US-Iran peace deal: Is it enough to end the 2-year drought for Nifty bulls, bring FIIs back?

A sudden breakthrough in West Asia is poised to break a gruelling, two-year stagnation for Indian stocks, as a US-Iran peace framework triggers a collapse in crude oil prices, a dramatic rally in the rupee, and a long-awaited capitulation by FII short-sellers.

Brent crude plummeted over 4% to $84 a barrel on Monday, following announcements by US and Iranian officials that they have agreed on a framework to end their war, halt the US blockade of Iranian ports, and reopen the critical Strait of Hormuz. The geopolitical breakthrough rippled instantly through Indian financial assets. The benchmark BSE Sensex surged nearly 1,300 points to an intraday high of 76,821, while the NSE Nifty 50 reclaimed the psychologically crucial 24,000 mark.

For Nifty bulls, the stakes could not be higher: the index remains down over 9% from its peak, leaving investors with virtually no returns over the last two years.

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The Macro Relief Valve

The deal, reportedly slated for an official signing ceremony in Switzerland on Friday, according to Pakistani Prime Minister Shehbaz Sharif, addresses the twin macro anxieties that have haunted Indian markets: punitive energy costs and relentless foreign institutional investor (FII) outflows.The immediate dividend was visible in the currency and money markets. The Indian rupee strengthened about 0.7% to 94.4625 per dollar on Monday, marking its highest level in seven weeks.

“With the dawn of peace in West Asia, hopefully, and the consequent sharp correction in Brent crude to below $84 in early trade, the prospects for the Indian economy and stock market have turned for the better,” said Dr VK Vijayakumar, Chief Investment Strategist at Geojit Investments Limited. “The GDP growth rate and CPI inflation projections for FY 27 can be revised in this changed scenario to 6.9% and 4.6%, respectively.”

Vijayakumar noted that the stabilising currency will alter foreign investor behaviour. “With rupee stabilising, FIIs are unlikely to continue big selling in India even though the AI trade still continues to be strong, particularly in South Korea and Taiwan.” Already, foreign institutional investors (FIIs) have begun covering shorts and creating fresh long positions in index futures.

Emkay Global’s Seshadri Sen said the news has a three-fold macro benefit for India.

“First, Brent should settle at USD75-80/bbl vs an average of USD103/bbl in Apr-May-26. This delivers a proforma benefit of 64% on the CAD. Second, it addresses supply chain bottlenecks and potential RM shortage worries across multiple sectors and averts a potential inflation shock. Third, the relief on the external account translates to improved domestic liquidity, which should help interest rate transmission. We expect a multi-asset rally: Rs93/USD, the 10-year gilt to 6.75%, and the 12M T-bill to 5.5%,” he said.

Given the number of false dawns during the ceasefire, he warned that any disruption would send oil spiking and reverse the entire thesis.

“Second, the entire region is on a knife’s edge, and flare-ups could recur even after the deal is signed. Third, the damage to oil infra is still not clear – there may be a negative surprise on timelines for supply normalization (though we think the oil market is pricing in 3-6M delays). We see low probabilities of these risks crystallizing, and are working of our base case of the Strait of Hormuz fully reopening on Friday and oil receding to $75-80,” Sen said.

The collapse in crude prices reinforces recent administrative interventions by the Reserve Bank of India. Economists have aggressively upgraded their outlook for India’s balance of payments, with most now projecting a marginal surplus for this fiscal year in a staggering reversal from prior expectations of a deficit reaching up to $70 billion.

“RBI’s recent measures have helped address pressures on India’s balance of payments, with the drop in oil prices further reinforcing these efforts,” said Gaura Sen Gupta, economist at IDFC First Bank.

Sen Gupta expects the rupee to extend its appreciation to the 93-94 level by September, bolstered by a revival in capital inflows from the central bank’s non-resident Indian (NRI) foreign currency deposit scheme.

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Axis Direct’s Head of Research Rajesh Palviya said a sustained revival in FII inflows could act as a key catalyst for the next leg of the market rally, especially given India’s strong macro fundamentals and earnings visibility.

“The combination of easing geopolitical risks, softer crude prices, healthy domestic participation, and the potential return of foreign capital creates a constructive backdrop for Indian equities over the coming months,” he said.

Sector Allocations and Tactical Playbooks

While the reopening of the Strait of Hormuz could take up to a month, market participants are already repositioning portfolios to capture the direct and indirect beneficiaries of cheaper energy. Technical analysts note that the market’s underlying structure has flipped.

“Technically, the undertone has turned decisively bullish,” said Rajesh Palviya, Head of Research at Axis Direct. “As long as the Nifty sustains above the 23,500 mark, the index is well placed to extend its recovery towards 23,800 initially, followed by the psychologically important 24,000 level.”

Market experts see a multi-sector rotation taking shape:

• Banking & Financials (BFSI): Regarded as the prime beneficiary of cooling inflation and attractive valuations. “Banks are likely to lead the rally,” Vijayakumar said, adding that large short positions in leading private lenders will trigger further short covering. Pankaj Pandey, Head of Research at ICICIdirect.com, agreed that “BFSI is very attractively placed from a valuation perspective and also with the growth inching up.”

• Energy & Defence: Strategy shifts are expected to outlast the immediate peace deal. “This crisis has clearly taught us that energy security is of prime importance, so that is one sector… going to be the biggest focus area” for the next 5 to 10 years, Pandey noted. He also flagged defense as a 40 lakh crore INR opportunity, given how resilient smaller nations like Iran proved against major powers.

• Automobiles: Car manufacturers have previously withheld necessary price hikes to sustain demand momentum, taking a hit on earnings; they are now positioned as clear crude-decline beneficiaries.

• Information Technology: Expected to lag. Pandey warned that IT “might take some time to play out” as a growth revival remains elusive, even though tech valuations look cheaper than metals.

A Word of Caution on Valuations

Despite the euphoric initial reaction, institutional fund managers are advising against untamed exuberance, particularly within the highly inflated broader market.

“The announcement of the US-Iran deal finally happening will prop up market initially. Focus will be on the normalisation on the ground with supply chain flowing and prices coming back to double digits,” warned Nilesh Shah, MD of Kotak Mahindra AMC. “We recommend clients to follow asset allocation ‘dharma’ and remain neutral weight to equity with overweight to mid-caps.”

Domestic retail and domestic institutional investor (DII) liquidity is expected to keep the broader market buoyant. However, valuation disconnects persist: the Nifty Midcap index trades at 29 times earnings and the Smallcap index at 33 times earnings, compared to the frontline Nifty at a more modest 20 times.

While superior fourth-quarter earnings and improved FY27 outlooks continue to draw capital to broader equities, the focus now shifts entirely to Switzerland. Investors will spend the week monitoring whether the precise terms of Friday’s formal signing ceremony match the high expectations built into Monday’s roaring rally.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)