Growing geopolitical tensions raw Oil prices emerge as a major risk to India’s macroeconomic outlook and financial markets.As Brent crude hovers around the $100 a barrel mark, concerns grow over the potential impact on inflationbudget balances, and growth momentum.
In an interaction with Kshitij Anand of ETMarkets, Garima Kapoordeputy director of research and economist at Elara Capital, warned that keeping crude prices above $100 could reduce India’s GDP growth by up to 1 percentage point, given the country’s heavy dependence on energy imports.
She also shared her views on rupeethe trajectory of the, sectoral opportunities in the middle market volatilitythe implications of REIT capital outflows and how investors should recalibrate their wallets in the current uncertain context. Edited extracts –
Q) The IT sector seems to be the most affected thanks to the comments on AI, but with geopolitical tensions rising, other sectors have also started to feel the rub-off effects. Are there any sectors now available at attractive levels?
A) Nifty Bank is currently trading at a trailing PB ratio of around 2x, well below the 5-year median of 2.7x, which looks attractive.
This is one of the lowest levels since the pandemic era, reflecting pressure from greater market volatility, rupee weakness and rising borrowing costs, but also presenting relative attractiveness for a sector with strong long-term structural drivers like credit growth, improving asset quality and India’s consumption/investment cycle.
The pharmaceutical sector appears to be resilient to current market volatility, amid structural tailwinds and defensive play. Given global reflation, we prefer stocks in the hard assets, metals and energy sectors.
Q) What could be the good, bad and ugly sides of Indian markets in the near term?
A) Good: The de-escalation of geopolitical tensions (especially in the Middle East and around Taiwan) remains the main positive catalyst. Rapid stabilization could ease pressures on oil prices (Brent has climbed to over $100/barrel amid recent escalations), restore risk appetite, support FPI inflows and allow the rupee to stabilize or appreciate towards the 90-91 levels. This would strengthen the narrative on India’s macroeconomic stability and boost confidence in stocks. A slight increase in profits compared to Q3FY26 is encouraging.
Bad: lasting impact of the energy shock on demand, leading to a visible erosion of consumption and investment demand. High crude levels (currently elevated due to disruptions in the Middle East) could widen India’s current account deficit, fuel imported inflation and put pressure on corporate margins, particularly in oil-sensitive sectors. The persistent weakness of the rupee (which has recently hovered around the 92 level) is exacerbating import costs and increasing borrowing pressures.
Ugly: A multi-pronged pessimistic scenario combining energy shock pass-through and demand erosion, persistent rupee depreciation, late Fed rate cuts (or even pauses amid peak-oil inflation fears), a stronger dollar globally, widening term premiums, and further escalation of geopolitical hotspots (e.g., tensions in the Taiwan Strait or new outbreaks of tensions in the Middle East). This could trigger sharper stock market corrections, higher bond yields, tighter liquidity and a challenge to India’s growth, potentially reducing GDP estimates by 50-100 basis points if it continues.
Q) REITs have been net sellers in 2025, and the story continues in 2026, perhaps for a different reason now. The situation seems to be changing when it comes to the FDI route, as India opens channels for Chinese investments to land in several sectors. What is your point of view?
A) FPI exits remain a drag: 2025 saw record net sales of around Rs 1.66 lakh crore (~$18-19 billion), driven by high valuations, currency volatility, global reallocations away from emerging markets and lack of AI plays.
The move towards FDI, particularly via relaxed rules for neighboring countries (including China), constitutes a notable positive development.
Recent cabinet approvals (March 2026) ease restrictions in sectors such as electronic components, capital goods, solar cells and polysilicon/wafer production, allowing limited investments through automatic route (up to ~10% non-controlling stakes) and expedited approvals (within 60 days) for manufacturing.
This could bring technical know-how, strengthen complex manufacturing capabilities (e.g. in electric vehicles, renewable energy and electronics) and support “Make in India” by localizing supply chains and reducing dependence on imports.
Overall, this is a pragmatic approach to growth if managed with safeguards for control, intellectual property and national security.
