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Mumbai: Indian stocks fell to their lowest level in almost six months on Monday as hopes of a US-Iran breakthrough faded, pushing crude oil further above $100 a barrel and deepening worries over higher interest rates. The benchmark Nifty 50 tumbled 1.6% to close at 22,780.25, its lowest level since 2 April, while the Sensex declined 1.5%. Global markets turned risk-off, with stocks in Japan, South Korea and China sliding and US Dow futures facing pressure. US President Donald Trump said he had rejected an Iranian proposal to reopen the Strait of Hormuz and end the fighting, while Iran said diplomacy remained the only way out of the conflict with the US and Israel, according to reports. The setback sent oil prices higher as fears of a prolonged disruption in the strategically crucial strait resurfaced. Brent crude futures traded around $107 a barrel on Monday after touching a high of $108.83. The surge in oil prices has a major bearing on the Indian economy, as the country imports 90% of its oil requirement. A $1-per-barrel increase in oil prices for a year may add around ₹18,000 crore to the country’s annual import bill. Higher prices of oil and other commodities, including liquefied natural gas (LNG) and fertilizers, threaten to push up inflation and weigh on economic growth and corporate margins. Crude staying above the $100 mark is weighing on sentiment towards Indian equities, said Gaurav Dua, chief investment officer at Standard Chartered Securities India. "The rising expectations of a rate hike and a possible hawkish commentary in the RBI's (Reserve Bank of India's) forthcoming monetary policy review is an added overhang on the markets," he said. Monday's decline took the Nifty's fall this year to about 13%, making it one of the worst-performing markets in Asia. The Nifty PSU Bank index fell 3.2%, while the realty and oil & gas indexes fell about 2%, among the worst-hit sectors on Monday. The rupee declined 0.2% to 95.9850 per dollar. Inflation concerns “India’s macro indicators have remained resilient, but the outlook is weakening due to rising oil prices and inflation,” according to a 21 September report by BNP Paribas Research. Brent has risen above $100 a barrel, US 10-year yields are near 5%, and rising global inflation is prompting central banks to hike rates. While FCNR flows have strengthened India’s macro buffers, capital-flight risks have also risen with rate hikes in developed markets, the brokerage firm said. “The INR has already depreciated by 1% and the RBI now has less room to keep interest rates unchanged,” it said. Standard Chartered Securities' Dua said the RBI may raise interest rates, given the narrowing interest-rate differential between the US and India. The key trigger to watch now, he added, will be the RBI’s commentary on the rate outlook and its assessment of economic growth. Strong support zone Technically, the benchmark CNX Nifty 50 is close to a strong support zone, and Dua expects a reprieve in the coming week after the Nifty’s seven consecutive weeks of decline. Harsh Gupta Madhusudan, chief equity strategist at Ionic Asset, believes that “if crude remains high, we are likely to see sideways performance.” At the same time, If September-quarter earnings come in fine and geopolitical risks subside, the second half could be much stronger, he added. Manish Bhandari, chief executive officer (CEO) and portfolio manager at Vallum Capital, said while the oil shock is largely priced in, markets have not yet priced in the impact on real interest rates. The bigger shift is in bond markets, he said. The US 10-year TIPS real yield rose to 2.653%, its highest since 2008, while Japan’s 10-year yield hit 3.055%, the highest since 1996. The Bank of Japan also raised rates last week. For decades, Japan was the world’s cheapest source of borrowed money, but that era is now ending, he said. Simply put, real interest rates reflect the cost of borrowing after inflation. Higher global real rates can tighten liquidity, make Indian equities less attractive and put pressure on foreign flows as investors find better inflation-adjusted returns elsewhere. Valuations in focus Ketan Gujrati, fund manager-equity at Quantum AMC, said a rise in global interest rates can lower valuations further, while companies trading at fair valuations and with good pricing power are likely to sail through and generate good returns. He added, “We believe prolonged elevated crude oil prices can moderate GDP (gross domestic product) and earnings growth.” At the current juncture, large caps have also come under pressure despite relatively reasonable valuations, as earnings growth remains muted in some segments, said Siddhartha Khemka, head of research, wealth management, Motilal Oswal Financial Services. Within the mid- and small-cap space, select names are holding up relatively better, supported by pricing power, clearer earnings visibility and healthy balance sheets, he added. “For the rest of FY27 (fiscal year 2027), we would favour domestic-facing areas such as healthcare, capex-linked industrials and selective consumption plays. We would remain cautious on businesses sensitive to crude and input costs, highly leveraged companies and pockets where valuations are still stretched.” (Srushti Vaidya contributed to this story)
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