Investors to watch US Fed’s policy meet as lingering Middle East conflict caps sentiment

Escalating US-Iran tensions, which pushed crude oil prices above $100 per barrel coupled with persistent FII selling led to stocks slipping for a third straight week, with investors weighing the risk of a prolonged Middle East conflict on energy prices and economic stability.

The Sensex plunged 5.51 per cent, or 4,354.98 points, to close at 74,563.92, while the Nifty declined 1,299.35 points, or 5.31 per cent, to end at 23,151.10. The Nifty marked its biggest drop since June 2022, while Sensex had worst week since May 2020.

Among broader indices, BSE Midcap and Smallcap indices shed 4.5 per cent and 3.6 per cent, respectively. All the sectoral indices ended in the red, led by sharp losses in auto and banking stocks. Nifty Auto plunged 10.6 per cent, Nifty PSU Bank fell 7.2 per cent, Nifty Defence and Nifty Private Bank dropped 7 per cent each, while Nifty Metal declined 6 per cent.

FIIs extended their selling for the fourth consecutive week, offloading equities worth Rs 35,052.03 crore, while DIIs remained net buyers with purchases worth Rs 37,739.78 crore. The Indian rupee fell to a record low to 92.4750 per dollar amid concerns that the Iran war-driven surge in oil prices could disrupt India’s growth-inflation dynamics and dent capital flows.

A prolonged Middle East conflict could worsen the rupee’s outlook significantly, with persistently high energy prices potentially pushing the currency beyond 95 per dollar. Higher crude prices typically weigh on Indian equities as the country imports a large share of its oil requirements. Rising oil costs increase the import bill, widen the current account deficit and add to inflationary pressures.

The conflict in the Middle East is not going to be easily resolved. Even if crude oil falls to $70 or $80 a barrel through the first half of 2026, that impact is still going to continue to reverberate in the economy.

According to some global market watchers the widening distress, combined with the spike in oil prices, is starting to resemble the market conditions in the lead-up to the 2008 global financial crisis when oil doubled from $70 to $140, and “subprime tremors” toppled firms such as Bear Stearns.

The US Federal Reserve’s policy meeting will be closely watched this week amid concerns that the ongoing conflict could disrupt inflation dynamics if it drags on. The central bank is widely expected to hold rates steady as US inflation remains above the Fed’s 2 per cent target.

War Chatter: Market confidence of a short US-Iran war was misplaced. This isn’t a time to be confident about the outcome. The International Energy Agency calls it “the largest supply disruption in the history of the global oil market.” The Israeli-U.S. attack on Iran has led to the near-complete closure and partial mining of the Strait of Hormuz, the world’s busiest oil-tanker route. Countries reliant on Middle East oil are already intervening to cap prices.

Yet, the oil price remains only around $100 a barrel, compared with an inflation-adjusted Brent crude price that hit $179 after the Iranian revolution in 1979, $155 when Iraq invaded Iran in 1980, $180 amid the Arab Spring of 2011 and $130 after Russia invaded Ukraine in 2022.

First, it started low, because there’s a lot of oil around. Oil in storage was the highest in five years before what we can call Gulf War III began, and the price was just $72, below the inflation-adjusted average since 1970.

Second, markets have been slow to accept that disruption will last. Investors initially thought this was likely to be over in a couple of weeks. When concern set in over the weekend that it might last longer, President Trump’s suggestion on Monday that the war was “very complete, pretty much” reassured traders.

Third, the IEA and its members are releasing 400 million barrels of reserves. Assuming the loss of about 15 million of the 20 million or so barrels a day that went through Hormuz (some is taken by Saudi Arabia’s pipeline), and some higher production elsewhere, that’s less than a month of supply, but it dampens price rises.

The widespread assumption of a short war rests on history, Trump’s past willingness to back down when times get tough, the US elections later this year and a guess that Iran won’t be willing to keep taking so much damage from the air. Logic and game theory may not be enough, though. It’s easy for Trump to declare victory given the conflicting goals the administration has laid out for the war.

