India’s reduced dependence on oil has strengthened macro stability, but crude remains the single biggest risk to market performance, Morgan Stanley said in its latest strategy note. The brokerage credited the decline in oil intensity measured by barrels imported per unit of GDP for supporting a market re-rating, while cautioning that a sharp rise in crude prices could reverse equity gains and strain external balances.
Morgan Stanley on why falling oil intensity drives macro resilience
Morgan Stanley said India’s structural shift away from oil dependence has been central to its improved economic fundamentals. The brokerage tracks oil intensity as barrels imported per unit of GDP rebased to 2007, and the data show a consistent decline since FY08. This trend, it said, means the economy’s sensitivity to global oil price swings has materially reduced over time.
The report noted that this falling intensity, combined with stronger exports, is improving India’s external savings imbalance. “The falling intensity of oil in GDP, coupled with a rising share of exports, improves macro stability and provides a basis for market re-rating,” Morgan Stanley said.
The brokerage also monitors India’s terms of trade through an indicator comparing crude oil to copper prices, calling oil “the most important ingredient in terms of trade.” It said the current crude-to-copper ratio remains benign a sign that supply-driven price shocks are absent for now. In its macro stability dashboard, “Crude oil relative to copper” is marked as a Positive indicator, reinforcing the near-term comfort on this front.
Morgan Stanley believes oil remains the defining bear risk
Even with structural progress, Morgan Stanley warned that a sharp rise in oil prices could still derail market momentum. In its scenario framework, the bear case with a 30% probability and Sensex at 70,000 by June 2026 is built entirely around a major oil disruption.
The brokerage said this downside assumes “oil prices surge past the 2022 peak,” leading to a worsening of India’s terms of trade, a weaker external position, depreciation of the rupee, and ultimately, a potential recession. In short, while oil intensity has fallen, the shock transmission from a sustained crude spike remains powerful enough to damage macro stability and corporate earnings.
Morgan Stanley called oil “the defining bear risk” for investors in 2025, warning that even with structural improvement, India cannot fully escape the consequences of an energy shock. The brokerage said investors must treat oil as both a macro and portfolio variable manageable in steady states, destabilising under stress.
Morgan Stanley on energy sector as defensive play
The report also discussed the treatment of oil and gas companies within India’s corporate analysis. Morgan Stanley separates market revenue growth data including and excluding Oil PSUs, acknowledging that their earnings are volatile and heavily influenced by global prices and policy actions.
The brokerage has kept an Overweight India call on the Energy sector, classifying it as a defensive play in its Asia portfolio. This stance reflects a recognition that Indian energy firms often provide a cushion during periods of commodity price volatility, even as higher crude prices pressure the broader market.
According to Morgan Stanley, this segregation of oil-linked revenues is crucial for understanding core earnings trends. “When tracking broad market revenue growth, analysts often calculate metrics both including and excluding Oil PSUs, as the sector’s contribution is volatile and can distort core private-sector growth,” it said.
Morgan Stanley sees crude as the key market swing factor
The brokerage identified oil as the key driver of India’s relative equity performance within Emerging Markets. Historically, India’s market multiples have expanded when oil prices are stable or supply-led declines favour importers. Conversely, sharp crude spikes have coincided with underperformance against peers.
The note pointed out that macro stability indicators currently show positive readings, but warned that these can “flip quickly” in a supply-led price shock. The terms-of-trade indicator, particularly crude relative to copper, is seen as the leading signal for such reversals.
Morgan Stanley’s base case expects India’s structural advantages lower oil dependence, strong exports, and improved external balances to sustain the country’s equity premium relative to peers. This view supports continued re-rating potential, provided oil prices remain contained.
However, the bear scenario underscores that even one variable oil can undo macro stability if prices breach critical levels. In that case, valuations would compress, the rupee could weaken sharply, and corporate earnings would face stress from higher input and financing costs.
The brokerage stressed that risk management is now more important than ever. While lower oil intensity offers resilience, it does not grant immunity. Portfolio hedges through energy exposure and tactical allocation to defensives, it said, can help mitigate crude-driven volatility.
Morgan Stanley says focus on structural progress, not immunity
In closing, Morgan Stanley’s analysis framed India’s relationship with oil as a story of progress, not permanence. The economy’s vulnerability to energy shocks has clearly declined, but the country’s market narrative still hinges on crude’s trajectory.
Lower oil intensity has given India breathing room its external balance, inflation outlook, and currency stability have all strengthened as a result. But as the brokerage put it, oil remains the “defining bear risk.” A sharp, sustained spike could quickly erase those gains, pulling equities and macro stability back under pressure.
India may no longer be hostage to oil, but it cannot afford to ignore it. The economy’s structural shift has made the floor stronger but the ceiling still depends on where crude goes next.