The crisis in Iran has raised fears over disruptions in oil supply. History has shown that markets tend to crash as wars break out across the world, and recover after tensions subside.

The trends have remained the same throughout the world, and in India historically. So, what does history teach us about markets collapsing during times of war?

Wars begin, markets collapse

As the First World War began in July 1914, the New York Stock Exchange (NYSE) was shut down till January 1915, after which it was reopened. But the prices of stock were significantly down, but recovered slowly, NDTV said.

Indian markets, too, have reacted in similar patterns. During the First Gulf War, in which the US launched its initial blow against Saddam Hussein's Iraq, the Sensex in India tanked 18 per cent before the war began, but recovered 50 per cent over the next six months, NDTV reported.

Similarly, Nifty decreased by 13 percentage points initially during the Kargil War of 1999, but increased by 31 points in the following six months.

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During the Iraq War of 2003, Nifty tanked 6 per cent at the beginning, but rallied 31 per cent over the next six months.

During the 26/11 terror attack in Mumbai, the markets crashed on the first day, but recovered 54 per cent over the next half a year. Similar trends were noted during the Pulwama attack and retaliatory Balakot strikes in 2019.

Recent war situations like the Russia-Ukraine and Israel-Hamas conflicts have shown similar market movements, with crashes reported initially, followed by steady recovery.

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Why does this happen?

This trend happens because markets fear what they cannot price. When geopolitical tensions rise, investors rush to factor in the most immediate risk, which is oil. For India, heavily dependent on crude imports, any threat to the Strait of Hormuz quickly translates into inflation worries, a wider current account deficit, and possible rupee weakness.

That is why brokerages expect a knee-jerk 1-2 per cent correction rather than a crash. Defence stocks may gain, but broader equities wobble if rate cuts are delayed, as per NDTV.