With Brent crude approaching the $100 per barrel mark, concerns are growing about the potential impact on inflation, fiscal balance, and growth.
In a conversation with ETMarkets’ Kshtij Anand, Girima Kapoor, vice president of research and economics at Elara Capital, warned that sustained crude oil prices above $100 could reduce India’s GDP growth by 1 percentage point, given the country’s reliance on energy imports.
She also shared her views on rupee movements, sectoral opportunities amid market volatility, implications of FPI exits, and how investors should restructure their portfolios in the current uncertain environment. Edited excerpts –
Q) The IT sector seems to be the worst affected by the AI commentary but with geopolitical tensions other sectors have also started seeing some adverse impact. Which sectors are currently at attractive levels?
A) Nifty Bank is currently trading at a trailing PB ratio of around 2x below the 5-year median of 2.7x which looks attractive.
This marks one of the lowest levels since the pandemic era, reflecting pressure from broader market volatility, a weaker rupee, and rising borrowing costs—but also a relative attractiveness for the sector with strong long-term structural drivers such as credit growth, improving asset quality, and India’s consumption/investment cycle.
Pharma appears to be flexing between structural fundamentals and a defensive play in the current market volatility. Given the global inflation trade, we prefer hard assets, metals and power sector plays
Q) What could be good, bad and bad for Indian markets in the near term?
A) Good: Easing geopolitical tensions (especially in the Middle East and around Taiwan) remains the biggest positive catalyst. A faster stabilization could ease oil price pressure (Brent has risen to $100+/bbl during the recent rally), restore risk appetite, support FPI flows, and allow the rupee to stabilize or appreciate towards the 90-91 level. This will reinforce India’s macro stability narrative and boost sentiment across the board. Revenue growth from Q3 of FY26 is encouraging.
Bad: Persistent pass-through of energy shocks to the demand side, leading to a marked erosion in consumption and investment demand. Higher oil levels (currently boosted by Middle East tensions) could widen India’s current account deficit, fuel import inflation, and squeeze corporate margins – especially in the oil-sensitive sectors. Continued weakness of the rupee (recently hovering near the 92 level) is driving up import costs and adding to borrowing pressures. Bad: A multi-faceted downside scenario that combines an energy shock and falling demand, continued rupee depreciation, feed rate slowdown (or even fears of a US oil cut). Globally, the expansion of terminology, and the re-intensification of geopolitical flashpoints (for example, Taiwan Strait tensions or further Middle East escalation). This could lead to faster equity reforms, higher bond yields, tighter liquidity, and a challenge to India’s growth story – potentially cutting GDP estimates by 50-100 bps if prolonged.
Q) FPIs were net sellers in 2025, and the story continues in 2026 may be for a different reason now. The story seems to be changing around the FDI route as India opens channels for Chinese investment in several industries. What are your thoughts?
A) FPI outflows remain a drag — 2025 sees record net sales of around Rs 1.66 lakh crore (~$18-19 billion), driven by higher valuations, currency volatility, and global positioning away from EMs and lack of AI plays.
The shift towards FDI, particularly through relaxed regulations for border countries (including China), is a significant positive development.
Recent cabinet approvals (March 2026) ease restrictions in sectors such as electronic components, capital goods, solar cells, and polysilicon/wafer manufacturing—allowing limited automatic route investment (up to 10% non-controlling stakes) and fast-track approvals (for manufacturing within 60 days).
It can create technological know-how, develop complex manufacturing capabilities (eg, in EVs, renewables, and electronics), and support “Make in India” by localizing supply chains and reducing import dependency.
All in all, this is a practical step for growth if managed with protections regarding copyright, IP, and national security.
Q) The rupee seems to be hitting fresh lows every week – where do you see the currency heading and how will it affect the Indian market/economy?
A) The rupee has weakened significantly, recently trading in the 91.9-92.5 range, reflecting oil shocks, FPI outflows, and global dollar strength. In the short term, a move towards 95 remains possible without aggressive RBI intervention (through forex sales or liquidity instruments), especially if oil remains high or geopolitical risks persist.
However, any meaningful reduction in Middle East tensions could trigger news-driven positive sentiment, potentially pushing it back towards 90-91 or stronger as liquidity returns and risk appetite improves.
The effects of a weaker rupee include: higher imported inflation (hitting macros), higher borrowing costs, pressure on corporate earnings (especially importers), and balance sheet volatility—but a weaker rupee helps exporters and could support IT/pharma competition if global demand is there.
Q) Will crude oil above $100/bbl and above hurt Indian markets and macros? We are building an investment space to the world on our macro stability which may be challenged in the near future. What are your thoughts?
A) Yes — sustained $100+/bbl crude oil year-over-year is a major headwind for India, given its ~85-90% energy import dependency. This could contribute a full ~1 percentage point to GDP growth through higher spending, lower consumption, and fiscal pressure.
Inflation is subject to an upward shock of ~70 bps (if the government passes through the impact of pump prices and LPG), complicating RBI’s balancing act.
On the FX side, this weakens any move near the 89 levels, as growth/inflation risks rise.
Fiscal responses (subsidies, duty changes) and RBI’s potential long-term rate hikes could raise benchmark yields, raise corporate/government borrowing costs and weigh on capex/investment cycles. India’s macro stability pitch (strong growth, controlled deficits) faces a real test if prices remain high.
However, it is worth noting that India entered the oil price shock with relatively low inflation, low CAD, high growth and a low fiscal deficit. So a sharp change in crude prices amid the downturn is unlikely to have a significant impact.
Q) How should investors restructure their portfolios during periods of increased volatility? Which subject/asset classes should they be overweight or underweight? (Assuming the person is between 30-40 years old)
A) Volatility is increasing due to geopolitical/oil risks, so defensive revision makes sense for now. However, it is also important to separate the wheat from the chaff. Broad corrections in names where the long-term story remains can present a buying opportunity amid recent corrections – such as aviation, ports, utilities, autos, banks.
Since the war will push up inflation and thus sovereign yields, we are wary of high-PE names and cycle-sensitive bonds (as RBI keeps rates long amid inflation, limiting returns; global duration faces similar pressures).
Among asset allocation bets, we would remain overweight gold – it is a classic hedge against inflation, currency weakness, and geopolitical uncertainty, with steady central bank demand.
Q) What do you advise investors to avoid doing in the current environment? We have already seen over 3% decline in SIP flow on MoM basis.
A) India’s long-term growth story remains. With the recent correction in the markets, our relative valuation has decreased against EM peers (1.65x MSCI India to MSCI EM vs 1.7X as of early 2026).
Across seven major geopolitical conflicts over 25 years – the Iraq War, the Lebanon War, the Libyan Civil War, Russia-Ukraine, Israel-Hamas, Iran-Israel, and the current US-Iran conflict, the Nifty’s average decline is 6%, with the worst 10% during the Iraq War.
Average days to: 11. Average recovery: 15 days, with an average recovery gain of 7%. In our opinion, taking into account the historical examples, the downside risk is limited to 4-5% of the current level.
The path after the conflict looks good: the average Nifty returns +4.5% in 3M, +11.7% in 6M, and +26.2% in 12M. The only exception is the 2011 Libyan crisis, when Brent stayed above 100 USD/bbl for three years, the Nifty was effectively flat from 2011-2013 until crude oil softened.
(Disclaimer: The suggestions, recommendations, views and opinions given by the experts are their own. They do not represent the views of The Economic Times)
