MUMBAI: As higher oil prices, foreign outflows and slowing corporate earnings growth weigh on markets, Indian investors may need to temper expectations from equities, according to Nilesh Bharkhada, chief investment officer at Kotak Pension Fund.
In an interview with Mint, Bharkhada said rising capital costs could pressure valuations further, while crude oil above $100 a barrel may trigger cuts to earnings and growth estimates.
Edited excerpts:
The government has hiked petrol and diesel prices. Which sectors are the most impacted? How is it going to affect the broader macro environment?
The current price hikes are modest compared to the sharp rise in crude oil prices. Elevated crude prices will either be absorbed by the government, if it expects prices to normalize soon, or passed on to consumers in a staggered manner. Either scenario would be inflationary.
Rising petrol and diesel prices will directly impact sectors such as travel and tourism, fast-moving consumer goods (FMCG) and other discretionary segments. More broadly, economic growth could come under pressure as a sharp rise in inflation affects consumer demand.
Inflation inched up in April. Do you see rising crude prices and El Niño pushing inflation higher? Which companies are likely to be most impacted by higher input costs?
The inflation trajectory is turning upward, with the Wholesale Price Index (WPI)-based inflation for April rising to 8.3%. However, the pass-through to consumers is yet to fully materialize, with retail inflation at 3.48%. Food inflation has remained subdued for a considerable period and has been a key factor in keeping overall inflation under control. However, the India Meteorological Department has forecast below-normal monsoon rainfall this year, which poses an upside risk to food inflation.
Higher crude prices and weather-related disruptions could increase input costs across sectors, particularly for companies with high dependence on energy and commodity-linked raw materials. Oil marketing firms, building materials companies and consumer discretionary players are likely to be among the most impacted.
FPIs have sold cash shares so far in 2026, almost equal to what they sold in all of 2025. Is this concerning?
Foreign portfolio investors (FPIs) have sold aggressively during previous risk-off phases as well, so the trend by itself is not necessarily concerning. However, India runs a current account deficit and relies on foreign capital flows to help manage its balance of payments.
The West Asia conflict is also widening India’s trade deficit, and sustained FPI outflows are adding pressure on the currency, which is a concern in the current context.
What could be the impact on earnings if crude stays above $100 a barrel? Earnings recovery was already under pressure before the West Asia conflict. What changes now?
Markets were positioned for a swift resolution to the West Asia conflict, but the tensions have persisted for a couple of months, pushing crude prices above $100 a barrel. Broader market valuations have corrected as FPI outflows continued.
However, crude oil above $100 a barrel is not factored into base-case market estimates and could lead to downward revisions in earnings and growth projections.
Should investors lower their expectations from equities now?
Yes. As the cost of capital rises, equity valuations will adjust lower. Corporate earnings growth has also moderated in recent years, which means investors may need to temper their return expectations.
India’s PE multiples are falling, but earnings estimates are also being cut. Are valuations really becoming attractive?
India’s valuation multiples have corrected meaningfully over the last 18-24 months. Valuations for large-cap companies are now at or below their long-term averages. Mid- and small-cap stocks, however, continue to trade at a premium, although bottom-up opportunities are available in select pockets at reasonable valuations.
Which sectors are you currently comfortable with?
We remain positive on private banks, the energy value chain, defence, commodities and information technology, including platform companies.
What are the key risks for markets?
India has remained an attractive investment destination and has commanded premium valuations primarily because of its relatively strong growth outlook. Geopolitical risks remain persistent, and India needs to ensure adequate measures are taken to build a more sustained, self-reliant and resilient growth story amid evolving global dynamics.
Fiscal profligacy also remains a key risk, and India should continue to focus on fiscal prudence and capital expenditure over the medium term to maintain macroeconomic stability.