Even before the Street could fully digest artificial intelligence (AI)-led turmoil, equity investors are staring at a fresh overhang: escalating tensions in the Middle East following joint US and Israel strikes on Iran.
How the situation evolves remains uncertain. But the immediate concern is clear—crude oil. Any prolonged disruption in Iran’s key water passageway, the Strait of Hormuz, could tighten global supplies and push prices higher.
Oil shock risk
“For India, the impact is direct: every $1 rise in crude increases the annual import bill by about $2 billion, putting pressure on the trade balance,” said JM Financial Institutional Securities.
Higher crude prices carry macro risks. They stoke inflation, inflate the import bill, widen the current account deficit (CAD), pressure the rupee, and complicate fiscal math.
“Around 50% of India’s crude imports have happened via the Strait of Hormuz recently in the last two months. But India has strategic oil reserves, so a short-duration disruption can be managed,” said Gaura Sen Gupta, economist at IDFC First Bank.
Only if oil price stays elevated for long, CAD could be impacted, but as long as CAD is below 2%, it is comforting, she said, adding that Indian rupee has breached the 91/USD mark and to protect it RBI intervention (by selling dollars) is likely.
So far in 2026, Brent crude has rallied 21.5% to $74/barrel.
The renewed geopolitical flare-up risks triggering a broader risk-off sentiment, keeping investors away from equities.
Incidentally, in February, foreign portfolio investors (FPIs) made a comeback, investing ₹22,615 crore in Indian equities after selling for three months in a row, showed NSDL data. Strengthening of the Indian rupee (improves returns in dollar terms) and reducing trade uncertainties with India-European Union deal and other trade agreements were the likely catalysts.
But geopolitics could interrupt that revival.
Growth vs valuations
The latest new series gross domestic product (GDP) data for the December quarter (Q3FY26), using 2022-23 as the base year, showed growth at 7.8% despite tariff troubles. FY26 GDP growth estimate was revised to 7.6% from 7.4%.
However, foreign investors tend to focus more on earnings growth and relative valuations than headline GDP.
To be sure, the quantum of earnings downgrades post Q3FY26 results has been lower, but upgrades were selective given the limited positive surprises amid pricey valuations. India trades at a premium one-year forward multiple of around 19x even though it is still underperforming peers after a dismal 2025.
So far in 2026, the MSCI India Index is down 11.5% versus positive returns by MSCI Asia Ex-Japan and MSCI Emerging Market indices, showed Bloomberg data.
Increased AI traction has raised concerns on deflationary pressures on IT companies, dragging the index down. India (seen as reverse AI trade) valuation is not cheap like other Asian peers which are seen as AI trades, say, South Korea and Taiwan, said Shrikant Chouhan, head of equity research at Kotak Securities.
Current geopolitical tensions will keep investors closely tracking crude prices and the level of retaliation from Iran. In the near term, markets are likely to move from earnings-driven to oil-driven trading, reckons JM Financial.
“Upstream energy and defence may see relative support, while oil-sensitive sectors such as OMCs, paints, tyres, aviation and chemicals face margin pressure,” said the analysts in a report on 1 March.
The pivot is stark: from AI disruption and valuation debates to oil shocks and geopolitical risk—and for markets, that shift could prove decisive.