Sensex plunges 500 pts, Nifty nears at 22,100; how Iran-Israel conflict may impact stocks

Benchmark indices Sensex and Nifty fell over 1 per cent for the second straight session after Israel’s military chief said his country would respond to Iran’s weekend attack, but he did not elaborate on when and how as pressure mount on Israel to avoid further escalation of conflict.

On the other hand, Iran warned it would "respond in seconds" to any strikes from Israel. It could even deploy "weapons never used before" if necessary.

Amid the prevailing geopoliical tensions, data showed China’s economy grew faster than expected in the March quarter, offering some respite to investors globally.

Sensex fell over 500 points but was later trading at 72,988.78, down 411 points or 0.56 per cent. Nifty hit low of 22,103.85, before recovring to 22,171.30 level, still down 0.45 per cent.

Impact of Iran-Israel war on stocks

"The recent direct conflict between Iran and Israel, continued Russia-Ukraine war, smaller conflicts elsewhere and increased geopolitical tensions between various economic and military blocs show the increase in geopolitical risks and risks of potential accidents. The 1990-2020 period was a relatively peaceful period in contrast with one global superpower able to ‘contain’ small conflicts in countries with relatively limited economic heft," Kotak said in a strategy note.

Kotak said continued ‘high’ inflation with inflation staying well above central banks’ targets, high inflation expectations and high bond yields and interest rates stand in sharp contrast to the post-GFC, pre-pandemic period with low nominal and negative real interest rates.

Kotak said markets have reconciled to fewer rate cuts by the US Fed in 2024 but they are yet to reconcile the ‘inflation’ in multiples with likely higher risk-free rates on a more permanent basis. It doubts nominal interest rates are going to nil or negative on a sustainable basis and expect real interest rates to stay positive in the foreseeable future.

"Market sentiment was impacted by higher-than-expected inflation data and reports of potential tensions between Iran and Israel. Amidst this backdrop, attention is also on Chinese GDP data, expected to shed light on Beijing's stimulus efforts. As Q4 results from Corporate India begin to trickle in, concerns loom over rising US bond yields and net selling by FIIs. However, there's a silver lining with oil prices declining despite geopolitical uncertainties, and the IMD's prediction of an 'above normal' monsoon," said Prashanth Tapse, Senior VP (Research) at Mehta Equities.

Among Sensex stocks, Bajaj Finance fell 1.39 per cent to Rs 6,976.50. NTPC declined 1.2 percent while Infosys Ltd, Kotak Mahindra Bank, IndusInd Bank and Bajaj Finserv declined over 1 per cent each.

Mahindra & Mahindra Ltd, Titan Company, Nestle India Ltd, Maruti Suzuki and Bharti Airtel Ltd bucked the weak trend and gained up to 1 per cent.

Fear gauge India VIX rose 0.68 per cen to 12.55. Earlier inthe day most Asian markets as dollar climbed to more than five-month highs as fears grew the US Fed may not cut interest rates anytime soon. A stronger-than-expected US retail sales for March further reinforced such expectations.

China's GDP for the March grew 5.3 per cent YoY, which was faster than the 5.2 per cent expansion in the fourth quarter of 2023 and 4.6 per cent growth expected by economists polled by Reuters.