Oil shock threat looms over Dalal Street rally

India’s stock indices and its currency face reversal risks from last week’s relief-inducing firmness after the US threatened to blockade the Hormuz Strait following the breakdown of peace talks between the US and Iran, spotlighting the fragility of a truce that dictates oil prices and capital allocation.

Last week’s stock market rebound—the best over a seven-day period since February 2021–hinges on the broad direction of oil prices in the aftermath of seemingly inconclusive talks in Islamabad, although Reuters cited shipping data to report the passage Saturday of three fully laden super-tankers through the Strait of Hormuz that accounts for a fourth of the global oil trade. “The market would see a gap down opening, though there should not be panic,” said Sham Chandak, head of institutional equities at Elios Financial Services.

“The market will take cues from oil prices, which are at the centre of this conflict.”

Last week, India’s equity indices climbed 6%, snapping a relentless six-week losing run, after the announcement of two-week truce. Oil slumped below $100 a barrel to $95.2 Friday, having climbed to nearly $120 in the immediate aftermath of the war.

For the currency, the bias would likely be weak, too. Stage-gated central bank curbs on speculative trading helped the rupee climb from record lows last week and those regulations could still provide the bulwark against a currency slide due to the oil prices, but the gains are expected to be capped if geopolitical concerns resurface.

The rupee’s upside may be capped in the 92.40/$ to 92.50/$ range in the absence of a further retreat in oil prices. On the downside, the central bank is expected to step up intervention around the 94.80/$ level, which is the currency’s record closing low.

‘TENTATIVE’
“Most avenues for speculative trades have been shut, so the market is now largely left with hedgers and market makers. That does make liquidity thinner, but at this point, stability is more important,” said Anindya Banerjee, head of commodity and currency, Kotak Securities.Banerjee expects meaningful intervention by the central bank at levels beyond 94.50/$, as these levels are psychologically very significant.

The rupee depreciated 10% in FY26, from 85.75/$ in April to close at 94.83/$ on March 31. The currency deprecated more than 4% in March alone, after the war started.

To curb the pace of deprecation, the Reserve Bank of India (RBI) came up with two back-to-back circulars on March 27 and April 1, restricting arbitrage trades between offshore and onshore markets.

“Currently, the ‘tweet risk’ outweighs traditional risk concerns. Despite talks of a ceasefire, the absence of a definitive agreement continues to sustain uncertainty,” said Kunal Sodhani, head of treasury at Shinhan Bank India. “This is evident in crude oil prices, which remain elevated in the $95–$100 per barrel range instead of easing meaningfully.”

‘ALL ISN’T LOST’
To be sure, market participants across asset classes expect the two-week time window to be fully utilised to hammer out a solution that is reasonably durable. “The market is cognisant of the fact that the current ceasefire expires on April 22. So there is still time for the parties involved to negotiate,” said Elios’ Chandak.

Some expect short sellers to return, pushing stock prices lower.

“The markets are expected to react negatively to the failure of talks and that is likely to imbue volatility,” said A Balasubramanian, managing director and CEO, Aditya Birla Sun Life AMC. “But typically, these dialogues involve a lot of back and forth and a strong outcome can’t be expected in a single day of talks.”