Spillovers from war in the Middle East threaten to push the rupee past 98 per dollar and hurt Indian stocks, ​according to analysts ⁠at Bernstein, highlighting the country's vulnerability to shocks stemming from a sharp rise in ‌energy prices.

The firm's base case is for hostilities in the Middle East to conclude within a ​month, while its bear case bakes in the war extending for a year.

If the conflict lasts much ​of 2026, "the ​repercussions could be catastrophic," Bernstein analysts' Venugopal Garre and Nikhil Arela said in a Wednesday note, citing supply risks, double-digit inflation and economic growth in the 2%-3% ⁠range.

The base case would leave India's benchmark Nifty 50 index at around 26,000 by year-end, a 2% cut from Bernstein's earlier target.

The bearish scenario, meanwhile, could push the index below the 20,000 mark and weaken the rupee beyond 110 to the dollar, which would ​be about 17% ‌weaker than ⁠current levels of ⁠near 94.

Even if a lengthy conflict is avoided, the Bernstein analysts see a realistic chance of ​the rupee breaching 98 per dollar this year, with pressure primarily ‌stemming from India's current account balance, which for the ⁠final quarter of fiscal year 2025-26 is expected to be in a deficit.

"One thing looks increasingly possible: if the crude levels sustain even in April, India will see its first real test in (the) last 12-13 years," the note said.

India's Nifty and Sensex indexes have both lost 7% in March, while the rupee has hit successive record lows since the start of the U.S.-Israeli war with Iran, which sent crude oil prices surging and severely disrupted energy exports from the Middle East.

The worst-case scenario, according ‌to Bernstein, would resemble India's experience after the Great Financial Crisis ⁠of 2008 which led to a sharp cut in India's ​economic growth, sent inflation soaring and sparked a sharp depreciation in the local currency.

"In the end, it all boils down to geopolitics rather than fundamentals, since those start dictating the markets overwhelmingly ​during times of ‌distress like these, and fundamentals go out the window," the firm's ⁠India strategy note said.

(Reporting by Bharath ​Rajeswaran in Bengaluru and Jaspreet Kalra in Mumbai; Editing by Ronojoy Mazumdar)