Indian stocks tumbled on Wednesday, 9 September, as Brent crude broke above $100 a barrel and an escalating Middle East conflict sent another shock through equities, currencies and bond markets.

The BSE Sensex dropped 813.35 points, or 1.08%, to close at 74,764.23, while the Nifty 50 fell 203.60 points, or 0.86%, to 23,431.50. Both benchmarks finished at their lowest levels since 11 June and extended their losing streak to a third session.

The selloff reflected a growing concern for Indian markets. Oil is no longer merely expensive. Its return above $100 is beginning to affect expectations for inflation, interest rates, the rupee, corporate costs and economic growth at the same time.

Brent crude climbed above $100 for the first time since 24 July as fighting involving the US and Iran intensified and attacks by Iran-backed Houthis raised fresh concerns over Saudi energy infrastructure and Red Sea shipping. Brent rose as much as 2.3% to above $100 during the session, while West Texas Intermediate traded around $94.50 to $95 a barrel.

The latest escalation included Iranian attacks on vessels and a US military base in Jordan after Washington said it had destroyed five Iranian oil tankers. Houthi attacks on Saudi energy facilities have added another potential point of disruption at a time when traffic through the Strait of Hormuz has already been severely constrained.

That matters disproportionately for India, one of the world’s largest crude importers. A sustained increase in oil prices raises the country’s import bill and demand for dollars, threatens to push inflation higher and can reduce the room for easier monetary policy.

The pressure was visible across Indian markets on Wednesday.

Thirteen of the 16 major equity sectors declined. The Nifty IT index dropped 3.2%, while small-cap and mid-cap indexes lost about 0.5% each. Energy and metals were among the exceptions, rising 0.6% and 1.8%, respectively, as higher commodity prices benefited producers even as they hurt the broader market.

IT stocks suffered an additional blow from concerns over US interest rates. Coforge fell 5.4% after Chairman Om Prakash Bhatt resigned following concerns raised by an internal audit over the company’s board evaluation process.

Expectations that the Federal Reserve could raise rates next week also weighed on technology companies with heavy exposure to US spending.

Rupee breaks past 95

The currency market showed the same oil pressure more directly. The rupee weakened beyond 95 to the dollar and closed at 95.1050, even as traders said the Reserve Bank of India probably intervened through spot dollar sales to prevent a sharper fall. The currency had ended Tuesday at 94.8175.

The RBI also likely conducted dollar-rupee sell-buy swaps with September and October maturities, according to traders cited by Reuters. The transactions allow the central bank to remove rupees from the banking system temporarily while also managing its foreign exchange positions.

That has become increasingly important because India is confronting two pressures that normally pull monetary conditions in opposite directions.

Higher oil prices and a weaker currency argue for tighter financial conditions. At the same time, large overseas deposit inflows have left India’s banking system with extraordinary excess rupee liquidity, forcing the RBI to absorb cash through reverse repos and foreign exchange operations.

Dollar-rupee forward premiums jumped as the central bank was seen using swaps. The one-year implied yield rose 11 basis points to 3.16%, its highest in more than three months.

Oil weighs on Indian bonds

Government bonds also came under pressure as higher oil prices revived worries that inflation could stay higher for longer. The yield on India’s benchmark 6.94% 2036 government bond rose to about 6.9525% in morning trading from 6.9431% at Tuesday’s close, although abundant banking-system liquidity limited the selloff. Bond yields move inversely to prices.

The benchmark yield has repeatedly approached 7% in recent weeks as investors balance India’s strong domestic liquidity against rising oil prices, elevated global yields and the possibility that central banks will have to keep rates higher.

Oil is particularly important for Indian bonds because a sustained rise in crude can feed into inflation, worsen the trade balance and make it harder for the RBI to consider easier monetary policy.

The RBI is facing an increasingly complicated policy mix. It is trying to remove surplus liquidity without creating unnecessary stress in bond markets while also using its foreign exchange reserves to prevent disorderly weakness in the rupee.

Global stocks retreat as inflation fears return

The pressure was not confined to India. European equities fell to their lowest level in a week as investors reconsidered how long interest rates may need to remain restrictive. The pan-European STOXX 600 was down about 0.7% in morning trade, with banks and industrial companies among the biggest decliners.

US stock futures were subdued ahead of the Wall Street open after the S&P 500 fell 0.6% on Tuesday. Investors are awaiting US producer-price and consumer-price data later this week, which could determine whether the oil shock strengthens the case for another Federal Reserve rate increase.

US Treasury yields also remained elevated, with the 10-year yield around 4.8%, as higher energy costs added to concerns that inflation may prove more persistent. Rising bond yields increase financing costs and reduce the relative appeal of equities, adding another source of pressure to global stocks.

European bond markets reflected similar concerns. Germany’s 10-year government bond yield reached around 3.4%, its highest level since 2011, while short-dated UK gilt yields climbed as investors priced a greater chance of further monetary tightening if the energy shock persists.

Currency markets were more mixed. The Japanese yen strengthened toward a seven-month high against the dollar despite Japan’s dependence on imported energy, helped by expectations of higher Bank of Japan interest rates and the unwinding of short-yen positions. The euro also edged higher ahead of the European Central Bank’s policy decision.

Gold rises while copper holds near record

The commodity complex showed how the Middle East conflict is producing different effects across markets. Gold gained about 1% to around $4,401 an ounce as geopolitical risk and a softer dollar supported demand for the traditional haven asset.

Copper remained close to record territory after reaching an all-time high of $14,779 a metric ton on Tuesday. Three-month copper on the London Metal Exchange eased 0.55% to about $14,628 on Wednesday, with tight supply outside the US continuing to support prices.

Brent, however, remains the commodity with the largest immediate macroeconomic consequences. Prices have risen roughly a quarter since early August as hopes of a lasting resolution to the US-Iran conflict have faded. Major banks including Goldman Sachs, Bank of America and HSBC have raised crude-price forecasts as disruptions around Hormuz and attacks elsewhere in the region increase the risk premium embedded in oil.

Flows through the Strait of Hormuz had recovered to roughly 8 million to 9 million barrels a day before fighting intensified again at the end of August, according to Rystad Energy, but more recently dropped below 2 million barrels a day. The International Energy Agency expects global oil supply to fall by about 4.3 million barrels a day this year.