Corporate earnings in India could face downside risks if the ongoing conflict involving Iran persists beyond a few weeks, as higher oil and gas prices may weigh on the economy and financial markets, according to a report by Kotak Institutional Equities.

“We expect some downside risk to corporate earnings, especially if the conflict lasts longer than a few weeks," the report said on Thursday.

Investor sentiment turns cautious

The brokerage noted that the escalation in the Middle East has already begun affecting investor sentiment, particularly among foreign investors, who remain sensitive to risks linked to global energy supplies and macroeconomic stability.

"With the outbreak of the Iran conflict over the weekend, the foreign investor mood has turned cautious again, as India is vulnerable to disruptions in oil and gas supplies, with the risk of a higher-than-anticipated current account deficit," it said.

India, which imports a large share of its crude oil requirements, remains particularly exposed to sharp increases in global energy prices. The report said an oil shock remains one of the biggest macroeconomic risks for the country in the current environment.

Oil price shock a key risk

Higher crude prices could increase input costs for companies across sectors, add to inflationary pressures, and push up the country’s import bill, which in turn could hurt corporate profitability.

The brokerage also flagged the possibility of a widening current account deficit if energy prices remain elevated for a prolonged period, as disruptions in oil and gas supplies could increase India’s external vulnerability.

At the same time, Kotak Institutional Equities said domestic factors such as steady inflows into local equities and India’s medium-term growth prospects could continue to provide some support to markets, though geopolitical developments will remain a key factor to watch in the near term.

"The key downside risks for the overall market are a longer-than-expected crisis in the Middle East, with oil and gas supply disruptions and price hikes," the note added.

The conflict in West Asia has intensified in recent days after fresh hostilities involving Iran raised concerns about potential disruptions to global energy supplies. The developments have heightened fears of volatility in crude oil prices, which could have broader economic implications for energy-importing countries such as India.