The Indian stock market currently exhibits a "cautious undertone" amidst escalating geopolitical tensions between Israel and Iran, according to Vinod Nair, Head of Research at Geojit Financial Services. This cautious sentiment reflects a broader unease in both global and domestic markets, as the conflict introduces new uncertainties.
Nair's analysis suggests that the Indian market had largely priced in the optimism surrounding a recovery in domestic earnings and the easing of global risks, such as tariff concerns. The Nifty 50's recent oscillation within a narrow 750-point range (24,500 to 25,250) indicates indecision and a mild downward bias among investors. This muted trend signals a potential shift in market dynamics as new factors come into play.
The escalating tensions in the Middle East have injected a dose of caution into the market. India, which had been benefiting from lower crude oil prices, now faces headwinds as geopolitical risks drive prices upward. Israel's intensified response to Iran's nuclear ambitions following the Gaza conflict has heightened fears of a broader regional crisis. The potential involvement of the United States in this complex situation further unsettles investor sentiment.
Despite the prevailing caution, the Indian market demonstrated resilience with a relief rally driven by hopes of a possible diplomatic breakthrough between the U.S. and Iran. However, diverging views have emerged amid signs of a global economic slowdown. The World Bank has lowered its global GDP growth forecast for CY25 by 50 basis points to 2.3%, with only a marginal improvement expected in CY26 to 2.5–2.6%. This downgrade is largely attributed to increasing trade frictions, policy uncertainty, and subdued investment activity, leading to growth forecast cuts for nearly 70% of economies.
Against this backdrop, the Indian market is projecting a modest earnings growth of around 10%, which may not be sufficient to sustain the previously positive sentiment. Nair suggests that geopolitical developments in the Middle East are likely to influence near-term market sentiment, with any signs of de-escalation being closely monitored. Small-cap stocks are expected to underperform in the short term, given their elevated valuations and lack of immediate triggers. Investors are likely to focus on quality large-cap stocks until there is more clarity.
The current market scenario underscores the impact of global events on domestic equities. While India's long-term domestic outlook remains stable, supported by strong macroeconomic fundamentals, the short-term volatility is likely to persist due to the ongoing geopolitical uncertainty. Investors are advised to adopt a cautious approach, closely monitor developments in the Middle East, and focus on fundamentally strong companies with reasonable valuations.
