Till the 28th of February this year, the Indian economy was in a sweet spot. GDP for FY26 was estimated to grow by 7.6 percent; CPI inflation was running at 2.75 percent; fiscal deficit and current account deficits were well within targets of 4.4 percent and 1 percent respectively; forex reserves at around $720 billion were comfortable and Brent crude was trading at around $70. The fiscal and monetary stimulus provided by the government and the RBI respectively in 2025 had boosted the earnings growth prospects for FY27 and Nifty appeared to be resilient trading around 26000 levels.
The conflict in West Asia that began on 28th February completely changed the macro landscape. The energy crisis triggered by the war exposed the soft under belly of the Indian economy – India’s dependence on energy imports and its consequent vulnerability to external shocks. The energy crisis triggered by the war transformed the economy from a position of strength to one of vulnerability. The widening CAD, worsened by the massive FPI outflows, weakened the currency, which, in turn, triggered more FPI outflows.
Sensing the hit to the economy and corporate earnings, the market started trending down with the Nifty touching a low of 22331 on 30th March – a 15 percent correction from the year’s high. With no end to the war in sight and crude prices remaining elevated, market sentiments had turned distinctly negative.
Crisis averted
If crude prices had remained above $95 for a few months more, India’s macros would have come under severe strain. But fortunately, a tentative deal has been reached between US and Iran and consequently there has been a sharp correction in the price of Brent crude to below $80. This is a big relief for the Indian economy. Even though confusion still remains regarding peace in West Asia and a lasting deal between US and Iran, market has discounted an end to the hostilities. This is the signal from the crude market where Brent is trading below $80. The worst for the economy is behind us.
Partly preparing for higher crude prices to remain longer, the RBI in the 5th June monetary policy had lowered India’s GDP growth rate for FY27 to 6.6% from 6.9% earlier and raised inflation for FY27 to 5.1% from 4.6% earlier. Now, with crude trading below $80 level, the current account and BoP deficits have become manageable. GDP growth rate for FY27 can be higher than RBI’s latest projection of 6.6 percent.
Policy initiatives from the Government and the RBI
On 5th June, the government announced an important policy decision to exempt interest and capital gains on FII investment in government securities from taxes. This is expected to facilitate more FII investment in government securities. More significant decision came from the RBI allowing commercial banks to raise deposits through the FCNR B route with the RBI bearing the hedging costs. Other measures included enlarging the scope of securities available through the FAR (Fully Accessible Route), currency swap facilities to PSUs etc. The market expectation is that these measures can bring in capital flows to the tune of around $60 billion, enabling easy financing of the BoP deficit.
Stability in rupee
Following these measures to attract more capital flows, rupee has appreciated from the recent low of 96.96 to the dollar touched on 20th May to about 94.40 by 21st June. FII selling appears to be tapering off, and Nifty has recovered about 1800 points from the March lows, indicating better times for the economy and markets.
Concerns surrounding poor monsoon
Assuming that there won’t be any flareups in crude prices, one can say with conviction that Indian economy has turned the corner. A concern now is the poor monsoon, so far, this season and the Indian Meteorological Department’s forecast of poor monsoon which can be 90 percent of long-term average. If the monsoon turns out to be as per prediction, that will impact growth of the agriculture sector and thereby the growth of the economy, too, marginally. But this is unlikely to become a serious problem since we have record food grain reserves and good storage levels in reservoirs. Also, since 55 percent of agriculture land is under irrigation poor monsoon will not have big negative impact. However, the situation may deteriorate if a strong El Nino triggers a drought. Therefore, the progress of the monsoon has to be watched.
Interest rates have bottomed out
Since inflation will be higher in FY27, RBI has no more room to cut interest rates. The rate cutting cycle is over. There is a possibility of a rate hike by the end of this year.
India’s corporate earnings for FY26 came much better than expected at 15.6 percent for Nifty 500. The mid-caps and small-caps have outperformed the large-caps in earnings. From the valuations’ perspective, large cap valuations are fair while mid and small cap valuations are elevated. However, the earnings growth potential is higher in the mid and small-caps.
