A sustained move in Brent crude above $100 a barrel could force investors to turn more cautious on Indian equities, corporate earnings, inflation and valuations, according to Prashasta Seth, chief executive officer of Prudent Investment Managers.
Crude around $90 a barrel would not by itself break his equity thesis, Seth said. The bigger risk would be how long prices remain elevated.
"If crude stays around $90 for a few weeks, the economy can absorb it. But if we see $100-plus crude sustained for two or three quarters, then I would have to become more conservative on earnings, inflation and valuations," Seth said in an emailed interview with NDTV Profit.
The risk comes as the Reserve Bank of India has kept the repo rate at 5.25% with a neutral stance, while projecting FY27 GDP growth of 6.7% and CPI inflation of 5%. Inflation is expected to rise to 5.9% in the third quarter. The RBI's latest assessment also assumes an average oil price of about $90 a barrel, making the crude outlook important to both inflation and interest-rate expectations.
Higher oil prices could put pressure on the current account, the rupee, inflation and corporate margins, Seth said.
The $100 Test
Seth said he remained constructive on India's long-term prospects but had become more selective.
"I would describe my position today as constructive but more selective. I am not changing the long-term India thesis because of one macro shock, but I would certainly not assume the same earnings and valuation assumptions that I would have made when crude was materially lower."
That makes the persistence of higher crude prices, rather than a short-term spike, central to his market outlook.
Earnings Risk
The oil shock could also test Seth's earlier earnings forecast.
In an Aug. 4 interview with The Economic Times, Seth said Indian companies could deliver mid-teen earnings growth in the current financial year if momentum from the June-quarter earnings season continued.
That remains his base case. But sustained crude above $100 would change the calculation.
"If crude moves towards $100-plus and remains there, I would probably bring that expectation down by a few percentage points and become much more selective," he said.
The impact would vary across the market. Higher oil, gas and metal prices could support earnings for parts of the Nifty exposed to metals and global cyclicals. Mid- and small-cap companies could face greater pressure on margins, he said.
Seth said valuations had already corrected, with the Nifty's forward price-to-earnings multiple falling from roughly 24 times in September 2024 to around 19.3 times.
"We don't necessarily need a massive valuation expansion from here. We need earnings to actually come through," he said.
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RBI Squeeze
For the RBI, sustained higher crude would further complicate the balance between inflation and growth.
The central bank projects FY27 inflation at 5%, with inflation expected to peak at 5.9% in the third quarter, while forecasting GDP growth of 6.7%. It has retained the repo rate at 5.25% and kept its stance neutral.
Seth's base case is now for a prolonged pause.
"If crude stays around $90, I think the RBI can remain patient. But if Brent moves towards $100 and stays there, the probability of another cut falls significantly," he said.
"So as things stand today, the rate cut is out of picture. We need to be open to the possibility of RBI having to raise rates in case crude prices sustain at higher levels."
Rupee Risk
The currency could be another pressure point.
Foreign investors measure their returns in dollars, Seth said, meaning gains in Indian equities can be eroded by rupee depreciation. A 12% equity return becomes less attractive if the currency weakens by 5-6%. Seth said the rupee around Rs 95-96 to the dollar remained manageable and that stability mattered more than a sharp appreciation.
However, crude moving towards $100 alongside the rupee approaching Rs 98-100 would become a bigger deterrent for foreign investors, he said. "The key isn't a particular rupee level. It is avoiding disorderly depreciation."
The RBI governor has also said the central bank does not target a particular exchange-rate level, focusing instead on preventing excessive volatility and disorderly movements.
For Seth, earnings remain the most important variable for Indian equities over the next 12 months, followed by crude.
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