Geopolitical turbulence and Indian markets: Patterns of short-lived shocks

As the US-Israel confrontation with Iran stretches into its second month, Indian equity indices have recorded one of their steeper monthly declines in recent years. The Sensex and Nifty 50 have suffered significant losses since late February 2026 amid oil prices climbing above $100 per barrel and foreign portfolio flows turning negative. 

Yet, this episode fits a recurring pattern that has defined Indian capital markets since the early 1990s. Geopolitical conflicts and global shocks tend to trigger sharp, but ultimately temporary corrections, though the speed and extent of any recovery have often depended on timely policy responses, liquidity conditions, and the precise nature of the shock itself.

RECURRING PATTERN

The 1991 Gulf War offers the starkest benchmark. Oil prices doubled within weeks, remittances from the Gulf collapsed, and India’s foreign-exchange reserves fell to critically low levels. The Sensex endured a substantial drawdown between late 1990 and early 1991, with trading briefly suspended to curb panic. The crisis coincided with a severe balance-of-payments emergency that ultimately forced the landmark 1991 economic reforms. Devaluation, industrial delicensing, and the opening to foreign investment transformed the market’s architecture and laid the foundation for greater liquidity and broader participation.

Subsequent conflicts have tested this new framework with comparatively less lasting damage. During the 1999 Kargil War, the Nifty experienced only a modest drawdown; the index actually posted substantial gains while hostilities continued. The 2003 Iraq invasion triggered an initial correction, yet markets recovered to pre-war levels within months and recorded strong returns in the period that followed.

The 2022 Russian-Ukraine conflict, which sent oil prices surging and triggered global risk aversion, resulted in a notable, but contained decline followed by a relatively swift rebound. In each case, the initial sell-off reflected familiar transmission channels of higher imported energy costs, rupee pressure, and temporary foreign-investor outflows.

The Covid-19 pandemic stands as the most severe non-geopolitical analogue. Global lockdowns and uncertainty drove a steep market fall in March 2020. Yet the recovery was equally dramatic, supported by unprecedented fiscal and monetary measures along with surging domestic retail participation through systematic investment plans. Here too, decisive policy action proved central to the outcome.

GETTING BACK ON TRACK

Several structural shifts since 1991 help account for this pattern of eventual normalisation. Foreign-exchange reserves have grown substantially, giving greater room for intervention to the RBI. Domestic institutional flows, particularly from mutual-fund SIPs, have become a stabilising counterweight to volatile foreign capital. The economy itself is more diversified, with services and consumption assuming larger roles. Although, these improvements do not guarantee automatic recovery, the outcomes have consistently been shaped by the scale of the shock and the effectiveness of policy measures.

None of this, however, implies immunity. A prolonged disruption to the Strait of Hormuz, through which a significant share of global oil passes, would represent a more systemic risk than many previous episodes. Such a development could intensify pressure on inflation, the current account, and overall economic growth.

Sectoral divergences are already visible. Oil-marketing companies, aviation, and import-intensive industries face margin pressure, while defence and upstream energy stocks have found some relative support. The uneven impact across sectors remains an aspect worth watching closely as the situation evolves. Even as equity indices tend to correct and rebound, the broader economy may confront more persistent effects from rising oil prices and supply-chain strains. Many such cost increases tend to rise quickly, but recede only slowly.

The broader implication is one of maturing, yet conditional, market resilience. Each episode from 1991 onwards has shown that Indian equities are not immune to external shocks, but have become progressively less hostage to them. The record spanning multiple wars and a global pandemic suggests that today’s correction is more likely to be remembered as another episode of temporary turbulence than as a fundamental turning point.

India’s capital markets have demonstrated a repeated capacity to absorb geopolitical noise and resume their long-term course once clarity returns. That historical pattern remains the most reliable guide for understanding the present uncertainty.

The writer is a management consultant specialising in enterprise risk, governance, and policy controls