Inside India newsletter: The worst might not be over for Indian equities

• The Iran war has exposed India's structural vulnerabilities, potentially threatening the government's 7.0-7.4% growth forecast for FY2027 due to rising energy costs and supply-chain disruptions affecting fiscal deficit, inflation, and currency stability
• India's government cut fuel excise duties by 10 rupees per liter to prevent retail price spikes, with an estimated annual fiscal impact of 1.65 trillion rupees ($17.6 billion), potentially diverting funds from productive capital expenditure to subsidies
• Earnings cuts between April and December 2025 are the largest in four years, while net overseas direct investment has fallen to just $1-2 billion, significantly trailing Brazil and Vietnam, as concerns grow about job creation and consumption demand

Summary: Indian Equities Face Mounting Pressures

Market Performance:

India's benchmark Nifty 50 plunged over 10% in March, with foreign investors withdrawing more than $12 billion in equities—the largest monthly outflow on record. The index's price-to-earnings ratio dropped to 19.6x, a level seen only twice in the past decade: during the 2020 COVID-19 outbreak and the 2022 Russia-Ukraine war.

Key Economic Concerns:

The Iran war has exposed India's structural vulnerabilities, particularly to oil price shocks. Chief Economic Advisor V. Anantha Nageswaran warned that the country's projected 7.0%-7.4% GDP growth for FY2027 faces downside risks from rising energy costs and supply-chain disruptions. The trade and current account deficits are expected to widen significantly.

Government Response:

India implemented currency controls to limit bank positions, helping stabilize the rupee. The government also cut central excise duties on fuel by 10 rupees ($0.11) per liter to prevent retail price spikes. Nomura estimates this could cost 1.65 trillion rupees ($17.6 billion) annually, potentially diverting funds from productive capital expenditure to subsidies.

Structural Weaknesses:

Earnings cuts between April-December 2025 were the largest in four years, according to Ambit Capital. Net overseas direct investment has fallen to $1-2 billion, significantly trailing Brazil and Vietnam. Weak job creation threatens consumption growth, a major economic driver.

Corporate Developments:

Airtel's data center arm raised $1 billion from Alpha Wave Global, Carlyle, and Anchorage Capital. IndiGo appointed industry veteran William Walsh as new CEO.

Fund managers warn that low valuations alone won't attract investors without improved earnings growth and structural reforms.