US-Iran Tensions: What It Means For Indian Markets If Conflict Escalates

The United States (US) and Iran are once again locked in an open confrontation. Tensions between the two countries escalated after US President Donald Trump warned of “very strong” military actions against the protest-stricken Middle Eastern country, reigniting the ghosts of what the US described as a highly sophisticated covert operation carried out on June 22, 2025, which saw more than 125 aircraft dropping around 75 precision-guided bombs on key Iranian nuclear facilities.

“The military is looking at it, and we are looking at some very strong options. We will make a determination,” Trump said when local reporters asked about Washington’s stance on Iran’s situation.

Trump’s warning comes amid mounting unrest within Iran. Protests that started over high inflation have grown into a wider movement against the clerical leadership. Many demonstrators are now calling for an end to the rule of Supreme Leader Ayatollah Ali Khamenei. According to media reports, at least 544 people have been killed in the crackdown so far.

According to an Associated Press report, the US administration is weighing a range of responses, including cyberattacks and direct military strikes by the US or Israel. Iran, for its part, has warned of retaliation.

If the US-Iran conflict escalates further, it would create ripples across global markets, including India.

Historically, markets turn cautious during geopolitical conflicts. Equities often come under pressure as investors turn towards safe-haven assets such as gold. Volatility rises, emerging market currencies tend to weaken, and commodities, especially crude oil, see sharp price swings if supply risks increase.

To gauge the impact, Outlook Money spoke to equity and commodity market experts on how the escalation could affect Indian markets and investor sentiment.

Equities Were Already Weak, Now There Is More To Worry About

Domestic equities were already under pressure from several global challenges, including the ongoing US-Venezuela tensions, the capture of the Latin American country’s President Nicolás Maduro, the Russia-Ukraine conflict, and a gradual depreciation of the Indian rupee against the US dollar. The lack of clarity on the potential US‑India trade deal, and Trump’s backing of the Sanctioning Russia Act 2025, which may implement tariffs up to 500 per cent on countries importing oil from Russia, have also weighed on investor sentiment.

Amid these geopolitical upheavals, the recent US-Iran conflict has added another layer of pressure to domestic equities. However, experts believe Indian equities are likely to see only a limited impact from the latest conflict unless it escalates further.

On January 12, both the domestic equity benchmark indices opened lower and slipped to their one-month lows, extending losses for the sixth straight session. However, by the end of the session, both the Sensex and the Nifty 50 recovered their losses and are trading above their opening levels. At close, Sensex was up by 301.93 points, or 0.36 per cent, at 83,843.19. Similarly, the Nifty 50 closed 106.95 points, or 0.42 per cent higher, at 25,790.25.

Vinod Nair, head of research at Geojit Investments, said India’s direct trade exposure to Iran is relatively low, which should cap the immediate fallout. “The impact on the Indian stock market is expected to remain limited due to the relatively low total trade exposure with Iran,” Nair said. However, he cautioned that heightened global tensions could exacerbate volatility in crude oil prices, making oil and gas-related sectors vulnerable in the short term.

Nair added that the risk of a severe supply disruption appears low for now. “Market stability is supported by maintained oil production from OPEC and the US, along with the reopening of the Venezuelan market, while global demand remains subdued,” he said.

According to him, the bigger overhang for Indian markets at present is the lack of clarity over a US-India trade deal.

If the US-Iran tensions escalate further, Indian equities could face more stress. Vaqarjaved Khan, CFA and senior fundamental analyst at Angel One, said markets are already in a risk-off phase.

“Indian markets are in a risk-off phase due to escalating US-Iran tensions and the new US administration’s aggressive trade stance,” Khan said. “While India's domestic growth shines at a projected 6.60 per cent for 2026, external shocks pose short-term threats,” he added.

According to Khan, Indian equities are likely to face moderate to high vulnerability in the near term, primarily due to the risk of an oil-led macro shock.

US-Iran Conflict: Which Sectors Are Most Exposed To Escalation?

