The benchmark Nifty 50 has delivered negative returns over the last two years, and investors expecting a swift recovery could be in for a disappointment as the domestic market faces a plethora of headwinds.
Swinging between highs and lows, the Nifty 50 has delivered a negative return of over 1% over the last two years (from 12 July 2024 to 13 July 2026).
Just when the market appears to be recovering, a fresh headwind either emerges or resurfaces to derail the rally. This time, it is the US-Iran conflict that has returned to puncture the nascent uptrend in the domestic market.
“I think there could be some short-term weakness that may pull the Nifty down by around 500–800 points from current levels. However, I believe things will eventually improve, and the market should recover from there. I don’t see the situation deteriorating significantly beyond that,” said Rohit Srivastava, the founder and market strategist at Indiacharts.com.
Tough times ahead for the Indian stock market?
While the market remains hopeful that a durable resolution to the US-Iran conflict will trigger a sustained recovery, investors may be overlooking other risks, many of them stemming from the conflict itself, that could keep the market under pressure for the current calendar year. Let’s take a look:
1. Geopolitics
No one knows when and how the US and Iran will reach a final deal that will restore a durable peace in the Middle East.
As per reports, there are several bones of contention between them, including Tehran’s nuclear programme, ballistic missile programme, the control of the Strait of Hormuz, and Iran’s support for proxy groups across the Middle East.
There have been multiple diplomatic efforts to iron out these issues, but none have yielded lasting results.
For markets and economies like India, which imports about 85-90% of its total oil requirements, the situation in the Middle East remains a key monitorable.
“The ongoing geopolitical tensions, particularly in the Middle East, have increased concerns over crude oil supply and global trade. For India, higher crude prices can lead to increased inflation, higher import costs and pressure on corporate profitability. These uncertainties also make foreign investors more cautious, resulting in volatile capital flows,” Ravi Singh, Chief Research Officer from Master Capital Services, noted.
“Until there is greater clarity on geopolitical developments, markets are likely to remain volatile. Investors should stay focused on quality businesses and avoid making decisions based on short-term market swings,” Singh said.
2. Watch out for the US bond yields
The US 10-year bond yield is now near 4.60%, climbing over 4.5% so far this month. Rising bond yields are not good news for emerging markets like India.
When bond yields rise in developed economies, foreign investors tend to take their money out of riskier emerging markets and invest them into fixed-income assets back home.
In simple words, rising bond yields can aggravate foreign capital outflow from India and exert pressure on the stock market.
“Global markets are facing pressure from two major factors- rising bond yields in developed economies and increasing geopolitical uncertainty. When bond yields move higher in countries like the US, Japan and Europe, investors often shift a part of their money from equities to fixed-income assets, reducing the appeal of emerging markets,” Singh explained.
As per Harshal Dasani, Business Head at INVAsset PMS, global yields remain the market’s first pressure point because the discount rate for equities is being reset while earnings growth is still uneven.
“Higher yields in the US, Japan and Europe raise the hurdle rate for emerging-market equities and make global liquidity more selective. India can still attract capital where earnings visibility is strong, but broad valuation expansion becomes harder when risk-free returns overseas are more competitive,” Dasani explained.
3. Monetary tightening
The spectre of inflation is resurfacing. India’s retail inflation rose to 4.38% in June, surpassing the Reserve Bank of India’s 4% midpoint target for the first time since January 2025. US inflation data is due this week.
Higher inflation can prompt the US Federal Reserve and the Reserve Bank of India to raise rates, which are already at fairly elevated levels.
Currently, some experts expect three rate hikes from the US Federal Reserve this year.
Further rate hikes will increase the borrowing costs of companies, which can impact their profitability. It can also lower spending and further investments, and accelerate foreign capital outflow.
4. Slowdown in economic growth
The Indian economy has clocked strong growth over the last few years, but the geopolitical turmoil and a spike in crude oil prices have come as major shocks, which can puncture the country’s growth momentum.
The Asian Development Bank (ADB) recently trimmed India’s economic growth forecast for FY27 to 6.6% from the 6.9% projected in April, saying prolonged disruption to global energy markets following the conflict in West Asia is beginning to weigh on domestic demand through persistently high fuel prices.
Meanwhile, India’s merchandise trade deficit widened to a five-month high of $30.43 billion in June, jumping by over 50% year-on-year from $19.1 billion in the year-ago month.
Aditi Nayar, Chief Economist at ICRA, expects the current account deficit to widen to at least 1% of GDP in FY27.
Additionally, the El Niño risk is another key factor that can hit the economic growth by dampening overall consumption.
5. The AI trade
From the stock market’s perspective, the AI trade remains among the key factors that will influence foreign capital flow.
The AI-driven rally has lost some momentum in recent weeks as investors booked profits following stellar gains in AI-heavy markets, which inflated their valuations.
According to experts, this prompted some foreign portfolio investors (FPIs) to selectively buy Indian equities this month, aided by easing geopolitical tensions.
However, renewed tensions in the Middle East have once again pushed oil prices higher, putting pressure on the rupee, keeping inflation elevated, and reducing the likelihood of interest rate cuts.
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Disclaimer: This article is for educational purposes only and does not constitute investment advice. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
