Oil shock, AI worries to weigh on Indian markets amid rising global uncertainty

Mumbai: A risk-off wave is set to sweep across equity markets early this week, as US-Israeli military actions against Iran are expected to drive up oil prices and spark a renewed dash to safe-haven assets. With fresh forecasts pegging crude at as much as $100 a barrel amid the supply disruptions in the oil-rich Persian Gulf, the odds are stacked against Indian stocks, already under pressure from uncertainties over the fallout of artificial intelligence-related disruptions in the country’s software sector.

On Sunday, Saudi Arabia was down 2.5%, Oman fell 1.6%, and Bahrain was down 1%. The sell-off in the Gulf market is a harbinger of what’s in store for other markets, including India, when trading opens on Monday.

“A gap-down opening on Monday remains possible because a spike in oil prices following the closure of the Strait of Hormuz and disruptions in the Gulf could weigh on Indian businesses,” said Sham Chandak, head of institutional equities at Elios Financial Services.

Barclays said Brent crude could hit $100 a barrel, citing the threat of a potential supply disruption. Fears of the US’s attack on Iran drove Brent to a seven-month high of $72.87 on Friday, but markets were hoping that both countries would resume negotiations over the long-running nuclear dispute this week after talks remained inconclusive till the weekend. Oil shipping has been largely disrupted in the Strait of Hormuz – the critical artery linking the oil-rich Persian Gulf to the open seas – after US-Israeli strikes on Iran, with several tanker operators pausing voyages and Iran’s state-media warning that the waterway is effectively closed.

“Markets are likely to move from earnings-driven to oil-driven trading in the near term,” said JM Financial Institutional Securities in a client note. “Indian markets are likely to see a gap-down opening with elevated volatility amid global risk-off sentiment.”

The heightened risk-aversion could drive up prices of gold and silver, while boosting demand for the US dollar. When oil prices surge, it triggers inflationary pressures, making gold and silver more attractive to protect investor wealth. Similarly, when oil prices rise, the demand for the US dollar typically increases because crude is valued in the American currency. JM said every $ 1 rise in crude increases India’s annual import bill by $2 billion, putting pressure on the trade balance. Upstream energy stocks such as Oil India and ONGC, along with defence names such as Hindustan Aeronautics and Bharat Electronics, may gain, while oil marketing companies, paints, tyres, aviation and chemicals may come under pressure on account of higher oil prices, it said.

March SeasonalityHistorically, March has been a relatively stronger month for the markets, but that seasonal trend could face some challenges this time.

“We are entering March with caution despite historically strong positive seasonality, as global and domestic headwinds continue to weigh on Indian markets,” said Sriram Velayudhan, senior vice -president, IIFL Capital Services.

In the past decade, the Nifty 50 and Nifty 500 have remained positive in eight out of 10 years, with average returns of 0.8% for both indices, said Chandan Taparia, head of technical and derivatives research at Motilal Oswal Financial Services

Elios’s Chandak said that if tensions persist, foreign portfolio investors may reduce exposure to risk assets, including emerging markets.

FPIs had turned buyers of equities worth ‘19,782 crore in February after selling in the range of ‘11,000-34,000 crore in the previous three months.