War in West Asia thrust geopolitical risk back to the forefront of global finance on Monday, erasing more than ₹6.5 trillion in market value from BSE-listed companies. The fear gauge India VIX shot up 23.5%, its biggest single-day climb in nearly 11 months, mirroring rising investor anxiety.
The selloff followed a joint US-Israeli military campaign against Iran over the weekend that resulted in the death of Supreme Leader Ali Khamenei, sparking fears of regional instability and speculation of regime change.
Global equity markets retreated in a broad-based flight from risk. Germany’s DAX fell 1.9% and France’s CAC 40 dropped 1.6%, while in Asia, the Hang Seng Index led declines with a 2.1% slide. Back home, the Nifty 50 and S&P BSE Sensex both shed roughly 1.3% to close at 24,865.70 and 80,238.85, respectively, after plunging over 2% during the day.
The pain was worse in mid- and small-cap segments, with the Smallcap 250 tumbling 1.9%. Provisional data showed that foreign institutional investors (FIIs) net sold Indian equities worth ₹3,296 crore while DIIs net bought shares worth ₹8,594 crore.
Investors may find themselves on edge as markets remain shut on 3 March for Holi, leaving little room to react at a time when geopolitical tensions risk intensifying.
Double whammy
The developments in West Asia impact India in two main ways: first, by pushing up the cost of oil & gas and shipping; and second, by making global investors temporarily pull back into ‘safer’ assets, explained R. Janakiraman, chief investment officer, India equities, Templeton Global Investments, which manages over ₹1,13,000 crore worth of assets.
“The unprecedented scale of recent strikes has moved us into uncharted territory. There is a possibility that uncertainty remains prolonged as Iran’s succession dynamics are resolved. However, our base case as of now is that this remains contained with temporary disruptions.”
Amid the escalating crisis, have climbed 6% since Friday’s close.
India imports over 80% of its crude needs, leaving it highly exposed to the instability, said Ashish Gupta, chief investment officer, Axis Mutual Fund. In a research note, Gupta said a spike in crude prices lifts input costs, widens the current account deficit and stokes inflation, and equity markets typically respond swiftly, especially in oil-sensitive sectors such as aviation, paints, cement and chemicals. Among Nifty’s worst performers were InterGlobe Aviation Ltd (down 6%), Larsen & Toubro Ltd (down 5.2%) and Asian Paints Ltd (down 3%).
Crude risks
A closure of the Strait of Hormuz represents a key risk to crude oil, refined products and LNG prices, he explained. “The Strait of Hormuz is a critical artery for global energy trade, accounting for ~20% of global crude oil flows and ~30% of LNG trade,” Gupta highlighted. Nearly 50% or more of India’s energy imports pass through the Strait; so even partial or temporary disruptions could affect the country’s energy security, inflation trajectory and external balances, he said.
”However, history shows that alone have not derailed Indian equities unless they persist long enough to damage growth and monetary stability. During the Russia-Ukraine war in 2022, for example, Brent crude surged above $100 per barrel. Yet after an initial sell-off, the Nifty 50 still ended the year in positive territory,” Gupta said.
Gaurav Dua, chief investment officer, Standard Chartered Securities (India) Ltd, agreed that past experience shows that geopolitical shocks get absorbed quickly after early volatility.
Dua he pointed out that the Nifty has given median returns of 17% over the 12 month. With the index now trading in a wide range of 1,500 points for the past six months, Dua feels the trend could continue for a few more months.
Road ahead
“Markets could see better times in H2 of calendar year 2026,” Dua said. Valuations have cooled in line with softer economic activity, but corporate earnings could see an uptick, supported by coordinated policy measures aimed at reviving consumer demand, alongside a sustained push on investment-led growth, he added.
According to Janakiraman of Templeton, the key swing factor for Indian equities is a potential recovery in earnings momentum. Q3 FY26 saw aggregate upgrades to consensus estimates and an improved upgrade-to-downgrade ratio, supported by a solid macro backdrop. High-frequency indicators—auto and CV sales, credit growth, and factory output —are trending higher, signalling strength in consumption and investment. With valuations cooling, the risk-reward appears more favourable, he believes.
Return trip?
Some market experts feel foreign investors could soon return to India.
Swati Khemani, founder and CEO of Carnelian Asset Management and Advisors, believes the return of global certainty could channel foreign capital toward India, as investors seek to diversify into stable markets with no glaring risks and strong underlying fundamentals. Over the next three to six months, with the possibility of the US cutting interest rates and India Inc gradually seeing earnings upgrades, the investment case for India is set to brighten. “In that backdrop, FIIs could well re-enter the market in a meaningful way,” she said.
Foreign institutional investors () turned net buyers of Indian equities in February, recording net inflows of ₹17,147.25 crore after two consecutive months of sustained selling.
Some fund managers point out that investors who hit the panic button during past conflict-driven sell-offs often ended up watching the rebound from the sidelines, with recoveries at times kicking in sooner than most anticipated.