A breakdown in the U.S.-Iran diplomatic communications on Monday sent global oil markets into a tailspin, with Brent crude surging as much as 6.5% past $97 a barrel and U.S. benchmark WTI climbing 7.5% to just below $94, as fears of a prolonged conflict and a possible double-blockade of global shipping lanes gripped markets worldwide.

In India, the fallout was immediate and visible. The rupee depreciated 34 paise to close at 95.19 against the U.S. dollar on Monday, touching an intraday low of 95.03 as rising crude and U.S.-Iran tensions weighed on sentiment. The dollar index was at 99.04, up 0.10%, adding further pressure on the currency. This reversed Friday's sharp recovery, when the rupee had gained 73 paise to 94.85 on suspected RBI intervention.

On the institutional front, foreign institutional investors net sold ₹3,911.68 crore on Indian exchanges on Monday, according to NSE data. Domestic institutional investors partially cushioned the blow, net buying ₹5,109.13 crore on the same day, keeping the session from a steeper fall.

The breakdown

The diplomatic unravelling came suddenly. As recently as May 24, both Washington and Tehran were reportedly inching toward a one-page memorandum of understanding that would have extended the ceasefire by 60 days, reopened the Strait of Hormuz for commercial shipping, and initiated nuclear talks. On May 29, reports indicated both sides had reached a tentative agreement.

That framework collapsed over the weekend. On Friday, President Trump held a Situation Room meeting and sent back revised terms — demanding that Iran agree to the immediate reopening of the Strait with no tolls, and that Tehran commit to the destruction of its stockpile of highly enriched uranium, hardening the U.S. position.

By Monday, Iran's IRGC-affiliated Tasnim News Agency reported that Tehran had stopped all dialogue with U.S. negotiators, linking the decision directly to Israel's continued military operations against Hezbollah in Lebanon. Iran's position has been consistent throughout: a ceasefire with the U.S. constitutes a comprehensive ceasefire across all fronts, including Lebanon, and any violation on one front nullifies the entire agreement.

Foreign ministry spokesperson Esmail Baghaei said Iran remains engaged with the U.S. but does so with "distrust." Earlier, foreign minister Abbas Araghchi had warned that "any violation of this ceasefire on one front shall be considered a violation of it across all fronts."

Strikes continue on both sides

Even as diplomacy collapsed, military exchanges continued. Over the weekend, U.S. Central Command struck Iranian radar installations and drone command-and-control facilities near the Strait of Hormuz, saying the strikes were "self-defense" after Iran shot down a U.S. MQ-1 Predator drone operating over international waters. The Washington Post reported that the U.S. targeted sites at Goruk and Qeshm Island.

On Monday, Iran's IRGC announced a retaliatory strike on an air base used by U.S. forces, without disclosing the base's location.

Separately, Kuwait's air defences intercepted Iranian missiles and drones for the second time in days, with sirens sounding three times starting at 6:00 AM local time. Kuwait's foreign ministry formally condemned the attacks, describing them as a "dangerous escalation" and a "direct assault" on Kuwaiti sovereignty. Saudi Arabia and UAE also condemned the attacks.

Israel pushes deeper into Lebanon

Adding to the regional pressure, Israeli Prime Minister Benjamin Netanyahu ordered fresh airstrikes on Beirut's southern suburbs on Monday and directed Israeli forces to push deeper into Lebanon, citing Hezbollah ceasefire violations. Israel's military also staged new incursions into Quneitra and Daraa in southern Syria. At least 12 people were reportedly killed in Israeli strikes on southern Lebanon in the latest wave. France, Egypt and the UN Security Council all called for restraint.

What the commodity desks are saying

Kotak Securities' commodity research team, in its Evening Track note dated June 1, flagged the exact pressure points before the full magnitude of the breakdown became clear. The note said Brent was "climbing above $94/barrel and WTI trading near $91, as uncertainty surrounding a potential U.S.-Iran ceasefire extension continued to support geopolitical risk premiums."

The note added: "Going forward, progress in negotiations could weigh on prices, while any escalation or supply disruption may drive crude higher." That escalation scenario is now squarely in play.

On gold, the Kotak report noted that bullion had "slipped nearly 1% to trade below $4,500/oz" — pulled lower by a stronger dollar and fears the Fed would keep rates elevated if energy-driven inflation persisted. However, the escalation since the note was published has strengthened the safe-haven case for gold, and the yellow metal may see fresh buying in Tuesday's session.

On base metals, the Kotak team noted that copper and nickel gained more than 1% on supply tightness, though "lingering uncertainty around West Asia negotiations and softer Chinese manufacturing activity capped broader gains across the complex."

The Iran Presidency: unconfirmed but significant

Adding a further layer of uncertainty, Iran International reported that President Masoud Pezeshkian had submitted a resignation letter to Supreme Leader Mojtaba Khamenei, claiming the IRGC had "effectively taken over large portions of the government" and excluded elected officials from key wartime decisions.

Iran's presidential office denied the reports. Spokesperson Fatemeh Mohajerani said the administration "is focused on addressing national challenges and supporting the Iranian people." The IRGC-affiliated Tasnim News Agency also said Pezeshkian "continues to carry out his official duties." No major international wire service has independently confirmed the resignation.

India in the crossfire

Back in Mumbai, the message from the trading floor was clear. Nifty IT rose 2.66%, lifted by global tech sentiment, but it was the only major sector in the green. Nifty Bank fell 1.10%, the Nifty FMCG index dropped 2.30%, and the Nifty Auto index slid 1.70% — weighed down by mixed May sales numbers and a general risk-off mood.

India VIX, the market's fear gauge, closed at 16.54, up 2.20% on the day — indicating that institutional players were hedging rather than adding risk. GIFT Nifty is trading over 130 points lower as of 9:45 pm. With Iran now openly threatening to block not just the Strait of Hormuz — through which flows roughly 20% of the world's seaborne oil — but also the Bab el-Mandeb, the Red Sea gateway, the energy and supply-chain risks for a large oil importer like India remain elevated and unresolved heading into Tuesday.