By Ashutosh Joshi and Alex Gabriel Simon

(Bloomberg) -- Indian stocks slid as escalating conflict in the Middle East sparked a broad risk-off move, wiping out all gains made since last month’s trade deal with the US.

The NSE Nifty 50 Index closed 1.2% lower in Mumbai, after falling as much as 2.1% earlier in the session. The benchmark slid to its lowest level in more than a month, dropping below where it stood before the US tariff cut on Feb. 2.

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The escalation of tensions in the Middle East and a sharp surge in oil prices can potentially delay recovery in India’s $5.1 trillion equity market that has lagged most major peers since late 2024, partly due to weaker earnings growth. Lower exposure to artificial intelligence-related stocks, compared with markets such as China, South Korea and Taiwan, also contributed to the underperformance.

“We should expect all Indian risk assets – equities, bonds and currencies to be under pressure in the immediate short term given the impact of a spike in oil prices and the expected strengthening of the US dollar,” said Arvind Chari, chief investment strategist at Q India (UK) Ltd.

Fear gauge India VIX jumped to the highest level since June 2025.

Engineering firms were among key decliners in India. Top player Larsen & Toubro Ltd., which has more than a third of its orderbook in the Middle East, tumbled 5%, while peer KEC International Ltd. closed 3.5% lower. Reliance Industries Ltd. and carrier InterGlobe Aviation Ltd. led the losses in the benchmark gauge.

“Middle east escalation draws rising oil risk for Indian markets,” JM Financial Ltd. strategists including Venkatesh Balasubramaniam wrote in a note, citing likely pressure on shares of oil marketing companies, paints, aviation and chemicals as they may face margin pressure from higher input costs.

Given India’s dependence on imports for most of its energy needs, rising oil prices can significantly widen the trade deficit and weigh on the rupee and equities. A $1 increase in crude prices raises India’s annual import bill by about $2 billion, putting pressure on the trade balance, the JM Financial strategists said.

While local stocks saw some gains following India’s much-awaited trade agreement with the US on Feb. 2, a relentless selloff in information technology shares has continued to weigh on investor sentiment.

“We were expecting fresh allocation by foreign funds after its underperformance and appeal as an AI bubble risk diversification play,” according to Q India’s Chari. “That might now get delayed.”

Foreign investors turned net buyers on Indian equities in February after pulling $3.3 billion in January. The inflows, however, remain tepid given the headwinds.

“Impact on India is typically magnified as higher crude oil prices widen the current account deficit, stoke domestic inflation, pressure the rupee,” said Nachiketa Sawrikar, a fund Manager with Artha Bharat Global Multiplier Fund. This could also lead to foreign outflows as “global investors reduce risk exposure.”

(Updates prices.)

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