Indian stocks have recently been under significant pressure, experiencing a notable downturn for six consecutive trading sessions. This downward trend has raised concerns among investors as they evaluate the ramifications of ongoing geopolitical tensions, particularly those between Iran and Israel, compounded by persistent selling from foreign institutional investors (FIIs).
The key indices, the Nifty 50 and the Sensex, concluded the trading day in negative territory, each declining by over 0.80%. This marks a stark dip, pushing both indices to their lowest points since mid-August. Notably, the Nifty 50 has witnessed a nearly 7% drop from its recent highs, while the Sensex has fallen by close to 6%, alarming market participants.
Additionally, the recent market correction appears to have prompted investors to lock in profits, further exacerbating the sell-off in market indices. Both the Nifty and Sensex recorded their worst weekly performance in two years last week, contributing to the prevailing market anxiety.
In October, investors have grappled with a fresh set of challenges, directing their focus to escalating conflicts in the Middle East, rising crude oil prices, and the potential repercussions on global trade. Analysts are increasingly concerned that these developments may influence the forthcoming rate decisions of major central banks during their policy meetings.
Impact of Geopolitical Tensions
The ongoing conflict between Iran and Israel has escalated, with reports suggesting Israel may be planning attacks on Iranian oil and nuclear facilities in retaliation for recent missile strikes from Tehran. As Iran ranks as a key oil producer, any military actions targeting its infrastructure could lead to significant hikes in crude oil prices, which have already shown volatility due to the prevailing tensions.
Iran’s oil production currently stands at approximately 3.2 million barrels per day, accounting for a notable 3% of global output. Despite ongoing U.S. sanctions, Iranian oil exports have surged to near multi-year highs, emphasizing the nation’s critical role in the global energy supply chain.
As crude oil prices rise, various sectors within India may face substantial impacts, particularly aviation, automotive, paints, tyres, cement, chemicals, synthetic textiles, and flexible packaging. The spike in oil prices can escalate operational costs, adversely affecting profitability across these industries.
Moreover, India’s dependence on oil imports intensifies the challenges posed by rising energy prices and geopolitical instability, leading to heightened concern regarding potential disruptions in global supply chains.
Foreign Institutional Investors and Market Dynamics
In October, foreign portfolio investors (FPIs) experienced a significant shift, withdrawing ₹30,719 crore from Indian equity markets within just the first three days, signaling a severe loss of confidence among foreign investors. The most pronounced sell-off occurred on October 4, when FPIs divested equities worth ₹15,506 crore.
This trend indicates a potential reallocation of investments, with FPIs redirecting their capital towards emerging opportunities in China and Hong Kong, driven by renewed optimism regarding China’s economic revival and attractive valuations in comparison to Indian stocks.
As a result, the Shanghai Composite Index has noticeably surged by 17.4% over the past month, with the Hang Seng Index rallying more than 32%, highlighting the strong capital shift towards Chinese equities.
Future Market Outlook
Given the historical context, the initial period of turmoil in financial markets due to conflicts has generally been short-lived. The ongoing geopolitical tensions between Israel, Hezbollah, and Iran may continue, but analysts suggest that unless these situations escalate drastically, the resultant market anxiety could prove temporary.
Historically, the Indian market has demonstrated resilience in bouncing back from geopolitical instabilities, particularly when they do not lead to large-scale escalations. During such periods, investors tend to concentrate on fundamental economic indicators rather than being overly influenced by temporary concerns.
Despite the FPI outflows, domestic institutional investors (DIIs) have stepped in to provide crucial support, buying the dips created by foreign selling. This trend reflects robust retail inflows that have underpinned the market during turbulent times.
The consistent pattern of domestic buying, particularly by mutual funds, has ensured that the Indian market remains stable amidst global uncertainties. According to Dr. V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services, the FIIs’ selling pressure is likely to be countered effectively by DII buying.
DIIs are emerging as formidable participants in the market with deeper financial resources than their foreign counterparts. As retail investors continue to commit capital into the market, mutual funds are compelled to allocate these funds, thus lessening the impact of global concerns on market sentiment.
Looking ahead, the sustained inflow of capital could mitigate market volatility even as valuations stretch. The Indian market, bolstered by domestic investment strategies, shows the potential to remain robust in light of fluctuating global conditions.
Disclaimer: The views expressed in this article are those of individual analysts. These do not represent the official views of the organization. Investors are encouraged to consult certified experts before making any investment decisions.
