How the Middle East War Shook Indian Markets, and What It Means Going Forward

How the Israel-Iran War Shook Indian Markets

On the morning of February 28, 2026, Indian investors woke up to a very different world. Missiles had flown across the Middle East overnight, the US and Israel had struck Iran, and by the time markets opened in Mumbai, the reaction was immediate and brutal. This was not a slow burn, it was a shock that hit trading screens within hours.

The Initial Shock

The numbers were hard to ignore. In the days after the strikes, the BSE Sensex dropped close to 1,750 points in a single session, and the Nifty 50 lost more than 530 points. By the time March was over, the damage had compounded:

• The Nifty 50 ended up falling more than 10% for the month

• Foreign investors sold over $12 billion worth of Indian equities- reportedly the worst monthly sell-off on record

• Sensex and Nifty together wiped out over ₹50 lakh crore of investor wealth as the correction deepened

• India's benchmark valuations dropped to a P/E ratio of around 19.6, a level seen only twice in the past decade, during early Covid (2020) and the Russia-Ukraine war (2022)

Fear also showed up in a more technical way. The India VIX,  the market's way of measuring how nervous everyone is, spiked over 45% in the early days of the conflict and later climbed past 20, territory not seen since mid-2025.

Why a War in the Middle East Even Matters to India

It's a fair question to ask why fighting between Israel and Iran would move stock prices in Mumbai. The honest answer is oil, and just how dependent India is on it.

India imports more than 85% of the crude oil it uses, and a large chunk of global oil trade passes through the Strait of Hormuz , a narrow stretch of water that Iran effectively sits on top of. When the conflict escalated, roughly 38% of India's oil imports were suddenly at risk.

Brent crude jumped by around 12% in a matter of days, eventually crossing $100 a barrel, with some analysts pricing in scenarios where it could push past $115–120.

That matters far beyond the price at the petrol pump. Higher oil prices mean a bigger import bill, which widens India's current account deficit and puts pressure on the rupee. And that's exactly what happened, the rupee slid to record lows, breaching 92 to the dollar and later sliding further toward 96.6, making every barrel of imported oil even more expensive and feeding straight through into inflation.

Money Leaving the Building

Foreign institutional investors (FIIs) do not like uncertainty, and this was about as uncertain as it gets.

• In the early days after the strikes, FIIs sold roughly ₹11,000 crore worth of Indian stocks in just two sessions

• As the conflict dragged on, total foreign selling exceeded $20 billion since the end of February

• This came on top of nearly $19 billion in net outflows the previous year

Interestingly, most analysts don't read this as investors losing faith in India as a long-term story. It looks more like a classic risk-off move — capital heading back toward the safety of the dollar while the dust settles — rather than a verdict on India's fundamentals.

Some Sectors Got Hurt, Others Had Their Moment

Not every part of the market moved the same way, and this is where things get interesting.

Sectors that struggled:

• Oil marketing companies & refiners — input costs shot up faster than they could pass increases on to consumers; Singapore refining margins actually went negative at one point

• Aviation & logistics — jet fuel and transport costs are directly tied to crude prices

• Paint companies — crude-linked materials make up a large share of input costs

• FMCG — edible oil prices climbed sharply, with palm oil a big chunk of raw material costs for snack and packaged food companies

• IT stocks — underperformed, though this had almost as much to do with ongoing AI-disruption worries as with the war itself

Sectors that held up or gained:

• Defence stocks had a genuinely strong run, the conflict raised global demand for modern weapons systems and pushed countries to rethink their own defence capabilities. Companies like Bharat Dynamics, Hindustan Aeronautics, Data Patterns, and Astra Microwave all saw noticeable share price gains

• Energy and PSU stocks held up relatively well compared to the broader market, falling only around 5–6% while sectors like auto and realty corrected closer to 15%

The Government Had to Step In

One of the less talked about consequences was the hit to government finances. To stop petrol and diesel prices from spiking at the pump, the Indian government cut central excise duty on both by ₹10 per litre.

Petroleum Minister Hardeep Singh Puri called it a huge hit to tax revenue, and analysts at Nomura estimated the total annual fiscal cost of that cut at somewhere around ₹1.65 trillion (close to $17.6 billion). That's money that has to come from somewhere else, adding pressure on the wider fiscal deficit at a time when the government would rather be spending on capital projects than fuel subsidies.

There's also a quieter worry tied to the Gulf specifically. The Gulf region contributes more than a third of India's total remittance inflows — money sent home by Indians working there. If the conflict drags on and slows economic activity in the Gulf, that flow of remittances could weaken too, rippling through to banks that lean heavily on NRI deposits, Federal Bank and South Indian Bank among them.

What This Actually Means for Regular Investors

If there's one consistent piece of advice across almost every report, it's this: don't panic sell during a geopolitical shock. Fear tends to move faster than facts, and investors who sell in the middle of a VIX spike often end up missing the recovery that follows once things settle down.

For people still investing regularly, this kind of correction has historically been a decent entry point for long-term money, provided it's deployed carefully rather than all at once. Strategies like spreading purchases out over time and keeping some cash aside for further dips in fundamentally strong sectors tend to work better than trying to time the exact bottom.

It's also worth remembering that India's foreign exchange reserves stand at a fairly comfortable $697 billion, and the country's export base is more diversified today than it was during previous crises. That gives it a bigger cushion than it had in, say, 1991 or 2008, even if the immediate headlines look scary.

The Bigger Picture

Wars are messy and their economic effects rarely stay contained to the region where they're fought. For India, the Middle East isn't just a source of unsettling news, it's genuinely tied into the plumbing of the economy through oil imports, remittances, and the Strait of Hormuz. That's why a conflict between Israel and Iran can knock 10% off the Nifty in a matter of weeks.

But the same history that explains why markets fall also tends to explain why they climb back. Corrections tied to external shocks have, more often than not, turned into opportunities in hindsight rather than the beginning of a longer decline.