5 biggest concerns around Iran-Israel tensions that could impact Indian stock market

Tensions in West Asia are high after Iran launched over 300 drones and missiles against Israel on Saturday after a suspected Israeli strike on its embassy in Syria earlier.

This fresh flare-up of tensions in West Asia dealt a blow to market sentiment across the globe. Indian stock market benchmarks the Sensex and the Nifty 50 fell over a per cent each in morning trade on Monday, April 15.

Also Read: Stock market crash today: Why is India stock market down today? Explained with 5 reasons

The US and other allies of Israel have urged restraint. According to a Reuters report, “US President Joe Biden warned Prime Minister Benjamin Netanyahu the US will not take part in a counter-offensive against Iran”.

Also Read: How US, UK, and France collectively thwarted Iran’s attack on Israel?

Let’s take a look at the five biggest concerns around the Iran-Israel tension that could impact the Indian stock market:

1. Downgrades due to the crude shock

Iran is the third-largest producer of crude oil within OPEC (Organization of the Petroleum Exporting Countries). If the tensions between Iran and Israel escalate further, the supply of crude oil prices will be severely disrupted. This will hit Indian share market sentiment as India is the third-largest consumer and importer of crude oil, importing over 80 per cent of its crude oil needs.

Also Read: Economy’s sound enough to bear short-term oil shock

Higher crude oil prices hurt India’s economy. It puts pressure on its currency, and negatively impacts foreign capital inflow. This may also fetch some ratings downgrades for the country, further deteriorating the prospects of capital inflow.

“It was expected that Israel would retaliate but that has not happened. However, in case of an escalation of tensions, it will strengthen crude oil prices. Crude oil drives emerging market economies. If crude starts moving upwards, the downgrades will come,” said Shrikant Chouhan, the head of equity research at Kotak Securities.

Also Read: Crude oil prices see a sharp jump; can they sustain gains? How can they impact Indian stock market sentiment?

2. A blow to rate cut hopes

Inflation, globally, is yet to come under the targets of central banks. If geopolitical tensions increase from hereon, commodity prices will move up due to supply disruptions. This will throw cold water on the efforts of keeping inflation down, eventually hitting the prospects of rate cuts.

“Globally, inflation will remain high due to geopolitical tension as it will affect crude oil prices and other commodity prices such as copper, zinc, aluminium, nickel, etc. If this happens, the US Fed will not make a hurry to cut interest rates. This will influence market sentiment and investors who invest in high-risk assets like equities will be disappointed,” said Chouhan.

“The markets across the globe were expecting a Fed rate cut in June. Due to rising geopolitical tensions, this looks unlikely now. Delayed rate cuts will increase the pressure on the market as the bond yield will remain high and it will aggravate foreign capital outflows from equities,” Chouhan said.

3. More capital outflow

Rising geopolitical tensions may make investors risk-averse. This could mean more capital outflow from the market as the Indian share market is already at premium valuations.

As Chouhan observed, the Indian share market is already trading with expensive valuations so there could be more foreign capital outflow.

Also Read: Will Iran-Israel conflict lead to higher gold and oil prices? Economist Mohamed A. El-Erian says…

4. Rupee may plumb new lows due to import-export imbalance

Geopolitical tensions may disrupt the supply chain globally. This will distort the import-export balance which could put pressure on the Indian rupee, dragging it to fresh lows.

Weak currency means, higher inflation, more capital outflow, expensive imports and low profit for domestic companies.

5. Capped upside

Liquidity from domestic institutional investors (DIIs) and retail investors are expected to support the Indian share market. However, the upside of the market may be limited due to geopolitical tensions.

“On the downside, 22,000 may be a very good support. On the upside, 22,800 could be the limit,” said Chouhan.

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