Iran-Israel clash, oil price rise: Key factors behind Dalal Street bloodbath

A combination of geopolitical tensions in the Middle East, a rise in oil prices, and regulatory changes contributed to the significant downturn in the Indian stock market.

In Short

• Stock markets fall sharply amid escalating Iran-Israel conflict
• Oil prices surge past $75, pressuring Indian import-dependent economy
• Sebi’s F&O tightening adds to market volatility and uncertainty

The ongoing clash between Iran and Israel triggered panic on Dalal Street on Thursday, with the Sensex tumbling as much as 1,250 points in early trade.

At 11:02 am, Sensex was down 958.55 points at 83,307.74, while the NSE Nifty50 was trading 297.50 points lower at 25,499.40. All other broader market indices were also trading in negative territory.

A combination of geopolitical tensions in the Middle East, a rise in oil prices, and regulatory changes contributed to the significant downturn in the Indian stock market.

Here’s a closer look at the factors driving this meltdown.

Iran-Israel conflict escalates

The ongoing hostilities between Iran and Israel have unsettled global markets, with concerns growing over potential disruptions to oil supplies from the Middle East.

Iran's recent missile strikes on Tel Aviv, followed by threats of Israeli retaliation, have stoked fears of a prolonged conflict that could have broader economic implications.

Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, highlighted the risks associated with these developments: “The situation will change if Israel attacks any oil installations in Iran, which will trigger a huge spike in crude. If it happens, it can turn out to be more damaging for oil importers like India.”

Brent crude prices have already surged past $75 per barrel, while West Texas Intermediate touched $72, with both benchmarks rising nearly 5% over the past few days. For India, which heavily relies on oil imports, this escalation in crude prices could exacerbate inflationary pressures and widen the fiscal deficit.

Oil price surge and Sebi’s F&O measures

In addition to rising oil prices, the Securities and Exchange Board of India’s (Sebi) recent decision to tighten rules in the futures and options (F&O) segment added to market uncertainty.

The new regulations, which include limiting weekly expiries to one per exchange and increasing contract sizes, have raised concerns among retail investors and contributed to the broader market weakness.

Foreign fund outflows and Chinese market rally

Foreign institutional investors (FIIs) have also been net sellers, pulling out Rs 5,579 crore from Indian equities on Tuesday.

Much of this outflow is attributed to the resurgence in Chinese markets following stimulus measures announced by the Chinese government. The SSE Composite Index rose 8% on Tuesday and has gained over 15% in the past week.

Prashanth Tapse, Senior VP (Research) at Mehta Equities, explained the impact: “FIIs are withdrawing funds from Indian markets and reallocating them to Chinese stocks, which are currently trading at more attractive valuations.”

What’s next?

Market experts are advising a cautious approach amid the ongoing volatility.

Vijayakumar noted that while the market has shown resilience, the situation remains fluid, especially given the geopolitical risks. “A partial switch in portfolios to defensives like Pharma and FMCG also can be thought of,” he suggested, as a way to mitigate exposure to potential downside risks.

Rahul Kalantri, VP Commodities at Mehta Equities, also pointed to crude oil’s volatility as a key factor to watch. “If tensions in the Middle East escalate further, especially if oil infrastructure is targeted, we could see crude prices surge even higher,” he cautioned.