Rising oil prices amid ongoing geopolitical tensions are emerging as a key risk for Indian equities, with potential implications for both earnings growth and market valuations, according to a report by international brokerage firm UBS. While near-term earnings may remain relatively insulated, sustained elevation in crude prices could begin to weigh meaningfully on corporate profitability and macro stability over the medium term.
The larger concern, however, lies in FY27 if crude prices remain elevated. UBS estimates that a 20% increase in crude could compress earnings by around 1.5 percentage points. At oil prices of $120 per barrel, FY27 earnings growth could slow by about 5 percentage points, from the current consensus of 16% year-on-year to roughly 11%.
India’s dependence on energy imports adds to the vulnerability. The country imports about 85% of its crude oil and nearly 50% of its LNG. Around half of oil imports and 60% of LNG shipments pass through the Strait of Hormuz, which is currently effectively shut, raising risks to the import bill, current account deficit and the rupee.
On valuations, UBS noted that Indian markets have re-rated about 10% since February-end. In past stress episodes such as 2011, 2013, 2018 and 2022, valuations typically corrected to around one standard deviation below the five-year average. A deeper correction was seen only during the COVID-19 disruption. UBS does not expect a similar magnitude of de-rating this time, even in a prolonged conflict scenario.
Given this backdrop, the brokerage said it prefers defensive names and stocks that have corrected recently, while also highlighting 10 stock ideas identified by its analysts in the current environment.
UBS said its stock selection strategy is centred around three buckets. The first includes defensive names that offer resilience in the current macro environment, such as Sun Pharma, Reliance Industries, Bharti Airtel and NTPC.The second category comprises stocks that have been caught in the cross-fire of uncertainty but where the underlying impact is expected to remain limited, including Hindalco, Adani Ports and SEZ, and Godrej Consumer Products. The third bucket focuses on structural winners with strong fundamentals that have become more attractive following the recent correction, with Apollo Hospitals, ICICI Bank and SBI Life highlighted as key picks.
The pressure is compounded by currency moves. A 1% depreciation in the rupee against the U.S. dollar could translate into an additional c1% drag on equities, as higher inflation risks and potential foreign outflows weigh on sentiment.
Recent market moves reflect these dynamics. Oil prices have risen about 55% since the start of the conflict, while the rupee has weakened around 3.5%, implying a combined impact of roughly 11% on the market. Software services stocks, however, have held up relatively better, aided by prior de-rating during the February sell-off.
In the near term, UBS expects the impact on March 2026 quarter earnings to remain manageable, supported by inventory buffers. That said, sectors such as airlines, oil marketing companies and agrochemicals are likely to face more immediate cost pressures.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)