Markets Anticipate Cautious Open Amid Escalating US-Iran Tensions

Indian Equity Markets Cautious Amid US-Iran Conflict Escalation

Key Factors:

• Sharp escalation in US-Iran conflict and its implications for oil prices, inflation, and near-term risk sentiment
• Crude prices have already moved higher, with potential for sustained rise, hurting India's balance of trade and balance of payments
• OPEC+ expected to increase production to stabilize prices

Market Analysis:

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The Indian equity markets are expected to open on a cautious note on Monday as investors assess the impact of the US-Iran conflict escalation. Analysts suggest the immediate impact will be negative, with crude prices already moving higher. However, the medium-term impact on equities will depend on how long the conflict lasts.

Sectoral Performance:

• Oil marketing companies, aviation, paints, and tyre manufacturers are likely to face pressure in the short to medium term due to their direct dependence on crude-linked inputs and uncertainty around pass-through.
• Banking, pharma, and IT sectors may see defensive interest, while upstream oil producers and defence stocks may outperform in a weak market environment.

FII Activity:

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FII activity is expected to remain cautious in the near term, with global investors likely to react headline-by-headline until there is greater clarity on the trajectory of the conflict.

Risk Reaction:

JM Financial notes that markets are likely to react negatively at the open, but flagged that the situation currently represents a risk escalation rather than a base-case shock.

Oil Risk:

• Rising Middle East tensions increase the risk of global supply-chain disruptions and higher freight and insurance costs, even without a full blockade of the Strait of Hormuz.
• India's crude oil and LNG supplies remain largely intact, with diversified sourcing, strategic petroleum reserves, and operational inventories providing near-term buffers against disruption.

Inflation and Fiscal Impact:

• Every $1 per barrel increase in Brent crude translates into a rise of around Rs 0.52 per litre in diesel and Rs 0.55 per litre in petrol at the retail level.
• Sustained high oil prices could feed directly into inflation and input costs across sectors.
• Emkay estimates that a $10 per barrel deviation from the $65 baseline could widen India's current account deficit by about 0.5% of GDP, with retail inflation rising by roughly 35 basis points, wholesale inflation by around 130 basis points, and growth taking a 15-20 basis point hit.

Gold and Safe Havens:

• Safe-haven assets, such as gold, are in focus, with sharp moves in gold reflecting uncertainty and risk repricing rather than short-term headlines.

Technical View:

Some market participants believe part of the geopolitical risk is already reflected in prices, with potential for a sustained rally in safe-haven assets.