Tariffs, AI, war, oil: what next for Indian stock markets

And then it all fell apart after the US and Israel attacked Iran and the latter retaliated by attacking other Gulf nations and shutting the crucial waterway of the Strait of Hormuz.

“The Indian equity market has digested a lot of good news…and ignored them,” American investment bank Morgan Stanley’s analysts said earlier this month. “The trailing 12M (12-month) performance is almost the worst in history and relative valuations are at previous troughs.” Since Morgan Stanley’s comments, the Sensex and Nifty are down 4.4% each, even after taking into account the near-3% rise this week. Since the war began in West Asia, both the benchmark indices are down 5.6%.

Note: Nifty, exchange rate month-end levels; crude oil price average for month. Source: NSDL, NSE, PPAC

The last year-and-a-half has seen Indian stocks hit by several global factors: Donald Trump’s reelection to the White House, his tariff war, the AI investment boom that sent several other countries’ stock markers on a tear, with the consolation for India being it could serve as a ‘reverse AI trade’. And now, it is the war and the supply shock that has sent global energy prices haywire.

Company earnings worries

Even as there is no clarity on when the war will end, the next set of headwinds are lining up, first among them being financial results for the current quarter that will start trickling in from early April.

The surge in crude oil prices is expected to hit profits of several sectors, starting with the likes of oil marketing companies, whose margins have slumped to the lowest in four years as pump prices of petrol and diesel as well as the excise duty on them remains unchanged.

Any sector that uses fuel as an input will be hit, including fertilisers, paints, chemicals, and plastics.

Then there are airline companies, who face the double-whammy of higher fuel costs — which is now being passed on to fliers through a fuel surcharge — and hit to operations. India’s largest airline IndiGo, for instance, gets nearly 20% of its revenue from the West Asia region, Moody’s Ratings noted last week.

The bottomline of banks, too, may not be spared if higher oil prices hit economic activity and lead to muted credit demand and weaker corporate profitability results in loans going bad.

“We reset our Dec-2026 Nifty target at 24,900 (from 29,300 previously). Our base case assumes a 7.5% reduction in consensus earnings estimates,” Saion Mukherjee, Nomura’s Head of India Equity Research, said in a note this week. On Wednesday, Nifty closed at 23,778. A target of 24,900 implies a rise of 4.7% in the next nine months.

It wouldn’t be a market if everyone held the same view, with Kotak Institutional Equities thinking it’s too early to assess the impact of higher oil prices on company earnings, “although downside risks have increased”.

Economy feedback loop

With company results will come the economy’s scorecard. The first of these will be from the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC), which will announce its interest rate decision on April 8.

The central bank cut the policy repo rate by 125 basis points (bps) in 2025, but the energy price shock is threatening India’s Goldilocks era, with economists predicting higher inflation and lower growth.

For market punters, there is no silver lining: if inflation rises, the MPC can’t reduce interest rates any further; growth seen taking a sizable hit – the RBI’s forecast for 2026-27 will tell us much – can’t be good news for the stock market either. Anecdotal evidence of small businesses such as restaurants and road-side eateries shutting shop due to unavailability of gas cylinders is already piling up; the reduction in supply of gas to the manufacturing sector to 80% should reflect in the sector’s output.

Core sector and industrial production data for March (to be released on April 20 and April 28, respectively) and GDP for January-March (May 29) will tell the full story.

Even if the Indian economy manages to withstand the energy price shock, the same can’t be said about the global economy, with stagflation increasingly becoming a concern. Weaker growth abroad would adversely impact India’s exports. Unless things unexpectedly take a turn for the better, Indian markets have to fight one battle after another.