But it takes two to end a war. Israel killed the new Iranian leader’s father, wife and son in an airstrike, according to Iranian state media. There’s no way to be sure how this will go.

Markets were far too confident the war would be short and are slowly adjusting to a slightly longer conflict. It would only take a couple of sinking oil tankers, a downed civilian jet or a direct hit on the critical Saudi oil pipeline to change this assessment again. This isn’t a time to be confident about the outcome.

Follow market trends and history. Don’t speculate that this particular time will be any different. For example, a major key to investing in a specific stock is its performance over five years.

FUTURES & OPTIONS / SECTOR WATCH

Adversely impacted by heightened tensions in the Middle East and continued selling by FIIs kept the market firmly under “bear” grip last week. The Nifty fell more than 5 per cent while Bank Nifty underperformed with a decline of around 7 per cent.

Over the last 27 trading sessions, Nifty has corrected more than 12 per cent, making it one of the sharpest declines in the recent past. From its recent peak of 61,678, Bank Nifty has corrected by nearly 13 per cent within just 15 trading sessions, highlighting the intensity and speed of the ongoing decline.

Such a sharp fall over a short span typically indicates aggressive unwinding of positions and heightened risk aversion within the banking space. In the options segment, the significant Call open interest for Nifty was observed at the 23,500 strike level whereas notable Put open interest was concentrated at the 23,000 strike.

For Bank Nifty, significant Call open interest was seen at the 54,500 strike with substantial Put open interest at the 53,000 strike. Implied volatility (IV) for Nifty’s Call options settled at 21.92 per cent while Put options concluded at 23.74 per cent.

The India VIX, a key indicator of market volatility concluded the week at 21.51 per cent. The Put-Call Ratio Open Interest (PCR OI) stood at 1.14 for the week. The weekly RSI has slipped to 30.43, its lowest level since the COVID-19 market fall.

Momentum indicators are also reflecting strong bearish momentum. Every pullback is witnessing selling pressure suggesting that market participants are using every rise as an opportunity to exit positions. Nifty is currently trading below its long-term average the 200-day Exponential Moving Average (200 EMA) on the daily chart which signals a weak market trend.

The outlook may remain negative as long as the index stays below this level. Market participants should keep a close watch on geopolitical developments as recent movements are largely driven by news flow.

In the near term, Nifty may face resistance in the 23,600–23,800 range while support is placed around 22,600–22,500. Investors are advised to remain cautious and adopt strict risk management while trading.

Stocks looking good are Aurobindo Pharma, CG Power, Coal India, Siemens, Tata Power and Wipro. Stocks looking weak are Axis Bank, CDSL, D Mart, Federal Bank, KPIT Tech and OIL.

(The author is a senior maket analyst and former vice-chairman, Andhra Pradesh State Planning Board)

STOCK PICKS

NLC India Limited

The Navratna public sector enterprise, is a leader in lignite mining and power generation with operations across India. Over the years, it has pioneered advancements in brown coal mining and diversified into coal mining and renewable energy, while exploring global opportunities.

Its segments include Mining and Power generation. The Mining segment includes mining of lignite and coal. The Power generation segment includes generation of power and sale to power utilities across the country.

It operates three opencast Lignite Mines at Neyveli in Tamil Nadu and one opencast Lignite Mine at Barsingsar in Rajasthan, with a combined mining capacity of 30.10 million Tons Per Annum (MTPA). It also operates Talabira Open Cast Mine in Odisha, with a mining capacity of 20.00 MTPA.

It is operating five lignite based thermal power stations, four at Neyveli, in Tamil Nadu and one at Barsingsar, in Rajasthan with capacity of over 3,640 megawatts. The total combined mining capacity of lignite and coal for the Company is 50.10 MTPA.

NLCIL was declared as preferred bidder for “Semhardih Phosphorite and Limestone Block” and “Raipura Phosphorite and Limestone Block of Balod, Chhattisgarh” in the Tranche–V auction of Critical and Strategic Mineral Blocks by Ministry of Mines.

Strong visibility of earnings and possibility of demerger of Renewables division unlocking vaue make the stock good medium term bet for target price of Rs400.