As crude prices continue to hover near $100 per barrel and geopolitical tensions in the Middle East remain unresolved, the Indian equities market is likely to face a bumpy road ahead. According to domestic brokerage Emkay Global, petrol and diesel prices in India could see an initial hike of ₹10 per litre after the ongoing state elections, a move that may trigger short-term volatility in domestic equities.

“We expect a ₹10/litre hike in the first round. While this does not fully neutralise the under-recoveries of OMCs, the inflation shock from a larger hike poses too many macro risks to be seriously considered,” Emkay said in a report. The brokerage added that if crude prices do not normalise in the medium term, further rounds of hikes could follow along similar lines.

Emkay noted that the Nifty 50 has already rallied about 11% from its April 2 lows, largely pricing in easing geopolitical tensions. However, this optimism may be running ahead of fundamentals. With the index now trading close to its long-term average valuation of around 19x one-year forward earnings, the cushion from cheap valuations has largely disappeared. In such a scenario, any negative trigger, such as a fuel price hike, could spark a short-term correction.

“The Nifty 50 has rallied 10.9% from the lows of April 2, 2026, factoring in the ceasefire but overlooking the stickiness in energy prices. This has eroded valuation comfort—the index now trades at an FY27E P/E of 19.5x, with little discount to its long-term average,” the report noted.

While the brokerage remains constructive on earnings recovery for FY27 and FY28, it expects Q1FY27 to be soft. “We believe the rally could pause in the near term, with potential downside if the Strait of Hormuz impasse is not resolved in the next 7–10 days and fuel price hikes materialise,” it said.

A key uncertainty remains the situation in the Middle East. Although a ceasefire has held for the past two weeks, a broader agreement to reopen the Strait of Hormuz is still pending. This has kept global crude prices elevated at around $100 per barrel, with India’s crude basket occasionally trading even higher. Elevated oil prices continue to strain India’s macroeconomic stability, given its heavy reliance on imports.

Potential fuel price hike

Emkay believes the government may need to raise retail fuel prices to ease the burden on oil marketing companies (OMCs), which are currently facing significant under-recoveries. At prevailing crude prices, these losses are estimated at ₹18-20 per litre for petrol and diesel. The brokerage expects a ₹10 per litre hike in the first round, enough to partially bridge the gap without triggering a sharp inflation spike.

However, if crude prices remain elevated for a prolonged period, further rounds of price hikes may follow. Emkay estimates that if oil sustains above $100 per barrel over the next few quarters, total fuel price increases could reach ₹18-20 per litre over the next three to six months.

Emkay estimates that a ₹10 per litre increase could push inflation higher by around 75 basis points, including second-order effects such as increased transportation and input costs. This could weigh on consumption and impact sectors such as automobiles, cement, and related ancillaries, which are sensitive to fuel prices.

FPIs likely to hit pause

On the flows front, foreign portfolio investors (FPIs) are likely to adopt a wait-and-watch approach, the brokerage said. After heavy selling in recent months, a pause in outflows is possible if macro conditions stabilise. However, a meaningful revival in inflows appears unlikely in the near term, given India’s premium valuations relative to global peers.

“We believe FPIs will pause their heavy selling for the remainder of 2026, but a sustained wave of inflows is unlikely until valuations moderate,” the report noted.

The brokerage added that the gap between domestic institutional investors (DIIs) and foreign institutional investors (FIIs) holdings in BSE 500 companies widened by 90 basis points to 154 basis points, driven by $14.2 billion of FPI selling in Q4FY26. FPIs reduced exposure to financials and technology, while reallocating capital towards materials, industrials, and healthcare sectors.

Despite near-term risks, Emkay remains constructive on the medium-term outlook, particularly on earnings growth for FY27 and FY28. However, it expects the current market rally to pause, with potential downside risks if crude prices remain elevated and fuel price hikes materialise.

(DISCLAIMER: The views and opinions expressed by investment experts on fortuneindia.com are either their own or of their organisations, but not necessarily that of fortuneindia.com and its editorial team. Readers are advised to consult certified experts before taking investment decisions.)