The Nifty 50 Index pulled back on Friday as a knee-jerk reaction to the latest Israeli attack on Iran’s nuclear sites, which risks a widespread crisis in the Middle East. The index, which tracks the biggest Indian companies, dropped to a low of ₹24,460, its lowest level since May 8.
Why the Nifty 50 Index is falling
The Nifty Index plunged on Friday as global stocks suffered a harsh reversal. This decline was in line with the sell-off in global indices. The Shanghai Composite Index dropped by 0.70%, while the Hang Seng, KOSPI, and BSE Sensex plunged by over 1%.
Similarly, global stock market futures, including the Dow Jones and S&P 500 indices dropped by over 1%.
This decline was triggered by Israel’s decision to launch military strikes on Iran’s nuclear sites. The country did that to undercut the ongoing talks between the US and Iran.
Therefore, there is a likelihood that this attack will attract retaliation by Iran, which may launch more powerful attacks on Israel. As such, since the US will always defend Israel, there is a likelihood that this crisis will escalate in the long term.
Still, on the positive side for the Nifty 50 Index, many of its constituent companies have no major presence in Israel or Iran. For example, Reliance Industries, the biggest company in the index makes most of its money in India.
The same is true with other companies in the Nifty Index like HDFC Bank, ICICI Bank, State Bank of India, and Bajaj Finance. While consulting companies like Tata Consultancy and Infosys have a presence in Israel, they generate a small portion of revenue from the country.
It is common for global indices like the Nifty 50, Nikkei 225, and Hang Seng to have a knee-jerk reaction after a major event. For example, most of them plunged in April after Trump announced his tariffs.
RBI is a key catalyst
The Nifty 50 Index has a key backer as the Reserve Bank of India (RBI). The bank caught the market by surprise last week when it slashed interest rates by 0.50% to 5.50%.
It also slashed the cash reserve ratio by 100 basis points in stages from September. Stocks often do well in periods of low interest rates as this usually leads to low demand for lower-yielding bonds.
In another surprise move, the media reported that the bank abandoned a tool it had deployed to defend the rupee. The bank’s short dollar positions in the non-deliverable futures market dropped below $5 billion, down from $70 billion last year.
Further, Indian stocks are attracting more corporate activity, including block trades. They had $6.4 billion raised through share sales in May, with momentum continuing this month. In a note, a Goldman Sachs analyst said:
“Right now, investors are saying, ‘I need exposure to India — and I need it fast. Block trades remain the quickest and most efficient way to get that exposure.”
Nifty 50 Index analysis
The daily chart shows that the Nifty 50 Index retreated to a low of ₹24,667, down from the year-to-date high of ₹25,240. On the positive side, the index has formed a golden cross as the 50-day and 200-day Weighted Moving Averages (WMA) crossed each other.
The index has also formed a bullish flag pattern, a popular bullish continuation sign. Therefore, the index will likely continue rising as bulls target the key resistance at ₹25,000. A drop below the support at ₹24,000 will invalidate the bullish view.
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