Indian Equities May Rally into FY27 if Iran Conflict Resolves by End of March

Fiscal Year 2027 Outlook for Indian Equities

The Senior Director, Head of Equities at Waterfield Advisors, Vipul Bhowar, has expressed optimism regarding the potential for Indian equities to experience a strong year in fiscal year 2027, provided that the ongoing conflict in Iran reaches a definitive resolution by the end of March.

According to Bhowar, the transition from panic to recovery is expected to be volatile, with the first quarter of FY27 potentially witnessing turbulent sideways consolidation before a sustained rally. The recent decline in the market can be attributed to external macroeconomic shocks rather than domestic microeconomic issues.

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Bhowar noted that the growth outlook for India Inc. remains stable due to robust GDP figures, but operating margins are being substantially downgraded for the first half of fiscal year 2027. Conversely, earnings forecasts for domestically oriented banks are relatively resilient, buoyed by strong credit growth.

The Reserve Bank of India (RBI) projects FY26 inflation at 4.2%, with upward pressure from precious metals and geopolitical uncertainties. Despite this, India's domestic momentum, driven by state capital expenditure and robust consumer demand, is sufficient to counterbalance geopolitical headwinds.

In the event of a conclusive resolution to the Middle Eastern conflicts in April, a significant and pronounced reversal in foreign institutional investment (FII) flows is highly likely. This is due to a structural global shift, as foreign investments are reallocating capital towards the global artificial intelligence and semiconductor hardware sectors.

The defence manufacturing sector, power generation and transmission, and capital goods industries are currently benefiting from sustained multi-year visibility in their order books, driven by government Production-Linked Incentive (PLI) schemes and an emphasis on achieving self-reliance in manufacturing.

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The Reserve Bank of India (RBI) is expected to demonstrate its ability to manage liquidity, facilitate credit flows, and ensure market stability through targeted, non-rate measures while awaiting a resolution of the current geopolitical uncertainties. The RBI will hold the policy repo rate unchanged at 5.25 percent and maintain its neutral stance.

Currency stability is fundamental to the allocation of foreign corporate capital. A stable Indian Rupee (INR) significantly reduces offshore borrowing costs for Indian manufacturers seeking to expand their capacities.

While there is some pressure on asset quality, it appears to be contained rather than indicative of systemic concern. The stress is primarily concentrated in unsecured retail products such as personal loans, credit cards, and microfinance.

If the ongoing conflict extends into the first quarter of fiscal year 2027 (April to June), a structural energy shock, systemic supply chain paralysis, and a significant recalibration of global growth are likely to occur. During the fourth quarter earnings season, management commentaries will adopt a universally cautious tone, and forward guidance for the following quarter will likely be rescinded or substantially downgraded.

In May, a flight to safety can be anticipated, with global equities undergoing widespread selling, the US Dollar and gold appreciating significantly, and the Middle East facing secondary supply shocks resulting from a prolonged blockade. For India, this scenario will entail a sharp increase in raw material costs just ahead of the critical Kharif sowing season, driving up agricultural input costs and posing a threat to food inflation.

By June, topline revenue estimates will finally begin to deteriorate for corporates, no longer solely an issue of margins, but also volume contractions as consumer demand wanes both globally and domestically. Global central banks, including the US Federal Reserve, will be compelled to abandon any residual expectations of interest rate cuts and may even consider increases to combat wartime-induced inflation.

The Reserve Bank of India may find it necessary to implement defensive rate hikes or enforce stringent liquidity tightening measures to safeguard the Rupee and stabilise inflation expectations, likely triggering a broad-based contraction in valuation multiples across Indian equities, including resilient domestic sectors.