crore. In 2025, DIIs had bought net equities worth ₹7.72 lakh crore, up 46% YoY. In the same period, FIIs have been net sellers for stock worth ₹2.98 lakh crore, which was 2.77% lower YoY.

The Nifty 50 and the Sensex are down 10-11% from the mid-September 2024 levels. The bad news is that the correction in the markets could continue if there is no resolution, or if there is an escalation in the conflict.

“Price-wise, there is a little more damage left for equities. We could see the Nifty slide to 22,000 or 21,500 levels, but in the last 500-1,000 points there can be a lot of capitulation in the small- and mid-caps,” says Amar Ambani, ED, YES Securities.

Agrees Tanvi Kanchan, associate director and head of international business & strategy at Anand Rathi Share & Stock Brokers. The Indian economy, she says, has experience dealing with crises such as the global financial slowdown of 2008, the pandemic, and pressures on oil when Russia faced sanctions at the start of the Ukraine war. The medium-term effect would be a drawdown on the Nifty 50, about 3-4% from the present levels, she says.

“Oil prices have been volatile in the past. But we now have stable GDP growth,” Kanchan tells Fortune India. India’s Q3FY26 GDP growth came in at 7.8%. Even if oil prices move to $120-150 per barrel, inflation would be in the above 4% level, which could still be manageable. “The RBI can intervene through open market operations to improve liquidity in the system and reduce the volatility levels of the rupee,” she says.

The RBI is likely to announce its monetary policy stance and interest rate decision on April 8, its first meeting in FY27. Experts say it is likely to maintain a wait-and-watch stance and keep interest rates on hold. The U.S. Federal Reserve, on March 18, had also kept rates on hold, citing uncertainty over the economic outlook and the developments in the Middle East.

“As the war continues to escalate, with oil and commodity prices higher and the trade wars in the backdrop, it will make it difficult for the RBI to cut interest rates as inflationary pressures and risks stay difficult to assess,” says Ambani.

Safe-haven investments

Traditionally, pharma and defence stocks have been the safe havens to invest into during conflicts. Generic drug makers have been exempted from the U.S. tariffs and despite recent gains, most pharma companies are trading close to their fair value, says Shrikant Chouhan, executive vice president and head of equity research, Kotak Securities.

Ambani points towards public sector companies. The S&P BSE PSU index is down just 0.54% in the past six months compared to an over 10% decline for the Sensex. However, metals, power, refining, defence, banks have all shown gains in this period.

The debate over how technology companies will fare is still open. If they are unable to transform themselves into consulting and AI implementation partners, and where contracts are not rolling in to offset the loss of work from current business models, there could be downward pressure on earnings.

Ambani says there is not much India can do specifically to boost FII investment. “Unless there is ‘risk on’ return, FIIs will not be in a hurry to come back in a major way,” he says. If AI investments globally slow down, then tech business models and valuations could improve, and India will be back in the reckoning as a key technology market, he says. “FIIs will come back only when they are convinced that the rupee has fully bottomed out.”

The earnings return of the U.S.-based mega-cap tech giants, the Magnificent 7 (Mag 7, which comprises Apple, Microsoft, Alphabet, Amazon, Meta Platforms, NVIDIA, and Tesla) will drive most of the sector performance in coming quarters, says Kanchan. Mag 7’s profit for calendar year 2026 is expected to be 18%, according to Bloomberg. This outstrips the profit of the S&P 500 companies, because of which foreign fund money is likely to continue to flow towards the U.S. But Ambani and Kanchan agree that over the longer term, India and China would continue to see further inflows.

Chouhan argues that a steadiness for the rupee could see foreign fund flows improve. “Valuations are more attractive over the past one year,” he says, adding that the Nifty 50 EPS of ₹1,430 could be seen by FY28, led by close to 16.5x PE multiples.

The big positive is that DIIs are likely to lead buying on declines through the SIP route in the coming months. This will be irrespective of capital flowing towards fresh primary market listings. “There is a very high chance of their support,” says Chouhan.

The state of remittances

Remittances form an important part of India’s higher purchasing power, boosting consumer spending and saving opportunities. Madan Sabnavis, chief economist, Bank of Baroda, says it is still “too early” to evaluate the exact impact on inward remittances. “One needs to assess how long the war extends. We must see the extent to which the quality of labour gets impacted,” he says.

A 10-20% hit to remittances from the Gulf region could translate into a loss of $5-10 billion. If the war extends, remittances from the Middle East towards India will slow down further. However, Sabnavis adds, that at present, a large percentage of individuals would be skilled labourers and corporate workers with private firms, and the impact on these segments would be limited.

An extended war will spell more pain for India’s economy, as oil is the raw material for several sectors as well. Even with an immediate de-escalation in hostilities, it could take weeks for the economy to be back on track. Till then investors need to brace for further volatility as the market grapples with the uncertainty in West Asia.