Despite persistent geopolitical tensions, elevated crude oil prices, and global economic uncertainties, India's equity markets are poised to achieve new highs in the latter half of 2026, according to Ajay Garg, Director & CEO of SMC Global Securities.
Navigating Geopolitical Headwinds and Crude Oil Volatility
Garg emphasized that while Indian equities have demonstrated resilience against various global shocks, any escalation in Middle East conflicts would introduce near-term volatility. The primary concern for India is crude oil, given that the nation imports approximately 85% of its requirements. A sustained surge in Brent prices could lead to a wider current account deficit, higher inflation, and pressure on the rupee, ultimately impacting corporate earnings.
Sectors most vulnerable to rising crude prices include aviation, logistics, paints, chemicals, tyres, and oil marketing companies due to their high fuel or crude-linked input costs. Export-oriented businesses may also face challenges from currency fluctuations and softer global demand. Conversely, upstream oil producers could benefit from higher crude realizations, and defence companies may see increased investor interest amid rising global defence spending.
However, Garg highlighted India's robust macroeconomic position, backed by foreign exchange reserves of around $675 billion, recent RBI measures to boost foreign currency inflows, a well-capitalized banking system, and resilient domestic demand. He advised investors to focus on companies with strong balance sheets, pricing power, and sustainable earnings growth rather than reacting solely to geopolitical headlines.
Rupee Movement and Its Corporate Impact
The rupee's trajectory will be influenced by crude oil prices, the strength of the US dollar, and global capital flows. While a gradual depreciation is manageable, a sharp fall coupled with high crude prices could intensify imported inflation and input costs across sectors. Higher US Treasury yields, currently around 4.5–4.6%, have also made foreign investors cautious towards emerging markets, potentially leading to intermittent FII outflows.
Despite these pressures, Garg noted that foreign institutional investors (FIIs) evaluate not only currency but also growth prospects, policy stability, and corporate earnings, areas where India remains competitive. Exporters like IT services and pharmaceuticals may benefit from a weaker rupee, while aviation, oil marketing companies, and import-dependent businesses could face margin compression. India's healthy foreign exchange reserves, robust domestic demand, and continued infrastructure spending provide crucial buffers, ensuring that earnings execution and domestic growth remain primary market drivers.
Q1FY27 Earnings Outlook: Mixed Expectations
SMC Global anticipates a mixed Q1FY27 earnings season, reflecting the contrast between India’s resilient domestic economy and a challenging global environment. Elevated crude prices, currency volatility, and softer external demand have prompted some global brokerages to moderate FY27 earnings growth expectations from 16% to 12–13%.
Positive Surprises Expected From:
- Financials: Driven by low double-digit credit growth, improved asset quality, and healthy retail lending.
- Automobiles: Supported by premiumization trends, strong rural demand, and improving exports.
- Capital Goods, Infrastructure, and Defence: Benefiting from sustained government capital expenditure and a robust project pipeline.
Potential Disappointments From:
- Metals: Likely to remain under pressure due to softer global commodity prices.
- Downstream Oil & Gas: Could experience margin compression if crude prices stay elevated.
For IT companies, investor focus will shift from quarterly numbers to management commentary on AI-led demand, discretionary spending, and new deal wins. Garg emphasized that stock-specific fundamentals, rather than broad market momentum, will determine returns moving forward.
Large-Cap vs. Mid-Cap Strategy
The recent rally in mid- and small-cap stocks, fueled by abundant domestic liquidity, strong retail participation, and improving earnings, has seen them outperform large caps. While monthly SIP inflows consistently exceed Rs 30,000 crore, providing significant liquidity, valuations in several broader market segments have become demanding.
Garg believes the next phase of market performance will be driven more by earnings than by liquidity. In this environment, quality large-cap companies with stronger balance sheets, better governance, and more reasonable valuations are well-positioned to regain leadership. While opportunities still exist in the mid- and small-cap space, returns will become increasingly selective. A balanced portfolio, prioritizing quality large caps while being selective in the broader market, is deemed the more prudent strategy.
Path to New Highs in H2 2026
India's long-term growth narrative remains compelling despite global uncertainties. Resilient domestic demand, moderated inflation, healthy bank credit growth, and consistent SIP inflows reflect growing retail confidence in equity investing. The government's continued focus on growth, evidenced by the Rs 12.22 lakh crore capital expenditure allocation in FY27, provides sustained support to infrastructure, manufacturing, and private investment.
While valuations in certain market segments appear rich after a strong rally, future returns are expected to depend more on earnings delivery than further valuation expansion. External factors such as crude oil prices, geopolitical developments, US interest rates, and foreign capital flows will continue to influence near-term sentiment.
Garg remains constructive on Indian equity markets over the medium to long term, confident that structural growth drivers are intact. If corporate earnings remain resilient and external risks moderate, Indian markets could continue their upward trajectory in the second half of 2026, though periods of consolidation and volatility should be anticipated. He advises investors to avoid chasing momentum and instead focus on diversified portfolios comprising fundamentally strong businesses with consistent earnings visibility.