Strait to the Point: What the Hormuz Crisis Means for Your Money

Let’s discuss recent geopolitical developments, examine their effects on the Indian economy and stock markets, and then run through some key points to keep in mind in a bear market.

Iran, the USA, and Israel have a difficult history with each party accusing the other of trying to destroy them. Iran has been developing nuclear weapons for a few decades now, which Israel feels is a threat to its existence and the USA, as the global police and firm friend of Israel, cannot allow it. On Feb 28th 2026, US and Israeli defence forces launched air and missile strikes on Iran targeting both military infrastructure and leadership. Iran responded with retaliatory missile and drone strikes that targeted US embassies, military, and oil infrastructure across the Middle East. The conflict has now expanded to Lebanon, as Israel is preparing for a ground invasion.

33 Kilometres That Control the World’s Energy!

We have all been hearing about the Strait of Hormuz; let’s understand more about it.

A strait is a narrow, natural waterway connecting two larger bodies of water, typically separating two landmasses. The Strait of Hormuz lies between Oman and the UAE on one side and Iran on the other. It links the Persian Gulf with the Gulf of Oman and the Arabian Sea beyond. The Strait is just 33km wide at its narrowest point and has only a 3km wide shipping lane. So why is this place, which nobody had heard about a month earlier, so important?

7 countries have oil and gas production infrastructure whose exports depend on the Hormuz passage. While the oil/gas fields are located inland, the oil/gas is moved via pipelines to coastal export terminals and loading ports. It is then pumped into massive tankers, which sail down the Strait, enter the Arabian Sea, and head to their destinations mostly in Asia. Approximately 20 million barrels of oil worth roughly $500 billion in annual global energy trade transited the strait each day.

Now, what did Iran do the moment the war started? It conducted several drone and missile strikes in the vicinity of the strait, and suddenly, insurance companies realised how dangerous traversing through the strait was, and risk premiums exploded. Crew safety has also been a major consideration. The traffic has collapsed, and Iran has sort of imposed a toll booth. It has only allowed ships owned by 5 countries – China, Russia, India, Iraq, and Pakistan to transit. This sharp supply shock has led to oil/gas prices surging, with Brent crude rising by ~50% over the last 1 month.

Now that we are up to date on the conflict and why oil/gas prices are rising, let’s move to the economic effects of this oil-price surge on India.

One Price Rise, Many Problems: The Oil-Rupee-Inflation Spiral

Between April ‘24 – March ‘25 (FY25 period), India imported ~89% of its domestic oil requirement, paying $143 bn. Assuming an annual GDP of $3.9 trillion during FY25, oil imports account for 3.6-3.7% of GDP. Almost 25% of all merchandise imports are oil. In addition, LPG is used nationwide for cooking, making it a kitchen-table issue for Indian households. So what happens when oil prices start increasing?

According to analysts, a $10 increase in crude prices adds about $12-15 billion to India’s import bill. The current account records the money that flows into and out of the country from trade and income. Money flows in when India exports and receives payment, or someone abroad transfers money to their family in India. Conversely, money flows out when imports have to be paid for. High outflows compared to inflows result in a high current account deficit. A high current account deficit puts pressure on the Rupee as the domestic currency has to be sold to buy Dollars to make the payment.

This is one of the reasons why the Rupee has been falling against the US Dollar. A weaker Rupee, along with rising oil prices, makes imported goods more expensive, which feeds consumer price inflation.  If inflation starts trending higher, then the RBI will most likely start raising repo rates. A combination of high fuel prices, high inflation and high repo rates will affect domestic consumption and affect India’s GDP growth rate. This, in turn, will affect corporate profitability, leading to continued FPI outflow and further dragging down stock markets.  

With no end to the war in sight and negotiations stalled, investors should start preparing for the worst-case scenario. Nifty 500 is down ~13% since the start of the year, and it is important to be prepared for further pain. 

So how does one prepare for a bear market?

• Please remember we have been here before – the global financial crisis (2008-09), the Eurozone crisis (2010-12), the demonetisation shock (2016), the COVID-19 crash (2020), the Russia-Ukraine crisis (2022-23), and the current bear market (since Oct 2024). Each time, markets have recovered.
• Investors should ask themselves this big question. Why did you invest in the first place, and has the macro story changed? If you invest for your retirement or your child’s education / marriage, these things will not change because of the war in the Middle East. While the present macro situation is challenging, it does not change the India growth story. Short-term events do disrupt markets; however, the long-term goals and story remain intact.
• Windmill Capital’s smallcases are based on a clear investment philosophy. Stocks are not manager favourites added to the model portfolio willy-nilly, nor are they added based on tips. Stocks are added based on valuations and fundamentals, and investing is driven by rules and systematic models. There is no place for panic or emotion.
• Please revisit the strategy of the smallcase that you have invested in. A high-growth, high-volatility strategy will fall sharply in a downturn compared to a conservative strategy. However, the recovery will also be sharper. Check the category your smallcase falls under and make sure you are comfortable with the risk level.
• Selling out when markets are down 13%, and the outlook is bleak, seems wise. Investors who make money over the long term are not the ones who sell during bear markets only to buy back at the top. The smart ones keep investing through the bear market, buying more quantity at lower prices. This will significantly boost returns when markets recover. 
• Nobel Prize winner Daniel Kahneman has demonstrated through experiments that people exhibit loss-aversion behaviour. Losses tend to hurt more than equivalent gains feel rewarding. This leads to the disposition effect, in which investors sell winning positions while holding onto losing ones. Ignoring rebalance updates, especially when they involve exiting loss-making positions, is a common and costly mistake.

Don’t exit, don’t time the bottom, don’t move to cash! Time in the market will always beat timing the market. 

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