Wall Street Turns on India as Oil Shock Drives 'Unprecedented Crisis'

India's Markets Hinge on History's Largest Exercise in Democracy

Oil’s up and so Asia’s energy importers are down. And down hard, with Indian stocks taking their worst hit in almost two years.

Indian equities are sinking both on the immediate effect of higher oil prices and on the likely long-term feedthrough into inflation and depressed domestic consumer demand.

The markets in Mumbai have disappointed the last two years, with prospects further undermined by record weakness in the Indian rupee.
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Thursday's 3.3% fall in both the Nifty 50 and the Sensex makes the day the worst single-day decline since June 2024. Indian volatility, meanwhile, soared to its highest level since May 2024, with the India VIX touching 23.2, up from 13.7 when the war began.

Disappointing for Two Years

Indian equities have underperformed over the course of the last two years. Their performance is disappointing rather than disastrous. But the impact of threatened 50% tariffs on exports into the United States is now compounded by India’s oil-import dependency and an exceptionally weak currency.

Nomura’s analysts called the oil shock an “unprecedented crisis” that threatens India’s overall macro stability. Iran’s blocking of the Strait of Hormuz is far more disruptive than the onset of the Russian invasion of Ukraine in 2022, the Japanese brokerage noted, since 20% to 25% of the global trade in oil travels through that strait, versus the 9% of the world’s oil that Russia supplies.

The Indian rupee set an all-time high of 93.41 rupees to the U.S. dollar on Wednesday. It is 8.9% weaker than it was heading into 2025, and has lost 40% of its value in the last decade. The weak currency only compounds issues surrounding the high price of oil, which is traded in U.S. dollars.

Shock Resignation of Bank Chairman

Thursday's decline in Indian stocks was magnified after the chairman of HDFC Bank (HDB) (NSE:HDFCBANK), Atanu Chakraborty, resigned suddenly, citing internal issues at India’s largest private bank.

“Certain happenings and practices within the bank, that I have observed over the last two years, are not in congruence with my personal values and ethics,” Chakraborty, a non-executive chairman who first took the role in 2021, stated in his resignation letter, without elaborating.

HDFC Bank shares fell 5.1% in response. The bank is the largest single constituent of the Nifty 50, accounting for an 11.8% weighting as of the end of last month.

The bank has appointed former HDFC executive Keki Mistry to replace Chakraborty, with Mistry stating a “relationship issue” may have manifested between the former chairman and management over time. The central Reserve Bank of India says there are “no material concerns on record as regards its conduct or governance.”

World-Leading Growth of 7% Threatened

Indian stocks have sunk 8.6% since the end of February. While India is turning to Russia to supplement oil supplies, the disruption threatens India’s growth prospects. The Indian economy was projected to grow around 7.0% this year prior to the onset of war in the Middle East. That’s the fastest economic expansion among major economies.

Inflation in India rose to 3.2% for February, year over year, well within the central bank’s range of 2% to 6%. But the rate has escalated quickly from just 0.25% in October, and has spent much of this decade north of the reserve bank’s tolerance.

That has prompted Wall Street banks such as Morgan Stanley and Citigroup to turn bearish on Indian equities. Global investors have also been selling out of emerging-market risk in general in a flight to quality back into U.S. dollar assets and developed markets.

Oil Up More Than 50%

Brent crude prices touched a high of $118.14 during Thursday trade, dipping back to $113 as I write. That means the price has soared 54.4% since the Iran war began at the end of February.

India imports 87% of its oil, 55% of it from the Middle East. Those figures are even higher for countries such as Japan, Asia’s second-largest economy getting 99% of its oil from abroad, and 95% of it from the Middle East.

I had noted in my last column that volatility has this week dropped across Asian markets as investors start looking to the long-term impacts of the Middle East conflict. But we still see Asian stocks sell off if the oil price jumps, and gain ground if oil eases.

Countries such as Japan, the Philippines, Singapore, South Korea and Taiwan import essentially all their oil. Only Australia, China, Indonesia and Malaysia have any domestic energy output that can help offset higher commodity import prices.

Japan Prepped for 'Very Difficult' Trump Talks

The Tokyo market is a particular barometer mapping prospects for global trade, with the major multinationals of “Japan Inc.” sensitive to currency fluctuations, higher input prices and any escalation in the cost of global trade.

The exporter-heavy Nikkei 225 in Tokyo fell 3.4% on Thursday, while the broad-market Topix ended Thursday down 2.9%.

Japanese Prime Minister Sanae Takaichi has arrived in Washington for a three-day visit. She told Japan’s parliament that she anticipates a “very difficult” meeting with U.S. President Donald Trump, despite the warm start to their relations when Trump visited Tokyo in October.

Trump is calling on allies to aid the war in the Middle East. But Japan, with a pacifist post-war constitution that prevents it from maintaining a standing army, is hampered as to how much it can contribute, while an overwhelming 82% of Japanese voters do not support the U.S. attack on Iran, according to a poll by the Asahi Shimbun.

At the time of publication, McMillan had no positions in any securities mentioned.