With the end of the conflict in West Asia in sight and the consequent sharp correction in crude prices, headwinds for the Indian economy and markets are weakening, while tailwinds are slowly strengthening.
Brent crude, which had peaked at $119.5, has corrected sharply to below $81 in evening trade on 16 June.
The initiatives of the government and the RBI to attract foreign capital inflows through bonds and FCNR B deposits, and stabilise the rupee, appear to be yielding results.
The rupee has appreciated from a low of 96.96 to the dollar, touched on 20 May, to 94.5 to the dollar on 16 June.
Will the expected dawn of peace in West Asia, particularly the opening of the Strait of Hormuz, turn the tide for the Indian economy, which has been facing severe macro headwinds since the start of the war?
What are the implications of the positive developments in West Asia and the consequent crash in crude oil on Indian stock markets?
The US and Iran have reached an agreement to end their conflict and reopen the Strait of Hormuz.
Anticipating the dawn of peace, Brent price has corrected sharply to below $81.
The RBI in the latest monetary policy announcement on June 5 had lowered India’s GDP growth for FY27 to 6.6% from 6.9% earlier and had raised the inflation target to 5.1% from 4.6% earlier.
This downward revision in GDP growth rate and upward revision in inflation rates were announced in the context of the geopolitical uncertainty in West Asia and the crude price remaining elevated.
Now that the uncertainty is over and India’s BoP deficit is getting addressed through capital inflows and declining crude, the GDP growth rate can be revised upwards and inflation rates downward to 6.9% and 4.6%, respectively, for FY27. This will have positive implications for the stock market, too.
Rally will be strong in the short-term
The relentless FPI selling is likely to slow down and taper significantly in the context of rupee appreciation.
This will be positive for banking stocks, particularly the leading private banks, which have been bearing the brunt of the relentless FPI selling in India.
More importantly, their valuations are attractive in the otherwise fairly valued market.
Capital goods are another segment which is likely to do well, particularly the market leader, which will benefit from the reconstruction in West Asia.
Power is one segment which has been doing well and will continue to do well in the context of the potentially explosive power demand emanating from the massive investments in Data Centers.
Within power, renewables will continue to do well, despite their high valuations. In the ongoing rally, defensives like pharmaceuticals and FMCG are unlikely to participate with gusto.
The broader market story in India is looking bright. Valuations are high in the broader market: Nifty Midcap 100 is trading at 29 times, and Nifty Smallcap 250 is trading at 33 times.
These are high valuations compared to the Nifty 50 PE of about 21 times.
However, the high growth potential of the mid and small caps and the better-than- expected Q4 FY26 results of this segment bode well for them despite their elevated valuations.
Sustained rally will take time
For the rally to sustain and take the market to much higher levels, FPIs should turn buyers in India.
This is unlikely to happen soon since the AI trade continues to be strong and markets like South Korea and Taiwan continue to outperform, driven by fundamentals.
Since Indian valuations continue to rule relatively higher, FPIs may turn sellers at higher levels.
Therefore, investors should exercise some caution even while riding this rally.
Disclaimer: The author of this article is Chief Investment Strategist at Geojit Investments. Views are strictly of the author, and not of Mint. This article is for educational purposes only and does not constitute investment advice. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
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