With Brent crude hovering near the $100 per barrel mark, concerns are growing about the potential impact on inflation, fiscal balances, and growth momentum.
In an interaction with Kshitij Anand of ETMarkets, Garima Kapoor, Deputy Head of Research and Economist at Elara Capital, cautioned that sustained crude prices above $100 could shave up to 1 percentage point off India’s GDP growth, given the country’s heavy dependence on energy imports.
She also shared her views on the rupee’s trajectory, sectoral opportunities amid market volatility, the implications of FPI outflows, and how investors should recalibrate their portfolios in the current uncertain environment. Edited Excerpts –
Q) IT sector seems to be the worst hit thanks to the AI commentary but with geopolitical tensions rising other sectors have also started to see some rub-off effect. Any sector(s) that are now available at attractive levels?
A) Nifty Bank is currently trading at a trailing PB ratio around 2x well below the 5-year median of 2.7x looks attractive.
This marks one of the lowest levels since the pandemic era, reflecting pressure from broader 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.
Pharma looks resilient in the current market volatility amid structural tailwinds and defensive play. Given the global reflation trade, we prefer hard asset, metal and power sector plays
Q) What could be the good, bad and ugly for Indian markets in the near term?
A) Good: De-escalation of geopolitical tensions (particularly in the Middle East and around Taiwan) remains the biggest positive catalyst. A quick stabilization could ease oil price pressures (Brent has spiked toward $100+/bbl amid recent escalations), restore risk appetite, support FPI inflows, and allow the rupee to stabilize or appreciate toward 90-91 levels. This would reinforce India’s macro stability narrative and boost sentiment across equities. An earnings uptick from Q3FY26 is encouraging.
Bad: Sustained pass-through of the energy shock to the demand side, leading to visible erosion in consumption and investment demand. High crude levels (currently elevated due to Middle East disruptions) could widen India’s current account deficit, fuel imported inflation, and pressure corporate margins—especially in oil-sensitive sectors. Continued rupee weakness (hovering near 92 levels recently) exacerbates import costs and adds to borrowing pressures.Ugly: A multi-pronged downside scenario combining energy shock pass-through and demand erosion, persistent rupee depreciation, delayed Fed rate cuts (or even pauses amid inflation fears from oil spikes), a stronger USD globally, widening term premiums, and re-escalation of geopolitical flashpoints (e.g., Taiwan Strait tensions or further Middle East flare-ups). This could trigger sharper equity corrections, higher bond yields, tighter liquidity, and a challenge to India’s growth story—potentially shaving 50-100 bps off GDP estimates if prolonged.
Q) FPIs have been net sellers in 2025, and the story continues in 2026 may be for a different reason now. The story seems to be changing around the FDI route as India opens up channels for Chinese investment to land into several industries. What are your views?
A) The FPI outflows remain a drag—2025 saw record net selling of around Rs 1.66 lakh crore (~$18-19 billion), driven by high valuations, currency volatility, and global reallocations away from EMs and lack of AI plays.
The shift toward FDI, particularly via relaxed rules for bordering countries (including China), is a notable positive development.
Recent cabinet approvals (March 2026) ease restrictions in sectors like electronics components, capital goods, solar cells, and polysilicon/wafer production—allowing limited automatic-route investments (up to ~10% non-controlling stakes) and fast-track approvals (within 60 days) for manufacturing.
This could bring in technical know-how, boost complex manufacturing capabilities (e.g., in EVs, renewables, and electronics), and support “Make in India” by localizing supply chains and reducing import dependence.
Overall, it’s a pragmatic move for growth if managed with safeguards on control, IP, and national security.
Q) Rupee seems to be hitting fresh lows every week – where do you see the currency headed and how will it impact Indian markets/economy?
A) The rupee has weakened notably, trading in the 91.9-92.5range recently, reflecting oil shocks, FPI outflows, and global USD strength. In the short term, a move toward 95remains possible without aggressive RBI intervention (via forex sales or liquidity tools), especially if oil sustains high levels or geopolitical risks persist.
However, any meaningful de-escalation in Middle East tensions could trigger news-driven positive sentiment, potentially pushing it back toward 90-91 or stronger as inflows return and risk appetite improves.
Impact of weak Rupee includes: higher imported inflation (hurting macros), elevated borrowing costs, pressure on corporate earnings (especially importers), and equity volatility—but a weaker rupee aids exporters and could support IT/pharma competitiveness if global demand holds.
Q) Will Crude@$100/bbl and above hurt Indian markets and macros? We have been making an investment pitch to the world about our macro stability which could be challenged in the near future. What are your views?
A) Yes—sustained crude at $100+/bbl through the year is a major headwind for India, given ~85-90% energy import dependence. It could deliver a full ~1 percentage point hit to GDP growth through higher input costs, reduced consumption, and fiscal strain.
Inflation faces a ~70 bps upside shock (if government passes through the impact on pump prices and LPG), complicating RBI’s balancing act.
On the FX side, this undermines any near-term reversal toward 89 levels, as growth/inflation risks rise.
Fiscal responses (subsidies, duty tweaks) and RBI’s likely prolonged rate hold could push benchmark yields higher, raising corporate/government borrowing costs and weighing on capex/investment cycles. India’s macro stability pitch (strong growth, controlled deficits) faces real test if prices stay elevated.
Point to however note is that India has entered this oil price shock with relatively low inflation low CAD, high growth and low fiscal deficit. So a quick reversal in crude prices amid de-escalation is unlikely to have significant damage.
Q) How should investors recalibrate their portfolio amid rise in volatility? Any theme/asset classes which they should go overweight or underweight on? (Assuming the person is between 30-40 years)
A) Volatility has spiked due to geopolitical/oil risks, so a defensive recalibration makes sense for now. However, it is also important to separate wheat from chaff. Extensive correction in names where long-term story remains intact could present buying opportunity amid recent correction- like aviation, ports, utilities, autos, banks.
Since war would lead to spike in inflation and thus sovereign yields, we are wary of high PE names and duration-sensitive bonds (as RBI holds rates longer amid inflation, limiting returns; global duration faces similar pressures).
Among asset allocation bets, we shall remain Overweight gold—it’s a classic hedge against inflation, currency weakness, and geopolitical uncertainty, with steady central bank demand.
Q) You advise to investors of things which one must avoid doing in the current environment? We have already seen drop in SIP flows by over 3% on a MoM basis.
A) India’s long term growth story remains intact. With recent correction in markets, our relative valuation premium vs EM peers has eased ( 1.65x MSCI India to MSCI EM vs 1.7X beginning 2026).
Across seven major geopolitical conflicts over 25 years – Iraq war, Lebanon war, Libya Civil war, Russia-Ukraine, Israel-Hamas, Iran-Israel, and the current US-Iran escalation, Nifty’s median drawdown is 6%, with the worst being 10% during the Iraq war.
Median days to bottom: 11. Median recovery: 15 days, with a 7% median recovery gain. In our view, taking cue from historical precedents, downside risk is limited to 4–5% from current levels.
Post-conflict trajectory looks better: median Nifty returns of +4.5% in 3M, +11.7% in 6M, and +26.2% in 12M. The single exception is the 2011 Libya crisis, when Brent stayed above USD 100/bbl for over three years, Nifty was effectively flat from 2011-2013 until crude softened.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)