Conventional wisdom predicts a market crash when war breaks out in West Asia. However, some of India's market experts expect stocks to actually rise this week, even as foreign investors remain cautious amid a market decline.
Behind the contrarian optimism lies Saturday's assassination of Iran's supreme leader Ayatollah Ali Khamenei, which has raised hopes of a speedy end to the conflict, regime change in Teheran, peace in the region and the stability that markets crave. Iran's state media confirmed that Khamenei died on the first day of military assault by the US and Israel.
"Markets could actually rally on hopes of stability in the region in the days ahead after the confirmed death of the supreme leader," said Nirmal Jain, founder of IIFL Group. This, he said, could stabilize oil prices, as Iran potentially increases production in the near future.
‘Swift end’?
"If the war ends swiftly, things will be back in place; but if it gets protracted, there will be challenges," said Nilesh Shah, managing director, Kotak Mahindra AMC. Shah said investors should stick to their asset allocation discipline rather than sell in panic.
The optimism runs counter to the caution among foreign institutional investors (FIIs) amid lingering global tariff uncertainty and disruptions led by artificial intelligence.
The Nifty fell 1.25% to 25178.65 on Friday, after FIIs net sold Indian shares worth a provisional ₹7,536 crore, and increased net derivatives hedges by ₹3,583 crore to offset the risk of a fall on Monday. Of the ₹3,583 crore of extra index futures shorted on Friday, Nifty shorts accounted for ₹3,117 crore, with Bank Nifty accounting for the bulk of the remainder.
Indian markets have fallen 4.5% from a record high of 26,373.2 on 5 January till Friday's closing, as FIIs sold ₹26,494 crore worth of equities in the cash market, based on depository and BSE data.
Independent market analyst Ambareesh Baliga is on the side of optimists.
"The Iran-Israel tensions were the sticking point for regional stability, but now with the leader gone, chances of a new regime not inimical to the West have risen. Markets could begin discounting what might be good news," Baliga said.
Lack of clarity
However, HSBC pointed to the lack of clarity ahead. "We can have no conviction on how the situation in Iran may evolve following air strikes launched on Saturday, with the impact contingent on the duration of any conflict and how it extends to the broader region," its Global Investment Research team said in a note.
"Oil market risk is asymmetrical regarding possible Iran scenarios, with Hormuz transit the main concern. Spare capacity in Mideast Gulf is significant, but would not be accessible if Hormuz is closed," the HSBC note said, while keeping its forecast for Brent crude unchanged at $65 a barrel for 2026.
Nearly half of India's daily crude imports of 2.5-2.7 million barrels reportedly transit the Hormuz Strait, per Kpler data. The strait between Iran and Oman has been closed by the former as of Sunday.
While this could impact crude prices in the short term, a swift end to the war and reopening of the Strait will stabilize prices, Baliga said.
Any likely cheer in markets could come on the back of short-covering by FIIs, who, apart from cash selling, were cumulatively net short index futures and index call options (Nifty and Bank Nifty) by 124,368 contracts and 85,157 contracts each as of Friday, per NSE data. Short-covering refers to closing out the short index futures or index calls by buying them back, thereby raising demand and prices for them.