Global equities, bonds sink as West Asia crisis stokes inflation fears

Hormuz blockade, surging oil prices may weigh on Indian markets

A broad-based selloff across global equities and government bonds, alongside a sharp rise in oil prices amid an escalating war in West Asia and the Iranian blockade of the Strait of Hormuz, is expected to weigh on Indian markets when they reopen on Wednesday. With crude prices climbing and investors shifting towards traditional safe-haven assets, derivatives trading at GIFT City indicates a gap-down start for domestic equities.

 

Sentiment has turned even more risk-averse after reports that Iran had closed the Strait of Hormuz, a critical artery for global energy trade, and warned of action against vessels attempting to transit the route. According to Kpler data, more than 14 million barrels per day passed through the Strait last year, accounting for nearly a third of global seaborne crude exports.

 

 

As the conflict entered its fourth day, concerns over potential disruptions to energy supplies in the Persian Gulf only intensified. Global benchmark Brent crude has risen as much as 18 per cent over two sessions, moving above $85 a barrel intraday for the first time since July 2024. Gas prices have climbed more than 30 per cent over the same period.

 

The increase in energy prices has prompted investors to reassess inflation expectations and the likely path of monetary policy.

 

Most Asian markets declined by over 1 per cent, with South Korea’s Kospi plunging 7.2 per cent, its worst session in 19 months. European markets fared worse, with key indices in Germany, France and Italy sliding more than 3 per cent amid concerns over a widening regional conflict. 

 

In early US trade, the S&P 500 was down more than 2 per cent and near its lowest level since December. Market participants reduced expectations of two Federal Reserve rate cuts in 2026 as higher energy prices complicated the inflation outlook.

 

US Treasury 10-year yields were on course for their biggest two-day advance since April last year. Across financial markets, investors have reduced exposure to government debt since Monday.  

 

The US dollar strengthened against major currencies on Tuesday, while gold paused after a four-day rally. Prices of sugar, fertilisers and soybeans also moved higher.

 

Indian markets were shut on account of Holi, but early indicators were weak. SGX Nifty futures at GIFT City declined 2.5 per cent to 24,380, signalling a weaker trade resumption for domestic markets.

 

Analysts said that with no clear timeline for de-escalation, markets could remain volatile. Any further disruption to West Asia energy supplies may complicate the global inflation and interest rate trajectory at a time when economies are adjusting to trade tensions and moderating growth.

 

For India, the implications are significant given its dependence on imported energy. The country imports over 80 per cent of its crude oil requirements, with more than half sourced from West Asia. Six of India’s top 10 crude suppliers are from the region. In addition to oil, Qatar and the UAE are key LNG suppliers, drawing attention after reports that Qatar shut its largest gas plant.

 

Radhika Rao, senior economist at DBS Bank, said signs of a widening conflict would weigh on domestic markets when trade resumes. If hostilities end within a fortnight, markets could recover swiftly. However, any escalation or blockade of the Strait of Hormuz would carry wider macroeconomic ramifications. “Every $10 per barrel increase in oil prices could raise the current account deficit by 0.35 per cent of GDP, with inflation rising 20-30 basis points depending on the pass-through,” she said.

 

Kaushik Das, chief economist (India) at Deutsche Bank, said a 10 per cent increase in global oil prices, if fully passed through, could lower growth by 10-20 basis points. “Higher oil prices, if transmitted to consumers, would weigh on private consumption, which accounts for nearly 60 per cent of GDP.”

 

While the Reserve Bank of India is unlikely to raise rates, Das added that inflation moving towards 5 per cent could limit the scope for rate cuts, potentially extending the policy pause through FY27.