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

This new flare-up of tensions in West Asia has dealt a blow to market sentiment around the world. Indian stock market benchmarks Sensex and Nifty 50 each fell more than 1% in morning trading on Monday, April 15.

Also read: Stock market crash today: Why is the Indian stock market falling today? Explained with 5 reasons

The United States and Israel’s other allies have called for restraint. Reuters reports that “US President Joe Biden has warned Prime Minister Benjamin Netanyahu that the US will not participate in a counterattack against Iran.”

Also read: How did the US, UK and France jointly thwart Iran’s attack on Israel?

Let’s take a look at the 5 biggest concerns regarding Iran-Israel tensions that could impact the Indian stock market.

1. Rating downgrade due to oil shock

Iran is the third largest crude oil producer within OPEC (Organization of the Petroleum Exporting Countries). Further escalation of tensions between Iran and Israel will cause significant disruption to the supply of oil prices. This will hit sentiment in the Indian stock market as India imports more than 80% of its crude oil needs and is the third largest consumer and importer of crude oil.

Also read: Economic health to withstand short-term oil shocks

Rising oil prices have dealt a blow to the Indian economy. It puts pressure on the domestic currency and negatively affects the inflow of foreign capital. This could lead to some downgrades in the country’s ratings, further worsening prospects for capital inflows.

“It was expected that Israel would retaliate, but that didn’t happen. But if tensions rise, oil prices will rise. Oil drives emerging economies. ” said Shrikant Chauhan, head of equity research at Kotak Securities.

Also read: Oil prices soar; Will they be able to maintain profits? How will they impact the Indian stock market sentiment?

2. A blow to interest rate cut expectations

Globally, inflation is still not within central bank targets. Going forward, as geopolitical tensions increase, commodity prices will rise due to supply disruptions. This would put a damper on efforts to curb inflation and ultimately hurt prospects for rate cuts.

“Due to geopolitical tensions, global inflation is likely to remain high as it affects oil prices and commodity prices such as copper, zinc, aluminum, and nickel. The board will not be in a hurry to cut rates.” This will affect market sentiment and investors in high-risk assets such as equities will be disappointed,” Chauhan said.

“Markets around the world had been expecting the Fed to cut interest rates in June. Rising geopolitical tensions now make that unlikely. For the worse, there will be increased pressure on the market “from stocks,” Chauhan said.

3. Further capital outflows

Rising geopolitical tensions may cause investors to avoid risk. This could mean further capital outflow from the market as the Indian stock market is already at premium valuations.

As Chauhan observed, Indian stock markets are already trading at expensive valuations, which could lead to more foreign capital outflows.

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

4. Export-import imbalance could push rupee to new lows

Geopolitical tensions can disrupt supply chains around the world. This could distort the export-import balance, putting pressure on the Indian rupee and dragging it to new lows.

A weaker currency means higher inflation, more capital outflows, more expensive imports, and lower profits for domestic companies.

5. Upper price can be suppressed

Liquidity from domestic institutional investors (DIIs) and retail investors is expected to support the Indian stock market. However, geopolitical tensions could limit market upside.

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

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Disclaimer: The views and recommendations expressed above are those of individual analysts, experts, and brokerages and are not the views of Mint. We recommend checking with a certified professional before making any investment decisions.

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Published: April 15, 2024, 11:37 AM IST