Gold taxes & rate hikes: Kotak explains why PM’s ‘austerity appeal’ warns of deepening West Asia fallout 

In its latest India Strategy report titled ‘Appeal to Action’, Kotak Institutional Equities said the Indian Prime Minister’s recent appeal to citizens to reduce fuel consumption, cut gold imports and lower foreign travel points to rising concern over the economic fallout from elevated energy prices and prolonged geopolitical tensions.

Weakening macro situation a concern

Kotak Institutional Equities said India’s macro conditions have already weakened materially since the start of the West Asia war, with the impact becoming visible across the current account deficit, inflation outlook, fiscal pressures and capital flows.

Kotak Institutional Equities estimated that every $10 per barrel increase in crude oil prices could widen India’s current account deficit by $22 billion, or nearly 55 basis points of gross domestic product.Kotak Institutional Equities also said oil marketing companies are currently losing nearly Rs 30,000 crore every month because of elevated crude prices and under-recoveries on fuel sales.

Kotak Institutional Equities said the government may eventually have to consider stronger taxation and pricing measures if crude prices remain elevated for a prolonged period.

India to face higher stress ifconflict prolongs

Kotak Institutional Equities said the Indian economy could face significantly higher stress if disruptions to global oil and gas supplies continue beyond the near term.

“The government may have to look at more concrete steps in the case of a prolonged conflict,” Kotak Institutional Equities said in the report.

Kotak Institutional Equities laid out multiple economic scenarios depending on the duration of the West Asia crisis.

Under its adverse scenario, Kotak Institutional Equities projected average crude oil prices at $100 per barrel in FY27 against a pre-war estimate of $65 per barrel.

The report estimated India’s current account deficit could widen to 2.6% of gross domestic product under the adverse scenario, compared with 1% in the pre-war environment.

Kotak Institutional Equities also projected India’s balance of payments position could slip to a deficit of $84 billion if the disruptions continue beyond May 2026.

The brokerage firm further estimated that India’s real gross domestic product growth could slow to 6% under the adverse case against 7% in the pre-war scenario.

Inflation may also remain elevated.

Kotak Institutional Equities projected average consumer inflation between 5.2% and 6% under the adverse scenario, while the report also flagged the possibility of 50 to 100 basis points of repo rate hikes starting October 2026 if pressures intensify.

“Most parameters look bad even in our base-case scenario but could turn worse in an adverse scenario of a prolonged conflict with continued disruptions to global oil and gas supplies,” Kotak Institutional Equities said.

Kotak Institutional Equities sees possible tax changes on gold and foreign investments

Gold has been in focus after the givernment  raised import tariffs ‌on gold and silver ​to 15% from ​6%, as ​part of efforts to curb overseas purchases of the metals and ease pressure on the country’s foreign ​exchange reserves. 

India is the world’s second-largest consumer of precious ⁠metals. 

Kotak Institutional Equities pointed out that the government may have limited options to manage immediate pressure on the current account deficit and balance of payments without taking stronger policy measures.

“The Indian government may have limited options to manage the immediate pressures on CAD/BoP without taking ‘harsh’ measures,” Kotak Institutional Equities said.

Kotak Institutional Equities said one possible route could involve changes in taxation structures aimed at curbing imports and improving capital flows.

Kotak Institutional Equities also suggested the government could look at lowering capital gains tax on equities for foreign investors to improve capital flows into Indian markets.

The brokerage firm, however, did not indicate whether such measures were under active discussion.

Higher crude may force burden-sharing between government, companies and consumers

Kotak Institutional Equities said the government may eventually have to distribute the burden of higher oil prices among consumers, oil companies and the exchequer.

“The Indian government may have to raise retail prices and/or absorb higher losses depending on the duration and magnitude of the conflict and high oil prices,” Kotak Institutional Equities said.

The report laid out multiple crude oil scenarios for FY27 and estimated the economic burden under each case.

Kotak Institutional Equities estimated that if crude oil prices average $100 per barrel in FY27, the total impact on auto fuels and liquefied petroleum gas could rise to nearly Rs 1.80 lakh crore.

Under that scenario, Kotak Institutional Equities estimated oil marketing companies may absorb around Rs 60,100 crore, while the remaining burden could be split equally between the government and consumers.

If crude prices rise further to $110 per barrel, the total impact could jump to more than Rs 3 lakh crore, according to Kotak Institutional Equities estimates.

The report also said Indian refiners bore nearly Rs 27,200 crore of additional burden in April 2026 alone because of elevated import costs.

Kotak Institutional Equities estimated India’s crude basket averaged $120 per barrel in April 2026 against $67 per barrel during the first 11 months of FY26.

The brokerage firm said losses on diesel and gasoline marketing have already weakened the ability of oil companies to absorb further shocks.

Kotak Institutional Equities says markets may be ignoring macro risks

Kotak Institutional Equities said Indian equity markets have remained surprisingly resilient despite rising macroeconomic pressures linked to the West Asia conflict.

“The Indian market has been fairly nonchalant about the West Asia war,” Kotak Institutional Equities said.

The report pointed to sharp rallies in several mid-cap and small-cap stocks during the past month despite deteriorating macro conditions.

Among mid-cap stocks, Bharat Heavy Electricals gained 41% in one month, Vodafone Idea rose 32%, Oracle Financial Services climbed 27% and HUDCO advanced 24%.

Kotak Institutional Equities also highlighted strong rallies in several narrative-driven stocks.

BHEL delivered 41% returns in one month and 85% returns over one year, while Cochin Shipyard rose 545% over three years and Mazagon Dock gained 2,306% over five years.

The brokerage firm also pointed to continued bullish domestic flows into equities.

Kotak Institutional Equities estimated Domestic Institutional Investor inflows at $35 billion in calendar year 2026 so far.

The report also showed total equity mutual fund inflows at Rs 2.22 lakh crore during the first four months of calendar year 2026.

Mid-cap funds attracted Rs 19,800 crore during the period, while small-cap funds saw inflows of Rs 20,000 crore.

“The Indian PM’s appeal may also have an unintended effect of prompting a shift in investor focus to the economic fallout of a prolonged conflict in the Middle East,” Kotak Institutional Equities said.

Nifty valuations remain elevated despite weak returns

Kotak Institutional Equities said retail sentiment continues to remain unusually strong despite limited benchmark returns over the past 18 months.

“Retail sentiment has been unusually bullish based on continued strong inflows into domestic equity mutual funds despite hardly any returns over 18 months,” Kotak Institutional Equities said.

The report estimated Nifty earnings growth at 7.8% for 2026, rising to 18.7% in 2027.

Kotak Institutional Equities projected Nifty earnings per share at Rs 1,247 for FY27 and Rs 1,425 for FY28.

The brokerage firm said the Nifty-50 Index currently trades at 19.1 times FY27 estimated earnings and 16.7 times FY28 estimated earnings.

Kotak Institutional Equities said the current macro environment may increasingly force markets to focus on crude prices, inflation, fiscal pressures and capital flows instead of momentum-driven themes in several pockets of the market.

Disclaimer: This report discusses macroeconomic projections, energy market risks, and tax implications based on institutional analysis. The data and scenarios presented are for informational purposes and should not be construed as investment advice or a solicitation to buy or sell any securities. Given the volatility of global energy markets and potential regulatory shifts, readers are encouraged to consult a qualified financial advisor before making any decisions related to their investment portfolios or tax planning.

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