Indian markets have fallen sharply since the start of the US-Israel-Iran war; they have reacted to the disruption in supply of critical energy sources, and to crude breaching $100 per barrel. The benchmark Nifty50 index has lost around 7 per cent since the war began three weeks ago, akin to other global emerging market benchmarks. However, this fall may actually be beneficial to the long-term health of our markets.
Stocks from many sectors were unhinged from fundamentals. Retail investors who entered stock markets in large numbers post Covid, propelled a surge in demand for direct and indirect equity (through the mutual fund route). As a result, Indian stocks have been quite pricey, compared to other emerging markets. The Nifty50 traded at price-earnings multiple of 21.7 times towards the end of 2025. This was at a premium to benchmark indices of other EMs including China, South Korea, Brazil and South Africa which traded at PE multiples between 11 and 18. Stocks in consumption-oriented sectors such as FMCG, healthcare and retail trade traded at higher PE multiples of over 50 times. The absence of a deep correction since the Covid-low in March 2020, with declines not exceeding 20 per cent from the peak, had led to complacency with investors buying at every dip. Stocks remained elevated for too long. Owing to these higher valuations, foreign portfolio investors turned net sellers of India equity since September 2024, pulling out close to ₹3.5 lakh crore. The ongoing correction will help valuations to revert to their mean levels. The valuation of Nifty50 has cooled a bit, with the PE multiple declining to 19.51 times. But prices need to decline further.
And they well may. Given the multiple headwinds currently facing markets and the economy, investors should be prepared for further price corrections. If the war in West Asia prolongs, corporate margins are going to shrink, as fuel, logistics and input costs increase. Shortage of LPG and other fuel will likely further dent corporate bottomlines. The domestic economy, which was trotting along nicely before the onset of this war, is up against multiple first and second-order effects. Besides shocks in the form of prices, supplies and asset valuations, the sentiment factor, too, could hurt business. It does not help that there are just a few stocks in nascent, sought-after sectors such as AI and semiconductors.
The bottomline is that market corrections should happen when the underlying fundamentals change. After all, equities are not meant to be risk-free, and excesses created in bull and bear markets need to be ironed out. The Securities and Exchange Board of India should let markets follow their course, while watching out for any undue volatility caused by manipulation. The regulator, Association of Mutual Funds in India and other investor bodies should run awareness campaigns, advising investors to pursue long-term goals with realistic expectations.
Published on March 18, 2026