A sustained rise in crude oil prices could pose a significant risk to India’s earnings-led economic and market recovery in the second half of calendar year 2026, even as improving macroeconomic conditions are expected to support corporate earnings and equities over the medium term, according to an Axis Direct report.
The report said the upcoming Q1FY27 corporate earnings season is likely to emerge as a key catalyst for Indian equity markets, with investors expected to shift their attention from broader macroeconomic developments towards company-specific fundamentals.
Management commentary will be closely monitored for indications on demand conditions, pricing power, margin sustainability, capital expenditure plans, exports and order inflows. According to Axis Direct, the ability of companies to deliver earnings growth in line with or ahead of market expectations will become increasingly important for sustaining gains in the equity market.
However, the brokerage highlighted several risks that could derail the recovery. An escalation in geopolitical tensions could keep Brent crude prices elevated at USD 110-120 or higher per barrel. Such a sharp and sustained increase in oil prices could widen India’s current account deficit to above 3.5 per cent of GDP and constrain the Reserve Bank of India’s ability to pursue further interest-rate cuts.
Higher crude prices could also raise input costs across several industries and put pressure on corporate profit margins. The impact could be particularly significant for sectors that are directly or indirectly dependent on petroleum-based raw materials.
The report also flagged the possibility of a below-normal monsoon as another risk to economic growth. A weak monsoon could affect agricultural output, rural demand and food prices, potentially creating additional inflationary pressures at a time when policymakers may need to support economic activity.
Indian equities experienced a challenging first half of CY2026, with foreign ownership of the Nifty 500 falling to a multi-year low by March. Axis Direct noted that the sharp market correction witnessed earlier in the year has, however, brought Nifty 50 valuations closer to their long-term historical average on a one-year forward earnings basis.
In a more adverse scenario, where geopolitical risks remain elevated and corporate earnings disappoint, the Nifty 50 could decline to around 23,030 by December 2026. The target is based on a valuation multiple of 16.5 times price-to-earnings.
The brokerage also warned that earnings downgrades could emerge across energy-sensitive sectors if crude prices remain elevated. At the same time, the Indian rupee could weaken towards Rs 100 against the US dollar, potentially triggering additional foreign portfolio investor outflows estimated at Rs 50,000-80,000 crore.
The FMCG and paints sectors are already facing near-term margin pressures due to elevated crude-linked raw material costs. Packaging materials, solvents and other petroleum-derived inputs have contributed to higher expenses for companies in these segments. Axis Direct expects margin recovery to remain gradual until input costs stabilise further.
Also read: Banks write off Rs 10 lakh-cr corporate loans
As a result, earnings growth could continue to trail volume growth over the next few quarters, particularly for companies that are unable to fully pass on higher input costs to consumers.
Despite these risks, Axis Direct remains constructive on Indian equities for H2CY26. The brokerage said it continues to favour sectors with strong domestic earnings visibility, policy support, healthy balance sheets and sustainable cash flows.
Overall, the report maintains a positive medium-term outlook but emphasises the importance of quality and earnings visibility. Companies with sustainable long-term growth prospects and strong financial fundamentals are expected to remain better positioned to navigate volatility arising from crude prices, geopolitical risks and currency movements.
Follow us
