After a turbulent first half marked by the West Asia conflict, volatile crude oil prices and heavy foreign investor selling, market experts expect Indian equities to fare better in the second half of FY27, provided geopolitical tensions ease.
The benchmark indices remained rangebound during April-September. However, there were sharp swings along the way. In the six-month period, the BSE Sensex gained just 0.74%, while the Nifty 50 rose 1.29%, as rising crude prices, pressure on the rupee and elevated global bond yields repeatedly weighed on sentiment.
For the second half of FY27, crude oil remains the single biggest variable for the market.
A Balasubramanian, MD & CEO of Aditya Birla Sun Life Mutual Fund, believes markets have already priced in much of the bad news. He expects the West Asia conflict to cool off during the second half, potentially bringing down crude prices and market volatility.
Agreed Sunil Singhania, founder of Abakkus Asset Managers. He estimates that crude oil is currently carrying a geopolitical premium of around $15-20 a barrel, suggesting that even signs of a resolution to the conflict could trigger a relatively quick correction in prices.
Pankaj Pandey, head of research at ICICI Securities, also sees crude as the most important variable for equities. “If crude prices remain high, bond yields will stay high, creating pressure on currency and the markets,” he said.
Pandey expects tensions in West Asia to ease, reducing the impact of oil on markets over the next six months. Rajkumar Rathi, chief investment officer at Yes Securities, however, said equities will have to navigate several other variables, including higher bond yields, the possibility of a Reserve Bank of India rate hike, El Niño and inflation.
Foreign portfolio investor (FPI) flows were another major drag during the first half. After heavy selling in the first quarter, FPIs returned as net buyers in July and August, only to retreat again when the West Asia conflict intensified in September.
Overall, foreign investors pulled out a net Rs 1.30 lakh crore from Indian equities during the first half of FY27.
Singhania said FPI flows are closely linked to inflation, bond yields and currency movements. The strengthening of the US dollar against several emerging-market currencies has contributed to foreign investor selling across these markets, including India.
A correction in crude prices could change that equation by easing pressure on inflation, yields and the rupee, potentially making Indian equities more attractive to overseas investors, he said.
Balasubramanian also expects policy measures to play a role in attracting foreign capital. He believes the government could consider further relaxation in capital-gains taxation for foreign investors in the next Union Budget.
If external pressures ease, experts believe domestic fundamentals could begin to play a bigger role in determining the market’s direction.
Balasubramanian expects the festive season to provide support after a difficult few months. Singhania said much of the pressure on Indian equities remains external, while domestic economic growth and corporate fundamentals remain supportive.
Pandey, while seeing an RBI rate hike as a possibility amid changing bond-yield dynamics, remains constructive on equities, particularly financial services. Strong credit growth and greater clarity over leadership at some of the country’s largest private banks could support the sector, he added.
Rathi also expects domestic flows, a robust credit cycle, manufacturing capital expenditure and resilient financial-sector fundamentals to provide a cushion against global volatility.
Banks and non-banking financial companies, automobiles and manufacturing could report strong earnings in the second quarter, while the performance of IT services companies is likely to be shaped by artificial intelligence-related disruption and deal wins, he said.
The broad message for the second half of FY27 is therefore one of cautious optimism. With much of the pressure on Indian equities originating overseas, an easing of the West Asia conflict and a retreat in crude prices could remove two significant overhangs — inflation and foreign investor outflows.
But with geopolitical and monetary risks still difficult to predict, experts expect returns to remain moderate, with market performance increasingly dependent on earnings quality and domestic fundamentals.