Indian equities declined on Monday, tracking losses across most Asian markets, as escalating Middle East tensions dampened investor sentiment.
The Nifty 50 index on the National Stock Exchange of India fell by 1.9% in afternoon trading, after dropping as much as 2.1% intraday, marking its largest single-day decline in over a month. The benchmark index is heading towards its lowest level since September, erasing all gains achieved after India and the United States reached a trade agreement in February this year.
Within the Indian market, engineering companies were among the major declining sectors.
Larsen & Toubro, a leading company that sources over one-third of its orders from the Middle East, saw its shares plunge by up to 7.4%, the largest intraday drop since April 7. KEC International Ltd. fell sharply by nearly 12%.
Reliance Industries and airline IndiGo led the declines on the benchmark index.
Arvind Chari, Chief Investment Strategist at Q India (UK) Ltd., stated, "Given soaring oil prices and expectations of a stronger US dollar, all Indian risk assets—equities, bonds, and the currency—will face pressure in the near term."
India's fear gauge, the India VIX, surged to its highest level since June 2025.
Analysts at JM Financial, including Venkatesh Balasubramaniam, noted in a report that escalating Middle East tensions are increasing oil price risks for the Indian market. They highlighted that shares of oil marketing companies, paint manufacturers, airlines, and chemical producers could come under pressure, as rising raw material costs may squeeze profit margins.
Given India's high dependence on energy imports, rising oil prices could significantly widen the trade deficit and weigh on the rupee and stock markets. JM Financial analysts indicated that for every $1 increase in crude oil prices, India's annual import bill rises by approximately $2 billion, thereby putting pressure on the country's balance of payments.
The Middle East conflict is the latest blow to India's $5.1 trillion stock market. Since late 2024, Indian equities have underperformed most major markets, partly due to weak earnings growth. Compared to markets like China, South Korea, and Taiwan, India's lower exposure to artificial intelligence-related stocks has also contributed to this underperformance.
Although local stocks saw a temporary rebound after India and the US reached a long-awaited trade agreement on February 2, continued selling in technology shares has persistently weighed on market sentiment.
Q India's Chari added, "We had anticipated foreign investors to reallocate funds given India's relative underperformance and its appeal as a diversification from AI bubble risks. Now, this process is likely to be delayed."
Foreign investors turned net buyers of Indian stocks in February, after withdrawing $3.3 billion in January. However, inflows remain subdued amid multiple headwinds.
Nachiketa Sawrikar, Fund Manager at Artha Bharat Global Multiplier Fund, commented, "The impact of rising oil prices on India is typically amplified, as it widens the current account deficit, boosts domestic inflation, and pressures the rupee." This could also lead to "global investors reducing their exposure," potentially triggering foreign capital outflows.