A potential agreement between Iran and the US that restores normal shipping through the Strait of Hormuz and lowers oil and gas prices could improve India’s macroeconomic outlook and create a more favourable environment for equities, according to Sanjeev Prasad of Kotak Institutional Equities.
The brokerage believes lower energy prices would ease pressure on India’s current account deficit, balance of payments and fiscal position, while broadening earnings growth beyond commodity-linked sectors.
Backing this view, Kotak has made a modest change to its recommended portfolio, increasing exposure to Axis Bank and State Bank of India at the expense of Infosys Ltd, while retaining its preference for financials, real estate, transportation, healthcare, pharmaceuticals and telecom. However, the brokerage cautioned that forecasts of a weak monsoon remain a key domestic risk that could affect growth and inflation in FY27.
Lower oil prices could improve India’s macro position
Kotak said a memorandum of understanding between Iran and the US could reopen shipping routes through the Strait of Hormuz and allow Iran to freely export oil, creating conditions for lower global oil and gas prices.
The brokerage noted that crude oil prices have already declined 39% from recent peaks. While its base-case assumption remains US$95 per barrel for FY27, any meaningful decline below that level could provide significant support to India’s external accounts. Kotak believes lower energy prices would reduce pressure on the current account deficit, improve the balance of payments position and ease fiscal concerns. Additional inflows through FCNR(B) deposits could provide further support to the external sector.
“The easing of energy prices could improve India’s macroeconomic fundamentals through lower pressure on the current account deficit, balance of payments and fiscal balances, while also improving the quality of earnings growth across sectors,” Kotak said.
Weak monsoon remains the biggest domestic concern
Despite becoming more constructive on the external environment, Kotak said weather-related risks continue to cloud the domestic outlook.
The brokerage pointed to IMD forecasts indicating a weak monsoon during 2026 and warned that deficient rainfall could affect both economic growth and inflation. Kotak expects India’s real GDP growth to moderate to 6.1% in FY27 from 7.6% in FY26, while average CPI inflation is projected to rise to 5% from 2.5% in the previous year.
“Forecasts of a poor monsoon may continue to weigh negatively on India’s growth-inflation dynamics,” the brokerage said.
Kotak expects broader participation in earnings growth
Kotak expects Nifty 50 earnings per share to rise to Rs 1,248 in FY27 and Rs 1,430 in FY28, translating into earnings growth of 18% and 14.2%, respectively.
The brokerage noted that commodity-linked sectors currently account for about 40% of incremental earnings growth expected in FY27. However, lower commodity and energy prices could result in a more balanced earnings profile across sectors by improving profitability for consumer-facing and investment-oriented businesses while reducing input cost pressures.
Kotak also believes concerns around banking sector asset quality could ease if macroeconomic conditions improve.
Banks remain central to Kotak’s strategy
One of the key messages from the report is Kotak’s continued preference for financials.
The brokerage said recent market multiple compression has been driven largely by banks and information technology companies. While it sees merit in the correction witnessed in IT services valuations, it believes the derating of banks is not supported by underlying fundamentals.
According to Kotak, financials continue to offer an attractive combination of growth, profitability and valuations. The brokerage remains overweight on banking and financial services while maintaining positive views on real estate and transportation among cyclical sectors. It also retains overweight positions in healthcare, pharmaceuticals and telecom.
“The correction in valuations of banks appears disconnected from the operating fundamentals of the sector, particularly when viewed against expectations for credit growth, margins and asset quality,” Kotak said.
Kotak makes a small but notable portfolio change
Kotak made only one adjustment to its recommended large-cap portfolio.
The brokerage reduced its weight in Infosys by 100 basis points to 3.3% and allocated the released capital equally between Axis Bank and State Bank of India. The move increases the portfolio’s exposure to financials while reducing allocation to information technology services.
The limited nature of the change suggests that Kotak’s broader investment framework remains intact despite the improvement in its macro outlook.
Nifty valuations remain reasonable
Kotak estimates the Nifty-50 currently trades at 18.9 times FY27 earnings and 16.5 times FY28 earnings.
The brokerage believes valuations could become more attractive if lower oil prices improve macroeconomic conditions and earnings growth becomes less dependent on commodity-linked sectors. It also noted that nearly half of Nifty profits have limited linkage to the domestic economy, providing some insulation against local economic volatility.
Conclusion
Kotak’s latest strategy update centres on a more favourable macro backdrop driven by the prospect of lower oil and gas prices following easing tensions in West Asia.
While the brokerage remains cautious on the implications of a weak monsoon, it believes lower energy costs could improve India’s external balances, strengthen earnings quality and reduce pressure on corporate profitability.
Disclaimer: The specific institutional portfolio adjustments, Nifty valuation estimates, and stock-specific exposure changes discussed in this report are sourced from Kotak Institutional Equities and are intended for general market commentary only. They do not constitute an offer, solicitation, or direct investment recommendation to buy, sell, or hold any individual equities or financial instruments mentioned. Equities and sectoral allocations carry inherent market risks, including vulnerabilities to global macroeconomic shifts, commodity price changes, and domestic factors like monsoon variance. Readers must conduct independent research and consult a SEBI-registered investment advisor or qualified financial consultant before making personal investment decisions.
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