India’s stock markets are responding to ongoing developments in West Asia without a definitive trend, and the broader economic effects of the conflict may be underappreciated, states Sanjeev Prasad, co-head at Kotak Institutional Equities.
In a discussion with ET Now, Prasad outlined two potential outcomes for India: challenging or dire.
In the challenging case, even if the conflict concludes quickly and key shipping routes like the Strait of Hormuz reopen, India would still experience lasting effects. Prasad projects that with oil at approximately $85 per barrel in fiscal year 2027—higher than before the crisis—India could see a current account deficit of about 2% of GDP, a balance of payments shortfall of around $50 billion, and ongoing depreciation pressure on the rupee. Inflation might range from 4.5% to 5%, with the fiscal deficit remaining controllable but at risk of increases.
In the dire scenario, if the conflict persists and oil averages $100 per barrel annually, conditions would deteriorate significantly. The current account deficit might expand to 2.5%, the fiscal deficit could exceed 4.5%, and inflation may climb to 5.5% or more, based on whether the government absorbs higher fuel expenses or transfers them to consumers. Both choices present difficulties. Prasad noted that in this case, all predictions become unreliable.
Despite these gloomy economic projections, Prasad highlighted that Nifty 50 earnings could prove more durable than anticipated in the short term. About half of Nifty 50 profits derive from sectors somewhat protected from domestic economic shifts. Oil and gas firms contribute roughly 20% of index earnings, IT about 12-13%, telecom 4%, regulated utilities 4%, and metals and pharmaceuticals around 5-6%, placing approximately 50% of earnings beyond the immediate reach of a local downturn.
Banks and non-banking financial companies represent another third. A brief interruption lasting one quarter would probably not affect credit expenses or loan expansion much. However, an extended conflict would alter this significantly.
The rest involves sectors sensitive to the economy, such as those reliant on oil, gas, or related products, where prolonged strife could lead to substantial pressures on margins and sales volumes.
Kotak currently projects an 18% growth in Nifty 50 earnings for fiscal year 2027, based on the expectation that the conflict ends by late April or mid-May, allowing oil prices to stabilize. The June quarter might underperform, but recovery could occur later in the year. IT sector results have been lackluster this period, while other corporate earnings have generally been solid.
Prasad emphasized that if the conflict continues, estimates for the domestically influenced portion of earnings would require downward adjustments soon.
