Rising geopolitical tensions to drive markets

Sectoral rotation and stock-specific actions are likely to dominate.

Indian equities are likely to trade in a narrow range next week amid rising geopolitical tensions, limited domestic catalysts, and with the earnings season largely behind us. Institutional flows remain the key monitorable, as sustained FII participation has supported recent stability. While geopolitical developments warrant close monitoring, markets may remain in consolidation mode unless tensions escalate materially and disrupt energy flows. In such a backdrop, sectoral rotation and stock-specific action are likely to dominate, keeping the Nifty range-bound with limited directional bias.

Key economic releases this week include Eurozone CPI, US Initial Jobless Claims, India’s quarterly GDP and US PPI, with stability in global bond yields remaining critical for near-term direction. On the policy front, an interim India–US trade agreement is reportedly expected to be signed in March and operationalised in April, with chief negotiators set to meet in Washington next week to finalise the first phase of the bilateral framework.

Last week, equity markets were largely subdued. The Nifty50 ended lower, down 1.5 per cent, while the Nifty Midcap100 lost 2.2 pr cent and the Nifty Smallcap100 declined 2.7 per cent. Sectorally, performance was polarised, with PSU banks emerging as the top gainers (+4.5 per cent), followed by Bank Nifty (+0.7 per cent), while IT (-8.8 per cent) lagged.

Despite the recent 15 per cent correction in the Nifty IT Index amid AI disruption concerns, developments this week suggest the debate is shifting from existential risk to opportunity capture. The AI Impact Summit held in New Delhi reinforced India’s ambition to position itself as a meaningful participant in the global AI ecosystem, with firms such as OpenAI and Anthropic deepening engagement with Indian enterprises. TCS unveiled a collaboration with OpenAI focused on AI infrastructure and enterprise deployment, while Infosys, at its own AI-focused Investor Day, outlined its roadmap across enterprise integration and governance and announced a partnership with Anthropic to strengthen its enterprise AI offerings. For investors, the debate is shifting from productivity disruption toward value redistribution. Enterprise complexity, cybersecurity oversight and large-scale systems integration continue to anchor vendor relevance, suggesting AI is more likely to reshape service mix and pricing models rather than structurally displace incumbents.

Apart from nervousness around IT sector, geopolitical developments also contributed to the cautiousness in the market sentiments. Escalating rhetoric around Iran injected fresh volatility into global markets, as investors priced in the risk of energy supply disruptions. With an estimated 40–50% of India’s energy imports transiting through the Strait of Hormuz, the country remains sensitive to any escalation in the region. The resulting risk premium in crude, alongside gains in gold and silver as traditional safe havens, reflects defensive global positioning. Elevated realisations, however, are supportive for upstream producers such as Oil India and ONGC, which could remain in focus.

Auto ancillaries on the other hand, are likely to remain in focus and do well amid improving structural tailwinds. Lower US tariff barriers and recent FTAs with the EU enhance export competitiveness for Indian component makers, supporting order inflows and capacity utilisation for export-oriented players. Domestically, the Union Budget’s emphasis on manufacturing, capex and localisation supports incremental volume growth across PV and CV segments, while ongoing global supply-chain diversification is increasing sourcing from India, strengthening medium-term revenue visibility for well-diversified ancillary units.

Meanwhile, PSU banks continued to attract attention, supported by strengthening institutional positioning. Mutual fund allocation to the sector rose to a three-year high in January, signalling improving domestic conviction. 

Overall, while geopolitical risks warrant close monitoring, domestic sectoral opportunities and institutional positioning continue to drive stock-specific action, keeping the broader market in a consolidation phase with a mildly positive undertone.

(The writer is Head of Research, Wealth Management, Motilal Oswal Financial Services Limited)