Amnish Aggarwal from Prabhudas Lilladher Capital believes that the situation is far from stabilizing and warns that the full impact of the ongoing conflict has not yet been felt in the Indian economy.
“It is going to be a very, very tricky situation and, as we discussed last week, the impact of the war in the Middle East is yet to fully flow into the real economy in India.” While the government has taken steps to provide some relief by cutting excise duties on fuel, the scope for further intervention appears limited. “Last week, the government cut excise duty on both diesel and petrol, which has provided some cushion to consumers as well as the economy. But having said that, there is a limit to which it can be done, because now on diesel it is practically nil and on petrol it is Rs 3.” This suggests that if crude prices remain elevated, policymakers may face difficult choices, including the possibility of subsidies, which could strain fiscal balances.
Beyond fuel prices, the broader concern is the disruption in the movement of essential commodities and inputs. The conflict has already begun to impact oil and gas supplies as well as cargo movement, and the effects are likely to intensify with time. “Whatever is happening in the war in the Middle East is taking a toll on the markets because the movement of oil and gas, and not only that, all essential inputs and a lot of cargo have got impacted.” Aggarwal points out that while shortages may not be visible immediately, they could emerge in the coming weeks. “As time goes by, the availability of goods in industries or segments where today we are not witnessing any shortage—maybe in another month or so—we will start witnessing that impact as well.” In such a scenario, only a few defensive sectors like pharma, utilities, and to some extent defence may offer relative safety, while the broader market could remain under pressure.
The financial sector, too, is likely to face challenges, although recent measures by the RBI to manage currency pressure may offer some support. Aggarwal notes that these steps are unlikely to be game changers for banks. “The rupee has been under pressure and now, without spending from the forex reserves, this plan of RBI is likely to provide some dollar inflows into the economy. But having said that, it is not going to be a very, very big game changer for financials or banks.” Instead, the larger concern is the potential slowdown in economic activity and its impact on credit growth. “If there is lesser production in factories, no movement of goods, and even some slowdown in construction and real estate, all those things are going to impact credit growth—not immediately, but maybe over the next few months.” This delayed effect could become a key risk factor for the sector.
Non-banking financial companies are also expected to feel the impact, particularly those linked to consumption and logistics. While the effects are not yet visible, the scale of disruption could be significant compared to previous crises like COVID. “As of now, we are not witnessing that impact, but the problem seems to be much, much bigger in magnitude.” He explains that disruptions in fuel availability and cargo movement could directly affect segments such as commercial vehicles and two-wheelers. “If the overall movement of cargo comes down, then some NBFCs focused on commercial vehicles or the CV cycle are likely to get disrupted. If there is fear about the availability of petrol and diesel, then that is also going to be detrimental for two-wheelers.” As a result, growth in the NBFC sector could slow in the coming months, with the extent of impact varying across segments. “Everyone is going to get impacted to some extent or the other—it is only a matter of the degree of the impact.”
When it comes to lenders, Aggarwal emphasizes the importance of focusing on quality and resilience. The key risk lies in potential stress at the bottom of the pyramid, including MSMEs and retail borrowers. “The actual fallout will depend on whether there is a real impact on the MSME sector, the bottom end, and consumers.” Rising delinquencies in segments such as personal loans, auto loans, and consumer durables could signal deeper stress. “If delinquencies start happening in personal loans, auto loans, or durables, then one needs to look at the mix of the credit book.” In this context, larger banks with stronger capital adequacy and better systems may be relatively better positioned. “Some of the large banks which have enough capital adequacy and better systems might be better placed than some of the smaller ones.” However, he cautions that no bank is entirely immune. “There could be an impact on practically every bank.” Therefore, a cautious approach is advisable. “It is better to stick to the frontline three-four banks and maybe a couple of NBFCs rather than going deeper at this point in time.”The real estate sector, which has already been under pressure, could face additional headwinds. Aggarwal points out that property cycles typically last several years and the current upcycle may be nearing its later stages. “If you look at the cycles in real estate, they sometimes last five to seven years. The current cycle started around COVID, so it is already five to six years into the run.” Early signs of stress are visible in key markets, including IT hubs and the NCR region. “We are witnessing some pressure building in certain sections of cities where IT hubs are there, or even in the NCR region.” Given the broader economic challenges, the outlook remains cautious. “I do not rule out that the realty sector faces more pressure in the coming three to six months.” Although valuations have corrected, a near-term recovery appears unlikely. “I see no big relief coming in the near term.” Slower growth, weaker demand, and execution delays could prolong the downturn. “Pre-sales will get impacted, executions are likely to be delayed, and it is going to be quite a rough patch for realty players over the next year or two.”
Overall, the current market environment is defined by uncertainty, with geopolitical risks, inflationary pressures, and growth concerns all converging at once. With no immediate resolution in sight, volatility is likely to persist, and investors may need to prioritize caution, quality, and patience as they navigate this challenging phase.