Oil, War, and Volatility: Israel-Iran Flare-Up Rings Caution Bells for Indian Equities

The latest flare-up in the Iran-Israel conflict has sent tremors through global financial markets, fuelling investor anxiety and putting the world’s most critical commodity—oil, on a simmering boil. And for India, a nation heavily reliant on imported energy, the stakes couldn’t be higher.

At the heart of the risk lies the Strait of Hormuz, a narrow but vital maritime artery through which nearly 20% of the world’s oil and LNG flows. Iran’s geographic proximity to this chokepoint makes any potential escalation a matter of global concern. While most analysts still peg the likelihood of a full-scale disruption as low given that the Strait has historically remained open even in times of war, the fear is far from unwarranted. This is especially after reports suggested Iranian officials threatening to close off the strait if things got worse.

As JM Financial points out, “The Strait of Hormuz has never been blocked during earlier wars in the region, and its blocking is extremely unlikely this time as well.” Yet, even the perception of risk has been enough to rattle nerves, and India, despite its robust macroeconomic footing, may not escape unscathed.

A Trifecta of Troubles

The conflict poses a multi-pronged threat. Firstly, India’s macroeconomic stability, a key factor behind its status as a darling among emerging markets, may face turbulence. Rising oil prices could cloud growth prospects and fan inflation, especially worrying given India’s dependence on imported energy.

Secondly, stretched valuations in Indian equities leave little room for error. As Sanjeev Prasad, MD at Kotak Institutional Equities, noted, “The escalation may have negative consequences for the Indian economy and market, particularly as rich valuations leave little cushion for adverse developments.”

The third blow could come from a wave of earnings downgrades. Crude oil and its derivatives form the backbone of various industries—from tyre and paint manufacturing to oil marketing, refining, and logistics. A prolonged rise in oil prices would inflate input and transportation costs, squeezing margins across the board. “Upgrades for upstream oil producers could be offset by downgrades for downstream oil PSUs and other users of oil-linked commodities,” Prasad said.

Adding to the woes, higher freight and insurance costs driven by heightened threat could further inflate import bills and erode profitability for India Inc.

Valuations on Thin Ice

With Indian equities already trading at a premium compared to their emerging market peers, any cracks in earnings or macro resilience could trigger sharp corrections. “Higher oil prices could undermine one of the core arguments justifying India’s rich valuations,” Prasad warned. Indeed, if growth falters while stocks remain expensive, investors may not hesitate to book profits aggressively.

Macros Under Pressure

Until recently, India’s macro story looked rock solid. A combination of soft oil prices, stable inflation, and resilient domestic demand had painted a rosy picture. That said, growth expectations had already softened for India amid a global slowdown, even before the Iran-Israel conflict emerged. However, with another geopolitical crisis on the map, the growth path may face fresh hurdles.

Brent crude has already surged past $78 per barrel, and the risk of sustained elevation looms large. “The sharp increase in oil prices in recent days, and the possibility of them staying elevated, could dent India’s macro position,” Prasad adds.

Every $1 per barrel rise in crude oil prices increases India’s annual import bill by around $2 billion, given that the country imports over 85% of its energy needs. This not only widens the current account deficit but also puts pressure on the rupee, stokes inflation through higher fuel and transport costs, and can strain government finances and economic growth.

Oil on the Boil

The geopolitical heat has not only boosted oil buying, sending prices climbing, but also forced analysts to revise their 2025 oil forecasts. Many now expect Brent to average around $70 per barrel, up from earlier projections closer to $60. That revision could have outsized effects on economies like India’s that remain heavily oil-dependent.

In the near-term, risks are far higher. JM Financial expects Brent crude prices to hover between $70-80 per barrel as tensions remain ripe.