Market Commentary

Equity

March was a negative drawdown month for Indian equities, with the Nifty 50 down 11.3% during the month. The war in the Middle East triggered shocks across several major markets as global shipping and trade flows were disrupted by fighting around critical chokepoints. The major concern was the availability and prices of crude oil and natural gas and its second order impacts on the Indian economy. The US-Iran ceasefire seems like the first step of a final peace settlement and while the duration of the war remains the key overhang, a resolution to the conflict is expected to release pent-up positive sentiment and help Indian markets recoup some of the losses and underperformance experienced in last quarter of FY26.

FIIs sold net equities worth USD 14.2 bn in March 2026 (Feb 2026: Net bought USD 1.7 bn) and have cumulatively sold equity worth USD 21.1 bn in FY26 (FY25: USD 15.7 billion). Domestic investors have continued to repose their unstinted faith in Indian equities, demonstrating strong resilience and an impressive capacity to absorb volatility over the past few years. DIIs bought net equity worth USD 15.4 bn in March 2026 (Feb 2026: Net bought USD 4.2 bn) and have cumulatively bought USD 95.7 bn in FY26( FY25: USD 71.7 bn).

The steep correction has made valuations favourable and as on March 31, 2026 Nifty 50 Index was trading at ~17x 1 year forward multiple at a discount to its longer term averages. Further Market cap to GDP stood at~127%(based on CY26 GDP estimates). Sectorally private banks, technology and consumer are trading at significant discount to their 10 year averages whereas Utilities, PSU Banks and Metals are at a premium.

As FY26 wraps up and we step into FY27, Indian equity markets stand at a pivotal juncture supported by several tailwinds yet overwhelmed by geopolitical headwinds emanating from the ongoing Iran-Israel/US conflict. Prima facie, the Indian equity market should benefit from a favorable base year characterized by multiple fiscal and monetary accommodative measures, progress on foreign trade agreements, an improved environment for aggregate demand, a series of better-than-expected GDP prints, a rare underperformance relative to EM peers, and sustained faith from retail investors in Indian equities. However, despite all these favorable factors, the near-term market set-up has been vitiated by the Iran-Israel/US war, and its consequent impact on the Indian economy and corporate earnings, given that a significant chunk of India’s energy requirements passes through the Strait of Hormuz (35-40% of crude demand and 54% of pre-war LPG needs). Going forward, the direction and strength of recovery will depend on whether the temporary truce between Iran and US holds and energy supplies are restored to pre-war levels.

Fixed Income

A contained geopolitical shock with Brent remaining below USD 100/bbl appears fiscally manageable through expenditure rationalization and calibrated revenue measures. However, the external account remains vulnerable, with the current account deficit (CAD) potentially widening to ~1.5% of GDP. This is further exacerbated by the risk of FPI outflows and a moderation in remittance flows. The combined effect could manifest in currency pressures, imported inflation, and tighter financial conditions.

Encouragingly, the domestic macro starting point remains resilient. High-frequency indicators such as GST collections, e-way bills, passenger vehicle and two-wheeler sales were robust in March, indicating underlying growth momentum. Headline CPI inflation stood at 3.2% in February, with food inflation at 3.4% and core inflation at 3.6%. The recent uptick is largely food-driven, while core ex-precious metals at 2.3% underscores subdued demand-side pressures.

From a market perspective, significant tightening is already priced in. The 1-year OIS at 6.25% versus a repo rate of 5.25% implies over 100 bps of rate hikes. Similarly, the 10-year and 30-year yields at 7.04% and 7.74% respectively reflect expectations of fiscal slippage and eventual policy normalization.

Given second-order growth risks, the bar for near-term rate hikes remains high. While the next policy move is likely a rate hike (Q4 FY27), yields may peak earlier as markets pre-empt the cycle.

Investment Strategy: Maintain a conservative duration stance while selectively accumulating high-spread assets to lock in carry. Long-end opportunities appear attractive, particularly 20–30 year G-Secs at 7.7%+ and 10–20 year SDLs at 7.9–8.0%, offering compelling relative value.