Indian equities entered FY27 on a relatively firm footing, supported by improving domestic demand, healthy March-quarter earnings, and record GST collections of Rs.2.43 lakh crore in April. The manufacturing PMI rose to 55.0 in May, while the top four automakers reported 25% year-on-year volume growth for the month, underscoring a still-supportive domestic backdrop. However, the macro environment has become more challenging.
The West Asia conflict, now in its fourth month, has had a deeper-than-expected impact on energy markets, with crude prices rising from an average of about $67–68 in FY26 to above $103 in recent months. This sharp increase has direct implications for India’s total import bill, inflation, and corporate margins. Wholesale price inflation accelerated to 8.3% in April from 0.83% in December 2025. Despite this, FY27 Nifty EPS estimates have been lowered by only 2–3%, indicating that the market may not yet be fully pricing in the broader economic impact. In addition, the Russia-Ukraine conflict and continuing US-China trade policy continue to pose risks to global supply chains across oil, chemicals, metals, and soft commodities.
Geopolitical pressures are being compounded by a weaker monsoon outlook. The India Meteorological Department now expects the 2026 southwest monsoon to be 90% of the Long Period Average, with the probability of deficient rainfall rising to 60%. A return of El Niño conditions, which is expected to strengthen through September, increases the risk of lower agricultural output. Rural CPI inflation has already risen to 3.7% in April, while the RBI has projected CPI of 5.1% for FY27. At the same time, real wage growth has softened, and rural consumer confidence has weakened following the escalation in West Asia. There are, however, some buffers in place. Reservoir storage is at 33% of capacity, above last year’s 30% and the 10-year average of 27%, while food buffer stocks remain adequate. Even so, these supports could weaken if monsoon conditions deteriorate further, increasing the risk of higher agricultural prices and renewed pressure on rural demand.
Even so, Indian equities have remained relatively resilient. Sustained domestic inflows since April, better-than-expected March-quarter earnings, and expectations of a possible diplomatic de-escalation in West Asia have prevented sentiment from turning decisively negative. Valuations have also corrected meaningfully. The Nifty 50 one-year forward price-to-earnings multiple has eased from elevated levels earlier in the year to 18x, reducing downside risk. In this environment, large-cap stocks, which are now closer to their long-term average valuations, appear better placed to attract incremental allocation relative to richer mid- and small-cap segments.
What should investors do?
Investors may be better served by prioritising quality large-cap exposure over expensive mid- and small-cap names at this stage. Sectors with direct rural demand exposure, including tractors, two-wheelers, FMCG, fertilisers and sugar, warrant caution in the run-up to what could be a weaker monsoon season. By contrast, power, air conditioners, and financials supported by RBI policy tailwinds offer more selective opportunities. Key variables to monitor include the progression of the monsoon, rupee movement, developments in US-India trade discussions, and any signs of a ceasefire in West Asia, all of which are likely to shape market direction. With Q1FY27 expected to absorb the sharpest impact of higher input costs, the environment may remain volatile. In that context, a measured and patient stance, rather than reactive selling, appears more appropriate.
(Vinod Nair is Head of Research, Geojit Investments Limited)
Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
