West Asia tensions to keep markets volatile

Indian equities are likely to remain volatile this week as escalating geopolitical tensions in West Asia and the sharp rise in crude oil prices continue to weigh on global risk sentiment. Elevated energy prices and persistent foreign outflows have added to investor caution, keeping market direction closely tied to developments in the region. Key economic releases this week include Eurozone CPI, the Fed interest rate decision, BoE and ECB policy decisions, and US jobs data.

Last week, equity markets witnessed heavy selling pressure. The Nifty50 ended [-5.3%], while the Nifty Midcap100 declined [-4.6%] and the Nifty Smallcap250 moved [-3.6%], reflecting broad-based risk aversion across segments. Sectorally, performance was weak across the board, with Pharma (-0.6%) and FMCG (-4.1%) declining comparatively less than the broader market, followed by Bank (-7.0%), while Auto (-10.6%) emerged as the worst-performing sectors. While Nifty50 has declined over 11% since the beginning of the year, Nifty Midcap and Smallcap indices are down by around 10% each. Even in March so far, Nifty has fallen by 8% - the worst monthly fall since the pandemic fall of March 2020.

Recent geopolitical escalation in the Middle East has kept energy markets volatile. Since the onset of the conflict in late February, Brent crude has surged sharply, rising over ~36% at one point and crossing $100 per barrel, as markets priced in potential disruptions to oil shipments through the Strait of Hormuz. For India, which imports nearly 85% of its crude requirements, sustained high oil prices could have important macro implications, including pressure on the current account deficit, currency stability and inflation expectations.

Against this backdrop, the defence sector remains in focus amid continued policy support for indigenisation and domestic procurement. The government has maintained a strong emphasis on capital expenditure in the defence budget, with the Union Budget increasing defence capital outlay by 18% YoY to around Rs 2.2 lakh crore, aimed at strengthening modernisation and domestic manufacturing under the “Atmanirbhar Bharat” framework. 

Energy-related disruptions could also have spillover effects on restaurants, QSR and food delivery segments, which may face near-term operational challenges following disruptions in commercial LPG supplies across several cities. India imports roughly 60% of its LPG requirements, with a large share of shipments transiting through the Strait of Hormuz, making supply chains vulnerable to geopolitical disruptions in the region. Restaurants, which form the backbone of food delivery ecosystems, typically maintain limited LPG inventory due to storage constraints, making them vulnerable to supply interruptions. Any prolonged disruption could therefore lead to reduced kitchen operations, shorter restaurant hours or temporary closures, potentially affecting order availability on food delivery platforms. While the situation remains fluid, the development highlights how energy supply disruptions can create operational risks for QSR & food delivery platforms that depend heavily on restaurant partners.

Institutional flows remain under pressure amid heightened geopolitical tensions. Foreign institutional investors (FIIs) have continued to pare exposure to Indian equities, with outflows exceeding Rs 46,000 crore so far in March, following sustained selling of around Rs 41,000 crore in January and Rs 34,000 crore in December, while February saw relatively modest outflows of about Rs 6,640 crore. The latest acceleration in selling reflects rising global risk aversion following the escalation of conflict in West Asia and volatility in crude oil prices. During March, domestic institutional investors (DIIs) have purchased equities worth over Rs 60,000 crore, providing liquidity support to the market.

However, markets have remained weak despite strong domestic buying, indicating that persistent foreign selling continues to weigh on sentiment. The FII’s cautious positioning is also visible globally, with LSEG Lipper data showing that global equity funds recorded their first weekly outflows in eight weeks as investors trimmed exposure to risk assets amid geopolitical uncertainty and rising energy prices. During this risk-off phase, capital has largely rotated toward safe-haven assets such as US Treasuries and gold, while equity allocations across emerging markets have turned more selective. For India, the trajectory of foreign flows will remain closely linked to crude price movements and broader global risk sentiment.

Overall, markets are likely to remain sensitive to developments in the West Asia conflict and movements in crude oil prices. Any signs of de-escalation could help stabilise sentiment, while further escalation may keep risk appetite subdued in the near term.

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