Q) The rupee seems to be hitting new lows every week – where do you see the currency heading and what impact will it have on the Indian markets/economy?
A) The rupee has weakened significantly, recently trading in a range of 91.9 to 92.5, reflecting oil shocks, FPI capital outflows and global dollar strength. In the short term, a move towards 95 remains possible without aggressive intervention from the RBI (via currency sales or liquidity tools), especially if oil maintains high levels or if geopolitical risks persist.
However, any significant de-escalation of tensions in the Middle East could trigger news-fueled positive sentiment, potentially pushing it back towards 90-91 or higher as capital flows return and risk appetite improves.
The impact of rupee weakness includes: higher imported inflation (which hurts macros), high borrowing costs, pressure on corporate profits (especially importers) and stock volatility – but a weaker rupee helps exporters and could support IT/pharma competitiveness if global demand holds up.
Q) Will crude oil at $100/barrel and above harm Indian markets and macro-economies? We have launched an investment narrative to the world about our macroeconomic stability, which could be challenged in the near future. What is your point of view?
A) Yes: Maintaining a sustained crude price above $100/barrel throughout the year is a major hurdle for India, given its dependence on energy imports of around 85-90%. This could have an impact of around 1 percentage point on GDP growth through higher input costs, reduced consumption and fiscal stress.
Inflation faces an upward shock of around 70 basis points (if the government passes on the impact in pump prices and LPG), making the RBI’s balancing act difficult.
On the FX side, this undermines any near-term reversal towards 89 levels as growth and inflation risks increase.
Fiscal responses (subsidies, tax adjustments) and the RBI’s likely prolonged holding of rates could push benchmark yields higher, raising borrowing costs for businesses and government and weighing on capital and investment cycles. India’s macroeconomic stability (strong growth, controlled deficits) will be put to the test if prices remain high.
It is worth noting, however, that India entered this oil price shock with relatively low inflation, a weak Canadian dollar, high growth and a low budget deficit. It is therefore unlikely that a rapid reversal of crude prices in a context of de-escalation will have disastrous consequences.
Q) How should investors recalibrate their portfolio amid increased volatility? Are there any themes/asset classes they should overweight or underweight? (Assuming the person is between 30 and 40 years old)
A) Volatility has increased due to geopolitical and oil risks, so a defensive recalibration makes sense at the moment. However, it is also important to separate the wheat from the chaff. A significant correction in stocks whose long-term history remains intact could present buying opportunities in the context of the recent correction, such as aviation, ports, utilities, autos and banks.
As war would lead to higher inflation and hence sovereign yields, we are wary of high PE and duration-sensitive bonds (as the RBI holds rates longer in an inflationary environment, limiting returns; global duration faces similar pressures).
Among asset allocation bets, we will continue to overweight gold: it is a classic hedge against inflation, currency weakness and geopolitical uncertainty, with constant demand from central banks.
Q) Do you advise investors on things to avoid doing in the current environment? We have already seen a decline in SIP flows of over 3% on a MoM basis.
A) India’s long-term growth remains intact. With the recent market correction, our relative valuation premium compared to our emerging market peers has attenuated (1.65x MSCI India to MSCI EM versus 1.7X at the start of 2026).
Across seven major geopolitical conflicts over 25 years – Iraq War, Lebanon War, Libyan Civil War, Russia-Ukraine, Israel-Hamas, Iran-Israel and the current US-Iran escalation, the median decline in Nifty is 6%, the worst being 10% during the Iraq War.
Median days to bottom: 11. Median recovery: 15 days, with a median recovery gain of 7%. In our view, based on historical precedent, downside risk is limited to 4-5% from current levels.
The post-conflict trajectory looks better: Nifty median returns of +4.5% in 3M, +11.7% in 6M and +26.2% in 12M. The only exception is the Libyan crisis of 2011, when Brent remained above USD 100/barrel for more than three years, while the Nifty remained stable from 2011 to 2013 until the price of crude softened.
(Disclaimer: The recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
