West Asia crisis could raise energy risks for India but domestic flows, growth outlook remain resilient: Jefferies

Synopsis West Asian tensions could hike global energy prices, impacting India's oil imports and inflation. Despite foreign investor pullbacks, strong domestic inflows from SIPs and NPS are stabilizing India's equity markets. The economy shows signs of acceleration with robust loan growth and improved corporate earnings, though AI poses a long-term challenge to the IT sector. Escalating tensions in West Asia, particularly around Iran and the Strait of Hormuz, could pose near-term risks to global markets through higher energy prices, though India's underlying economic momentum remains relatively resilient, according to a report by Jefferies. The report noted that energy markets reacted sharply to the geopolitical developments, with Brent crude rising about 13 per cent and European natural gas prices jumping 55 per cent in the week following the escalation. Jefferies said the surge in energy prices was triggered by fears surrounding the potential closure of the Strait of Hormuz, a critical global oil shipping route. Such disruptions could significantly affect oil-importing countries like India by raising import costs and inflation pressures. You can follow our live coverage of the Iran-Israel war here However, the report suggests that markets have so far reacted cautiously, as investors increasingly treat geopolitical shocks as temporary buying opportunities. Live Events India, which imports more than 80 per cent of its crude oil needs, remains particularly exposed to sustained oil price spikes. Higher crude prices typically affect India through multiple channels, including, rising inflation and fuel costs, pressure on the current account deficit and higher fiscal subsidy burdens if retail prices are controlled. While the report does not provide a direct forecast for oil's trajectory, it warns that prolonged conflict could intensify global energy market volatility, adding pressure on emerging markets. Despite the strong domestic story, foreign investors have been pulling back from Indian equities in recent months. According to the report, foreign investors have sold a net USD 32.7 billion of Indian equities since October 2024, though they made a modest net purchase of USD 1.7 billion in February 2026. Jefferies said foreign flows are likely to return only when global investors believe the semiconductor and AI investment cycle has peaked, triggering a rotation away from hardware-heavy markets such as Taiwan and Korea toward India. Domestic inflows remain the biggest stabilising factor for India's equity markets. Systematic Investment Plan (SIP) contributions averaged around Rs 305 billion (USD 3.4 billion) per month over the three months to January 2026, demonstrating strong retail participation. In addition, the government-backed National Pension System (NPS) is contributing roughly USD 1.4 billion per month to equities, a trend expected to grow over time. These steady domestic flows have helped offset foreign outflows and supported valuations. The report adds that, despite global uncertainty, there are signs of a cyclical pickup in the Indian economy. The report noted that, "The best evidence of the cyclical acceleration is loan growth which is now rising by 13.6 per cent YoY as of 15 February, up from a recent low of 9.0 per cent YoY in May 2025." Corporate performance has improved as well, with earnings growth for companies under Jefferies coverage accelerating to 18 per cent year-on-year in the December quarter, an eight-quarter high. However, the report flags some longer-term challenges for India. One key concern is the potential impact of artificial intelligence on the country's IT services industry, which employs around six million people. Automation and AI-driven efficiencies could reduce demand for traditional IT outsourcing work in the future. (You can now subscribe to our Economic Times WhatsApp channel) AI puts India’s USD190-billion services trade surplus at a crossroads All eyes on crude, but it's something else that could trip economy Prashant Jain’s contrarian masterstroke: From IT exit to SBI super bet Battlefields and barrels: The explosive link between war and crude Stock Radar: APL Apollo Tubes stock hits fresh record highs; breaks out from 8-quarter consolidation phase These mid-cap stocks with ‘Strong Buy’ & ‘Buy’ recos can rally over 25%, according to analysts 1 2 3