India Perspectives - Lower oil prices supportive for growth

Highlights: The swift decline in oil prices due to partial re-opening of the Strait of Hormuz has led us to upgrade our GDP growth forecast for FY27 (April 2026-March 2027) to 6.3 per cent y/y from 6.0 per cent previously. However, weak monsoon rains risk hurting rural growth, and need close tracking. INR bonds have seen uptick in foreign flows and decline in yields over the past month, but risk of RBI rate hikes leads us to retain a neutral stance. We retain our tactical mild underweight stance on Indian equities, as they are likely to struggle to outperform global equities given relatively lower earnings growth, higher valuations, and limited exposure to the AI investment cycle.

• Both headline and core inflation picked up meaningfully in May. We expect 5.1 per cent inflation in FY27, with the possibility of inflation exceeding 6 per cent for some monthly prints. We believe the RBI would focus on curbing inflation, and we look for two 25bp rate hikes in Q4 2026, bringing the benchmark rate to 5.75 per cent
• We retain our tactical mild underweight stance on Indian equities. From a relative perspective, north Asian markets continue to offer cheaper valuations, higher earnings growth as well as exposure to the AI trade compared to India. 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. Recent tax cuts and increased FAR universe have resulted in a pick-up in foreign inflows. Lower oil prices also reduce the risk of fiscal slippage and higher supplies. However, the risk of RBI rate hikes leads us to view the risk-reward as balanced. INR has stabilised following the announcement of a raft of FX policy measures last month. However, broad USD uptrend and technical factors are likely to keep the currency rangebound in the near-term