Here's how the West Asia war takes its toll on Indian stocks
Israel and Iran have struck deep inside each other's territory in their worst direct conflict yet, threatening to inflame crude prices and rattle India's stock markets.
Based on NSE weekly options data on Friday, the benchmark Nifty could veer in a range of 24340-25060 this week, with a bias to the lower end of the range. On Friday, the Nifty closed at 24718.60 points, clocking a 14% recovery from a multi-month low of 21743.65 on 7 April.However, with oil surging by 7% on Friday and likely to rally more if the conflict escalates, markets could take a turn for the worse, analysts said. The Nifty could open a percent lower on Monday.
"Indian stock markets, like their global peers, will have to brace for a challenging week ahead as both sides are ratcheting up attacks on each other's territory, including on energy assets," said Dubai-based Shankar Sharma, founder of GQuant Investech. "Crude could surge more after Friday's rally if the hostilities intensify, hurting Indian stocks."
Benchmark indices Nifty and Sensex fell 1.7% each to 24718.6 and 81118.6 over two days through Friday, after Israel attacked Iran's nuclear and military facilities a day earlier. The attack invited a serious retaliation from the latter, driving up Brent crude price by 7% to $74.2 a barrel, the most in five months.
Also read | Govt to hold talks with exporters as Iran-Israel conflict stalls shipments, drives up costs
Brent has averaged $79 over the past two years, Bloomberg data showed, but the latest outbreak could have a wider impact than the Ukraine-Russia war, which has raged since February 2022.
The risk premium due to the escalating conflict could drive crude higher on fears that Iran could block the Strait of Hormuz, a narrow waterway that sees 100 million barrels transit every day, or a fifth of global oil demand. India imported over four-fifths of its oil consumption of 5.5 million barrels per day last year, according to oil cartel Opec, making it vulnerable to supply disruptions.
"Our markets could see a bigger correction if oil rises further due to the conflict," said Chandan Taparia, senior vice-president (head of derivatives and technical research) at Motilal Oswal Financial Services.
Taparia believes the Nifty could fall to 24200-24300 this week, which squares with the lower end of the range of 24340-25060 option traders are working with for this week.
Option sellers on Friday sold the Nifty 24700 strike call and put expiring on 19 June. They received ₹720 a share (75 shares make a contract) for this. So , they have baked in a 720 point range for the market—360 down from 24700 to 24340—and 360 up from 24700 to 25060 this week.
Read this | India concerned about crude oil supply disruptions in Strait of Hormuz as prices surge after Israel's attacks on Iran
Agreed Rohit Srivastava, founder of analytics firm IndiaCharts, who said the marketwide quantum of overall put options to call options (index plus stocks) sold on Friday stood at 0.75 on Friday, which was still above the multi-year low of 0.65 on 3 March this year, indicating there is scope for a steeper correction from Friday's closing.
Srivastava explained that in a bearish set-up, traders tend to sell more puts than call options on fears of a correction, which could expose them to huge losses as put prices rise when markets fall. A ratio of 0.75 means traders had sold just 75 puts marketwide for every 100 calls sold on Friday. In a bullish market, traders sell 90 puts for every 100 calls sold, he explained.
Tension among traders was palpable with fear gauge India Vix rising 10% over two days of the conflict through 15.08 on Friday, as per NSE data. The Vix rises when uncertainty increases.
Foreign portfolio investors (FPIs) accelerated selling Nifty and Bank Nifty futures contracts by 17660 contracts to a cumulative 104,209 contracts over two days to Friday. These sales act as hedges against losses to their portfolios in the event of a market fall.
And read | Israel's war on Iran to hit Indian workforce
FPI cash sales over Thursday-Friday stood at ₹4539 crore. Domestic institutional investors, including mutual funds, net-purchased shares worth ₹12,435 crore over these two days. However, a great part of this— ₹7703 crore—was because of a block deal in Asian Paints on Thursday and nearly ₹1900 crore in Jubilant group companies on Friday.
FPI actions assume significance, going by their total equity assets, which stood at ₹71.26 trillion as of 31 May, according to NSDL. This compared with mutual funds' net assets under custody of ₹43.4 trillion as of the same date, according to the Association of Mutual Funds of India (Amfi).
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