A cocktail of geopolitical tensions and El Niño concerns at home has raised rate-hike bets, as surging crude oil and food prices fuel inflation. India Inc, already facing huge foreign equity outflows, could face further pressure if margins come under strain in an inflationary cycle. It may even not participate in the much-hoped "AI reverse" trade if growth moderates ahead.
The fear dragged nearly 400 listed stocks to their 52-week lows on Thursday, with 226 hitting their lower circuit limits. India's macro backdrop is deteriorating, and last one month's steep market correction reflects that reality, Bernstein said in a note.
Modest earnings revision
"Earnings are not seeing upward revisions for FY27 with only a modest 0.2 per cent increase in the past three months and with several sectors continuing to see cuts. Support to PE usually emerges as the earnings burden is shifted to FY28 - and that appears in the one-year forward basis for valuations," it said.
Nifty Smallcap 100 has fallen 8 per cent in the past one month, trimming its year-to-date rise to 3 per cent. Nifty Midcap 100 has erased its yearly gains and is down 5.93 per cent in 2026 after falling 8 per cent in the past one month. The largecap benchmark Nifty is down 13.53 per cent in 2026, but its fall was restricted to 3 per cent in the past one month.
Bernstein said margins will remain a key risk for earnings in the near term and if companies push pricing, which has already started, it will impact growth levels.
Macros take hit
Jefferies said rural indicators have continued to soften, with weak rains driving higher demand for employment guarantees. Consumption trends were healthy in September, though early festive-season data is mixed. The sharp inflation jump is a negative, it warned in India Equity strategy note.
"Higher revenue growth expected in FY27 could support hiring and consumption, though weak monsoon and GST benefits entering the base remain headwinds," the global investment bank said today.
Rate hikes ahead
Radhika Rao, Senior Economist and Executive Director at DBS Bank said the door remains open for a back-to-back hike in December, with inflation set to rise to 6 per cent in the December quarter.
A big source of rising inflation is crude oil prices. Brent has topped $111 a barrel, while WTI approached $98 a barrel, following attacks on Saudi Arabia’s energy infrastructure and airports.
A drone strike targeted Saudi Aramco’s 1 mbd Shaybah oilfield, although production remained unaffected, while another attack targeted Dammam airport. The US subsequently ordered the departure of non-essential embassy personnel and their families, said Choice Broking.
It said declining OECD inventories, widening Brent-WTI spreads and elevated tanker freight rates reflect persistent tightness in global crude markets. Reduced inventory buffers and constrained shipping capacity have weakened the market's ability to absorb additional supply disruptions, it said.
"We expect geopolitical uncertainty to sustain elevated near-term pricing premiums, while further escalation in the Middle East could trigger a disproportionate upward price response," the brokerage said.
Further downside?
Nifty valuations are now at six-year lows. Bernstein said it may sound a tempting proposition despite modest earnings growth over last two years and this is why it is building in modest returns from here.
"This anchor, however, may be a bit misleading. Firstly, broader markets remain expensive, buoyed by unprecedented domestic flows. Secondly, derating of markets is a much longer process hence we are not calling for new paradigm for India valuations at this stage. Relative to global peers, the valuation argument is harder to make: Nifty remains the third-costliest market globally and is more expensive than several Asian markets that offer much stronger medium-term growth," it said.
LTCG cut may not be enough
Bernstein said lower long-term capital gains tax is desirable for a capital-starved economy, but it believes an LTCG cut by itself is unlikely to drive sustained Fll inflows without a recovery in India's growth and earnings cycle, which remains elusive.
"A sharp 1-2 day market rally that a cut would trigger may actually be used to offload positions. Al adoption is still in early stages, making near-term threat to India limited in our view, although risks to white-collar employment and services exports could become significant over the next few years," it said.
The foreign brokerage said India is unlikely to benefit materially from a near-term pause in the Al trade: it offers neither the return profile nor the investment opportunities attracting global capital into Al today. It may be some time of away for portfolios to turn black.
Disclaimer: Business Today provides stock market news for informational purposes only and should not be construed as investment advice. Readers are encouraged to consult with a qualified financial advisor before making any investment decisions.