The IMF has lowered its 2026 global growth forecast by 20 bps, citing risks from Middle East conflict through higher commodity price and tighter financial conditions. Under its reference scenario – assuming the conflict remains contained and disruptions ease by mid-2026 – global growth is projected at 3.1% in 2026 and 3.2% in 2027, below both recent 3.4% pace and the historical average of 3.7%. In adverse scenarios, growth could slow down to 2.5% or even 2.0%, accompanied by significantly higher inflation, with emerging markets expected to be disproportionately affected.
Global financial conditions have tightened amid renewed inflation risks arising from West Asia crisis. Major central banks have turned more cautious on the policy outlook while bond yields have risen globally. The U.S Federal Reserve kept rates unchanged in April and with 3 dissents from officials who no longer feel that Fed should a bias towards lowering interest rates.
Gross domestic product (GDP) was previously forecast to expand at 7% levels in financial year 2026-27. But the crisis in the Gulf could shave off growth by as much as 1%, if the conflict persists as India is the world’s third-largest importer of crude with 35-40% of crude demand and 54% of pre-war LPG needs passing through the Strait of Hormuz. The impact is most starkly visible on the Indian currency, which has hit record lows and is down nearly 15% against the US dollar in the last year.
While crude has corrected as markets priced in hopes of a US-Iran ceasefire extension and potential easing of Strait of Hormuz restrictions, the agreement is still not finalized, and shipping through the Strait remains much below normal, keeping geopolitical risks alive.
Further, in its 2nd long range forecast, the IMD downgraded the Southwest Monsoon 2026 forecast to 90% of the long-period average vs 92% estimated in April. This represents the weakest monsoon outlook since 2015, raising concerns over agricultural output, increasing inflation risks and weakening rural demand.
The Nifty consolidated (down 1.9% MoM) in May’26 after rebounding smartly in Apr’26 with a 7.5% MoM gain. Over the last 12 months, largecaps have been down 5%, underperforming midcaps and smallcaps, which have been up 7% and 1%, respectively.
FIIs recorded outflows for the third consecutive month in May’26 at USD4.9b. FII outflows into Indian equities stood at USD25.9b in CY26YTD. Following India’s sharp underperformance in FY26 and record FII outflows, a favorable base has likely been set for Indian equities. However, in the near term, the market will remain hostage to volatile developments arising from the West Asian crisis.
The 4QFY26 corporate earnings concluded on a strong note, showcasing widespread outperformance across aggregates. BFSI, Metals, OMCs, Technology, Telecom, and Automobiles fueled this healthy performance.
Nifty reported a single-digit earnings growth (4% YoY PAT growth) for the eighth consecutive quarter since the pandemic (Jun’20). However, excluding Reliance Industries and Indigo, Nifty posted a 9% YoY PAT growth.
Corporate commentary remains constructive but uneven, with strongest visibility in B2B and investment-led sectors such as Industrials, Power/T&D, EMS, Defence, Metals, Textiles, CDMO and Pharma, Recycling and Auto components.
For our G+V portfolio, revenue growth during the quarter stood at 20% whereas PAT grew faster and witnessed 25% growth clearly highlighting that growth remains healthy with broad based positive surprises.
Higher crude prices as well as high chances of below normal rainfall have disrupted India’s earlier favourable macro setup, shifting the balance from strong growth and moderate inflation towards a more difficult trade-off between inflation, growth, fiscal deficit and external stability. Hence, we believe that next quarter as well as next year will be challenging for companies to navigate and hence the volatility may continue. Also, different sectors will be impacted differently due to the current crisis and hence, one needs to adopt a dynamic approach gauging external shocks and its impact on domestic demand. Further, we feel management commentary post Q1’27 will matter more than the reported numbers.
However, it is prime belief that India’s long-term story shines brighter than short-term volatility. Also, for a long-term investor, there is no alternative than to enduring this volatility. Equity investment does not work on guarantee or certainty but works on probabilities and we believe, current probabilities are in favour of Indian equities.
