India Perspectives - Feeling the heat from higher oil prices

Highlights: Higher oil prices linked to the Middle East conflict are negative for India, given its reliance on energy imports from the region. We see an increased risk of a wider fiscal deficit and have revised our GDP growth forecast lower. Last month, we downgraded INR local currency bonds to neutral, as higher inflation and the potential for greater supply weaken the risk-reward. We have also tactically downgraded Indian equities to a mild underweight in our global asset allocation, as investor outflows, the risk of margin compression and slower economic growth present headwinds in the near-term.

• In the scenario where oil prices average USD 80/bbl, we expect the FY27 (April 2026 – March 2027) GDP growth at 6.3 per cent (versus 7.0 per cent forecast previously). While the recent reduction in fuel excise duty is supportive of consumption, we expect lower revenues to lead to modest fiscal slippage in FY27
• The Reserve Bank of India (RBI) is likely to keep interest rates unchanged at the April Monetary Policy Committee (MPC) meeting, as it is likely to adopt a wait-and-watch approach to assess the impact of higher oil prices. We have revised our FY27 inflation forecast to 4.5 per cent (versus 4.0 per cent previously)
• We have downgraded Indian equities to a mild underweight, as they are likely to struggle to outperform global equities until oil prices stabilise. Our relative preference between bonds and equities remains unchanged for domestic investors. While valuations have moderated, we see risks of margin compression and continued foreign outflows. We therefore favour more defensive large-cap stocks over small- and mid-cap stocks. Within sectors, we remain overweight Financials, and Industrials, but reduce Consumer Discretionary to neutral
• We have also reduced Indian local currency bonds to neutral. While INR-denominated bonds continue to offer attractive yields, the spectre of higher inflation and increased bond supply weakens the risk reward. We also tactically turned 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