India Perspectives - Looming geopolitical uncertainty dampens trade deal optimism

Highlights: The ongoing conflict in the Middle East has cast a shadow on the optimism witnessed after the US-India trade deal was announced in early February. India is a large importer of oil and is vulnerable to prolonged spike in oil prices. While we acknowledge the heightened risks, we retain our bullish stance on INR local currency bonds as they continue to offer attractive yields and are more defensive. Despite the easing of valuations, Indian equities offer a balanced risk-reward given the ongoing geopolitical risks and persistent investor outflows. 

• 45 per cent of India’s crude oil imports, 60 per cent of LNG imports, and 80 per cent of LPG imports come from the Middle East. Hence, a prolonged closure of the Strait of Hormuz can have significant implications for India’s energy security. Higher oil prices pose downside risks to growth and upside risks for inflation and trade deficit. However, the eventual impact will depend on the magnitude and the duration of the oil price shock
• 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 the ongoing conflict in the Middle East on inflation, which was on an uptrend
• We are Neutral on Indian equities. The valuations for Indian equities have eased due to their underperformance over the past year. However, they remain vulnerable to the ongoing geopolitical risks and investor outflows due to limited exposure to the AI story. Therefore, we favour the more defensive large-cap stocks over the small- and mid-cap stocks. We favour domestically oriented sectors and are overweight on consumer discretionary, financials, and industrials
• Bullish on Indian local currency bonds. INR bonds continue to offer attractive absolute and relative yield and offer diversification benefits due to their low correlation with global bonds. We also view them as a more defensive asset should higher oil prices lead to a risk-off scenario. We are neutral on INR and expect USD/INR to edge towards 90 by end-2026