Iran's Warning Of Choking Hormuz Strait Sends Sensex Tumbling

US Attack On Iran: Indian markets opened the week deep in the red, with the Sensex dropping over 900 points in early trade before paring some losses. By mid-session, the benchmark index had fallen 436 points to 81,971.57, while the Nifty was down 120 points at 24,992.35. Volatility spiked too, with India VIX rising 2.91 per cent to 14.07, at 1:24 pm.

The total market capitalisation of BSE-listed firms declined sharply, erasing nearly Rs 3 lakh crore within the first 15 minutes of trading. The BSE Midcap and Smallcap indices each slipped close to 1 per cent, indicating broad-based selling.

The trigger: a major geopolitical flashpoint in the Middle East. Over the weekend, the United States launched strikes on three nuclear sites in Iran, intensifying an already fraught conflict between Tehran and Tel Aviv. The fallout has reverberated across global markets, especially oil-importing economies like India.

Geopolitics Drives a New Risk Premium

"Monday's 800-point Sensex slide is partly an instinctive 'sell-first-ask-later' response, but it also marks the first meaningful repricing of a new geopolitical risk premium," says Vinit Bolinjkar -Head of Research - Ventura. Brent crude surged over 5 per cent post-strike to around $81/barrel, and India's VIX climbed 5 per cent, indicating a shift from short-term fear to long-term pricing of geopolitical tail risks.

Aviation and shipping sectors may face higher fuel and freight costs, while petrochemical and fertilizer industries grapple with rising input prices. Overall, macroeconomic pressures could weaken the rupee and elevate inflation if the tension prolong, as per Saurabh Jain, Head - Equity Research - fundamentals, SMC Global Securities

VK Vijayakumar, Chief Investment Strategist at Geojit Investments, played down the correction. "Indian indices have fallen only mildly: Around half of last Friday's rally. This need not be interpreted as serious correction in response to the West Asian crisis," he said. "A sharp correction will happen only if the Hormuz Strait is closed and crude spikes above, say, $90. That's a very low probability event."

The Strait of Hormuz: A Fragile Lifeline for Oil

India's heavy reliance on crude imports makes it uniquely exposed to the Strait of Hormuz. About two-thirds of its oil passes through this narrow passage. Iran has threatened to shut the route a move that would hammer global supply chains.

India imports around 85 per cent of its total crude oil consumption and a sustained conflict in the Middle East can create high upside risk for crude. If crude oil touches $90/barrel and sustains over it, it creates immense pressure on India's inflation and CAD. For Every $10/barrel rise in crude oil, India's CAD gets impacted by 40-45 bps, and there is a negative impact of 25 bps on inflation. Iran is expected to block the Strait of Hormuz, which will hamper oil trade routes. In such a risk-off situation, equity risk premiums for an emerging market like India rise, which leads to the strengthening of USD and hurting inflows in India. In April and May FII had turned net buyers in Indian equities after months of being net sellers. Again, in June, they turned net sellers and sold equities worth Rs. 4,192 crore till 20th June. If the conflict is sustained or deepens further, this will affect FII flows into India as well, as per Vaqarjaved Khan, Sr. Fundamental Analyst (CFA), Angel One.

Utkarsh Sinha, managing director at Bexley Advisors, agrees the threat is real but believes India has some buffer. "Nearly 40 per cent of India's crude now comes from Russia, with additional volumes from the U.S., Angola, and Nigeria. This strategic diversification has created a meaningful hedge against chokepoint risk."

R-routing shipments would lead to higher freights and Insurance cost and while India has diversified sources (Russia, US, Brazil), prolonged disruption would challenge consistent supply. LNG supplies, especially from Qatar, would be heavily impacted.

India has 5.33 MMT (approx. 9-10 days' supply) in strategic reserves, with plans to expand to 22 days. Additionally, Oil marketing companies hold 60-65 days of commercial stock, offering a total buffer of 70-75 days. This provides short-to-medium term cushion, explains, Aamir Makda, Commodity & Currency Analyst, Choice Broking.

Sectors Feeling the Pinch

Energy-intensive sectors are taking the brunt of market stress. "Aviation (jet fuel is 40 per cent of costs), oil marketing companies, paints, chemicals, fertilisers, logistics they're all getting hit by rising input and shipping costs," Bolinjkar explains.

The broader IT index also slipped over 1 per cent after Accenture flagged lower growth and higher uncertainty in its latest quarterly results. The Nifty IT index mirrored this decline amid fears of weakening demand from the U.S. and Europe.

Tarun Singh of Highbrow Securities echoed that sentiment: "The Strait of Hormuz's potential closure isn't just a supply disruption, it's a trigger for inflation, fiscal strain, and eroded consumer demand. Unlike Middle Eastern markets, which rally on oil windfalls, India's growth story hinges on stability."

Iran is the world’s third-largest urea exporter, impacting the fertilizers sector. Supply disruptions may lift global urea prices, putting pressure on Indian gas-based fertilizer producers and potentially increasing input costs, as per Apurva Sheth, Head of Markets Perspectives & Research, SAMCO Securities.

Global Risk-Off Mode Amplifies the Pressure

It's not just oil. Global investors are pulling back from riskier assets across emerging markets. The dollar index is up nearly 0.5 per cent, and the rupee weakened to 86.72/$ in early trade. These pressures, combined with rising oil, sparked foreign capital outflows.

Foreign Institutional Investors (FIIs) poured Rs 7,940 crore into Indian equities just last Friday, but now they seem to be retreating.

"About 60 per cent of the recent Nifty drawdown reflects oil-shock angst," says Bolinjkar. "The remaining 40 per cent is broader de-risking as EM fund flows reversed."

Middle East Markets Rally on Oil Boom

In stark contrast, markets across the Gulf have rallied. Israel's TA-35 climbed 1.5 per cent on Sunday, while the Tel Aviv 125 index surged 1.8 per cent, bringing its weekly gains to nearly 8 per cent. The Saudi Tadawul rose 1 per cent, and Oman's MSX30 gained 0.5 per cent. Kuwait's Boursa also edged up nearly 1 per cent to 8,650.6.

"Gulf bourses are structurally oil-levered," Bolinjkar explains. "Higher crude prices lift fiscal surpluses, bank liquidity and petrochemical earnings. Local investors buy the dip."

Sinha adds, "The Middle East market rally is less about economic fundamentals and more about movements in oil futures. This isn't a traditional equity rally it's better read as a forward-looking proxy for Brent crude expectations."

For GCC nations, an increase in oil leads to an increase in fiscal surpluses and stronger earnings for their energy and energy-linked companies. Middle East markets are more retail and sovereign wealth driven which makes them less sensitive to global liquidity shocks. On the other hand, for India it's the opposite case, as per Khan.

What Happens Next?

Market watchers are split on whether this volatility will last. Vora of TRUST Mutual Fund says, "Oil prices can be moderated by the release of the US reserves. As long as oil stays within $65-$85, India can manage. Only if it spikes to $100-$120 will it become a serious issue."

He also sees India's underlying economic story holding steady. "Government spending is up, private investment is picking up, and rural demand is reviving. We remain bullish on sectors like industrials, financials, and healthcare," Vora adds.