India Perspectives - Elevated oil prices continue to weigh on Indian markets

Highlights: Despite US and Iran agreeing on a ceasefire almost a month back, the Strait of Hormuz still remains effectively closed. The ongoing oil price shock has clouded the growth outlook over the next 12-18 months. We are neutral on INR local currency bonds despite attractive yield on offer, as higher inflation and the potential for greater supply lead to a balanced risk-reward. We retain our tactical mild underweight stance on Indian equities, as they are likely to struggle to outperform global equities until oil prices stabilise.

• The Reserve Bank of India (RBI) kept interest rates unchanged at the April Monetary Policy Committee (MPC) meeting, while downgrading the GDP growth and increasing inflation forecasts. We expect the central bank to keep interest rates unchanged in the near-term as we expect inflation to remain within its 2-6 per cent range
• We retain our tactical mild underweight stance on Indian equities, as they are likely to struggle to outperform global equities until oil prices stabilise. While valuations have moderated, weak investor sentiment due to higher oil prices and limited exposure to the AI investment cycle are likely near-term drags. We therefore favour more defensive large-cap stocks. We also prefer domestically oriented sectors and are overweight Financials and Industrials
• We are neutral on Indian local currency bonds. While we acknowledge the risks from higher inflation and supply, current yield of around 7 per cent offers investors attractive carry and adequate risk premium. We are bearish on INR, as persistent outflows and concerns about a wider current account deficit are likely to weigh on the currency in the near-term