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The Indian economy is facing a double whammy of higher oil prices, driven by the ongoing US-Iran conflict, and a weak monsoon this year, adding another layer of uncertainty for investors in the Indian stock market.
Oil prices have been up most of the year now due to supply disruptions caused by the US-Iran conflict. The Strait of Hormuz - a narrow waterway through which about 20% of the world's oil and liquefied natural gas (LNG) passes - is still only partially open.
Higher oil prices are a major negative for the Indian economy and the markets, as the country is the world's third-largest importer of the commodity and meets about 85-90% of its oil requirements through imports.
Higher oil prices can distort India's fiscal maths, shoot up inflation, trigger monetary tightening, weigh on demand, and erode corporate profitability.
Other than oil prices, the second major macro risk is a poor monsoon this year.
As brokerage firm Motilal Oswal Financial Services highlighted, this year's southwest monsoon season is ending weakly and unevenly. While all- India rainfall was about 15% below the long-period average (LPA) as of 23 September, the national average masks large regional differences, the brokerage firm underscored.
According to Motial Oswal, East and Northeast India (-27%) and Southern India (-26%) have seen the sharpest deficits, while Central India is relatively better placed at -6%. Among major states, rainfall deficit stands at 37% in Bihar, 30% in Karnataka, 27% in Kerala, and 26% in Assam.
A poor monsoon can fuel food inflation, impact rural incomes, and overall demand. As Motilal Oswal pointed out, while total kharif sowing reached 99.95 million hectares as of 18th September, only 1.4% below last year and around 2% below normal, the national rice acreage dropped 3.7% YoY.
Besides, reservoir storage across 178 monitored reservoirs is at 71% of live capacity, compared with the normal 78.1%, implying a 9.1% deficit, according to the brokerage firm.
"The macro outlook is likely to become more challenging in Q3FY27, as the weak and uneven monsoon, alongside rising El Niño risks, could feed into food prices. Elevated crude prices and high input costs are adding pressure across transportation, energy and manufacturing, with WPI inflation already near 10%," Motilal said.
The current challenging macroeconomic environment could lead to greater volatility across equities, bonds and currencies. Import-intensive sectors and rate-sensitive assets are particularly at risk, even though India’s underlying macroeconomic buffers may provide some resilience against external shocks.
This is certainly not a time to make any aggressive bets. Investors should focus less on short-term market swings and more on portfolio resilience.
"Maintain adequate diversification, avoid excessive leverage, and favour businesses with strong balance sheets, pricing power and relatively low sensitivity to energy costs," said Apurva Sheth, Head of Market Perspectives and Research, SAMCO Securities.
"It is also important to distinguish temporary commodity-price volatility from a persistent deterioration in inflation and growth. With uncertainty elevated, disciplined asset allocation and a staggered investment approach may be more appropriate than making large directional bets," said Sheth.
Sheersham Gupta, Director, Rupeezy, said from a sector perspective, investors should watch domestic consumption and financial services, but selectively rather than taking a broad sector bet.
Gupta underscored that with a weak monsoon potentially affecting rural incomes and elevated crude oil prices increasing input costs, businesses with strong brands, pricing power, healthy balance sheets and greater exposure to urban consumption could prove relatively more resilient.
"Investors should closely monitor sectors such as aviation, paints, tyres and chemicals, where sustained high crude prices can directly feed into operating costs. The key distinction is not simply which sector benefits or suffers from high oil prices, but which companies have the ability to absorb or pass through that cost without materially affecting demand or margins," said Gupta.
For retail investors, macroeconomic challenges are not necessarily a reason to step away from equities or attempt to time the market.
According to Gupta, the better approach is to stay invested through SIPs, diversify across asset classes and deploy fresh capital gradually.
"In uncertain markets, investment discipline matters more than predicting the next macro trigger,” Gupta emphasised.
Disclaimer: This article is for educational purposes only and does not constitute investment advice. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
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