Market Sentiment Suggests Increased Downside Risk Over Sustained Bounce

Market Experts Warn of Further Weakness Amid Oil Supply Disruption

The ongoing oil supply disruption in the Strait of Hormuz has left the market on high alert, with experts warning of further weakness in the coming months. According to Anirudh Garg, Partner and Fund Manager at INVasset PMS, the current setup warrants caution, with crude sustaining above $110 and Foreign Institutional Investor (FII) outflows crossing $20 billion through April.

Garg has not positioned aggressively in either direction at this stage, emphasizing that capital preservation is more important than trying to catch the bottom in this phase of the cycle. He believes that the longer the Strait of Hormuz remains closed, the more challenging the outlook becomes. If the situation normalizes by September, a rebound in FY28 still appears plausible. However, if the disruption extends into the second half, even those expectations may need to be recalibrated.

The math behind the potential impact of the oil supply disruption is straightforward. India imports 88 percent of its crude oil and has already lost over 40 percent of flows since the Strait of Hormuz closed. If the disruption persists for another two months, GDP growth could slip below 6.5 percent for FY27, while inflation may remain above 5 percent. The current account deficit would widen meaningfully, putting additional pressure on the rupee.

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The RBI has adopted a wait-and-watch approach given the evolving macroeconomic outlook, and that posture appears appropriate for now. Inflation at 3.48 percent and policy rates at 5.25 percent leave room for manoeuvre if required. The fiscal deficit is currently tracking at 4.4 percent, leaving limited space for aggressive spending without compromising the fiscal consolidation path.

Targeted measures to support supply chains and exports would make sense, but any drastic intervention appears premature unless the Strait situation worsens materially or growth decelerates sharply. The current stance strikes a balance between vigilance and prudence.

Garg's team has revised growth estimates down to the mid-six percent range and earnings growth to the high single-digit, assuming crude sustains near current levels through the first half. The Hormuz closure has disrupted over 40 percent of India's crude flows and pushed oil prices back above $100 a barrel, narrowing margin runway and increasing input costs across sectors such as autos, chemicals, and consumer discretionary.

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Valuations and PSU Banks

India's valuations still look reasonable, with the Nifty trading at 20.6 times earnings. However, the more important question is the earnings trajectory. If crude prices normalize and FY27 earnings growth tracks closer to the mid-teens rather than single digits, India's premium valuation remains justified.

Garg remains selective within PSU banks rather than taking a broad-based approach to the sector. Valuations at single-digit multiples may look compelling on the surface, but performance will ultimately depend on which institutions can sustain clean balance sheets and protect margins, rather than simply appearing statistically cheap.

March Quarter Earnings

The March quarter delivered stable volumes, but profitability was visibly under pressure. Revenue growth for the Nifty remained relatively healthy at 10 to 13 percent, yet earnings expansion stayed constrained at 2 to 6 percent, indicating that margins are where the stress is emerging. Oil prices surged through March while supply chains tightened, and much of that cost pressure could not be fully passed through. The June quarter is likely to carry forward those challenges, with input prices remaining elevated and margin pressure intensifying further in Q1.