Crude oil, rupee & interest rates: Is the macroeconomic squeeze spreading to equities?

Facing the triple blow of sharp spike in crude oil prices, falling rupee against the US dollar and interest rate upcycle, Indian equities have been under sustained pressure this year, with the Nifty 50 down around 14% in 2026. Sensex fell around 1% from day's high on Monday morning even as the rupee rebounded 1% on new measures taken by the RBI.

The central bank measures came after the rupee closed near Rs 96.78 per dollar on Friday as the RBI’s 25-basis-point repo rate hike failed to provide lasting support to the currency, as foreign investment outflows, importer dollar demand and elevated crude prices continued to weigh on sentiment.

With the Nifty and Sensex nursing steep losses, investors are now assessing how much of the macroeconomic stress is already priced in, whether the combined impact of expensive oil, currency depreciation and tighter monetary policy could trigger further earnings downgrades, and which sectors may remain resilient.

Oil, rupee and rates: The pressure on equities

Analysts said Indian equities are facing a combination of macroeconomic headwinds, with elevated crude oil prices and rupee depreciation adding to inflationary pressures and prompting monetary tightening. However, they pointed to global bond yields and foreign investor outflows as key factors weighing on market sentiment.

“We are seeing a perfect confluence of headwinds where high crude oil, weaker rupee are feeding into inflation and thus are compelling rate hikes. But on the flip side, the resilience of Indian economy despite US Iran conflict is giving comfort to RBI to hike rates,” said Garima Kapoor, Deputy Head of Research and Economist at Elara Capital.

Kapoor said the cycle of disorderly depreciation was over. She said FCNR(B) flows had removed the stress on funding the current account deficit and that cooling US bond yields should be viewed as a key trigger for markets. She added that stability could return to Indian equities once there was some easing in indiscriminate FPI selling, driven by concerns over rising global yields.

V K Vijayakumar, Chief Investment Strategist at Geojit Investments Limited, said the pressure on Indian equities stemmed more from elevated US bond yields than from domestic macroeconomic stress.

“The market is getting impacted not by domestic macroeconomic stress, but by the highly elevated US bond yields. The US 10-year yield above 5.2% is a strong headwind for the market. With such high US bond yields there is no incentive for the FIIs to invest in India. That’s why they turned sellers in September and have accelerated selling, so far, in October. Sensing the negative sentiments bears have turned offensive, increasing short positions in the market,” Vijayakumar said.

He added that the macroeconomic stress caused by high crude prices, though important, was not significant enough to dent India's economic growth and corporate earnings. India's current account deficit remained under control, while the RBI had sufficient reserves to intervene in the currency market, he said.

Nifty, Sensex: How much stress is priced in?

Analysts offered differing perspectives on the extent to which the market had absorbed the macroeconomic risks. Kapoor argued that equities were pricing in more stress than the economy currently faced, while Vijayakumar said the next direction for the market would depend on corporate earnings.

“Indian equities are pricing in much larger stress than what actually exists. The continuing outflows by FPIs amid elevated crude oil prices and worries about renewed trade war with US are souring the sentiment even as global bond yields surge has raised the opportunity cost for investing in equities,” Kapoor said.

She noted that Indian markets were trading below their 10-year rolling average despite the resilience of the domestic economy, while India's performance relative to emerging-market peers was at a five-year low.

“History shows that Indian markets always bounce back after a year of underperformance. Eg. 2011 MSCI India gave negative return of 38% to only rebound in 2012 by rising 24%. Earnings hereon could provide a necessary support to markets if growth holds on. So far, there is little to suggest that domestic growth is weakening. I will hence believe that we are close to a trough in the markets,” Kapoor said.

Vijayakumar, meanwhile, said the macroeconomic stress had already been discounted by the market, shifting attention to the upcoming earnings season.

“The macroeconomic stress is already discounted by the market. Going forward, the Q2 results will start influencing the market trend. Q2 results will be better than the Q1 results,” he said.

He added that foreign investor selling had accelerated in October amid elevated US bond yields, while negative sentiment had encouraged bears to increase their short positions in the market. The Q2 earnings season would therefore be an important factor influencing the market trend, he said.

ALSO READ:Exclusive | Akash, Isha Ambani take Rs 30,000 crore Jio IPO pitch global; marquee investors seek bigger stakes

Which sectors can weather the storm?

Analysts identified financials as a preferred area, alongside power, consumer discretionary, automobiles, telecom and select pharmaceutical companies. Their sector preferences reflect expectations around credit growth, capital expenditure and the ability of businesses to sustain earnings despite the broader market weakness.

“Given the massive correction, large caps provide better risk reward although selective opportunity still rests in mid and small cap stocks. Among sectors, for now I would prefer to look for opportunity in sectors where FPI ownership is already at a historical low, such further large selling pressure exists there. Otherwise, from a top down perspective amid current macroeconomic conditions, financials, power and consumer discretionary are our preferred bets,” Kapoor said.

On financials, Kapoor said the credit cycle was turning and FCNR(B) deposits had eased pressure on deposit growth. She added that the rising repo rate gave banks visibility on potential net interest margin expansion.

Kapoor also highlighted the power sector, citing rising peak electricity demand driven by higher industrial consumption.

“A rising peak power demand, driven by higher industrial consumption suggests power sector will continue to see a long and a durable capex cycle across generation, transmission, storage and distribution,” she said.

Vijayakumar, meanwhile, identified financials, automobiles, telecom and select pharmaceutical companies as sectors likely to remain resilient.

“Financials, autos, telecom and select pharmaceuticals will remain resilient,” he said.

Disclosure: This article has been written by Kumar Gaurav, who is not a Sebi-registered Research Analyst or an Investment Adviser. Gaurav and their ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective Sebi-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here