Certain sectors would feel the heat almost immediately if crude oil prices spike. Khan said aviation would be among the worst hit, as aviation turbine fuel accounts for nearly 30-40 per cent of operating costs and reacts instantly to crude price movements. Paints, chemicals, and tyre manufacturers would also come under pressure due to their heavy reliance on petroleum-based inputs.

Oil marketing companies (OMCs) could face margin pressure if higher crude costs are not fully passed on to consumers, Khan added. On the other hand, defensive sectors such as FMCG and pharmaceuticals tend to be relatively more resilient during periods of global uncertainty.

US-Iran Tensions: How Vulnerable Is India To An Oil Shock?

The Strait of Hormuz is back in focus as the possibility of a US intervention in Iran has raised fears that Tehran could disrupt one of the world’s most important energy routes.

According to Khan, “A disruption in the Strait of Hormuz could push crude prices sharply higher, worsening inflation and the current account deficit.” Such a scenario could also accelerate foreign portfolio investor (FPI) outflows and add pressure on the rupee, amplifying imported inflation, he said.

Aamir Makda, commodity and currency analyst at Choice Broking, said that India imports nearly 89 per cent of its crude oil requirements, of which about 45-50 per cent of India’s crude oil and 54 per cent of its LNG imports pass through the Strait of Hormuz. “Any disruption here is not just a price shock; it is a physical supply threat,” he said.

Makda noted that in 2025, Indian refiners faced a “triangular” pressure due to US-led sanctions and heavy tariffs on exports linked to Russian oil, forcing them to pivot back towards Middle Eastern suppliers such as Iraq, Saudi Arabia, and the UAE. “This has ironically increased India’s reliance on the very routes most at risk from US-Iran tensions,” he said.

He estimated that every $10 rise in crude oil prices could widen India’s trade deficit by roughly 0.30 per cent of gross domestic production (GDP), which would put immediate downward pressure on the rupee. “This will directly impact consumer price index (CPI) inflation, which is likely to rise by 25-30 basis points (bps),” Makda added.

US-Iran Conflict: What It Means For Rupee And FPI Flows?

If the US-Iran conflict continues for long, it could also weigh heavily on the rupee and foreign fund flows. Makda said the rupee, currently hovering around Rs 90-91 against the US dollar, could weaken to Rs 93-95 if tensions persist.

He attributed this to three factors. First, import-led depreciation from high oil prices increases US dollar demand; second, the “twin deficit” threat from necessary government subsidies affects the fiscal and current account deficits; and lastly, the Reserve Bank of India’s (RBI) intervention limits, where the central bank may permit managed depreciation, increasing the rupee's volatility.

FPIs view India as a "high-beta" emerging market, susceptible to global shocks, he said, adding, “During Middle East turmoil, FPIs often withdraw from Indian equities to safer assets like US Treasuries or gold.” Such exits typically hit oil-sensitive sectors first, though India’s inclusion in global bond indices could provide some cushion by attracting steady debt inflows.

US-Iran War: What Investors Should Do?

In times of geopolitical risks, investors often resort to panic selling; however, experts advise taking a measured approach and avoiding any panic selling.

Nair of Geojit Investments advised investors to avoid panic selling and maintain a measured approach amid ongoing volatility. “We suggest investors hold a humble view in the short-term and avoid selling tendency during the ongoing volatility as further discussions are on between the US and India with a positive expectation,” he said.

For now, markets are watching whether the US-Iran conflict escalates into a broader regional conflict or remains a limited confrontation. Angel One’s Khan said that capital preservation should take priority in such an environment. He advised investors to maintain a defensive bias, allocate a portion of portfolios to gold and silver as safe havens, and focus on quality large-cap stocks with pricing power.

Much will depend on what happens next in the Strait of Hormuz and the signals that come from Washington and Tehran in the coming days. For domestic markets, the key question is whether this remains a short-term jolt or turns into a longer-lasting economic risk.