Hormuz blockade biggest risk for Indian markets; fuel prices, inflation in focus: Aditya Birla Sun Life AMC's Kaustubh Gupta

The raging conflict in West Asia, particularly the continued disruption at the Strait of Hormuz, remains the most critical factor for Indian financial markets due to its potential impact on fuel supplies, energy prices, the balance of payments, fiscal health, and fertiliser imports, according to Kaustubh Gupta, Chief Investment Officer – Fixed Income at Aditya Birla Sun Life AMC Ltd . 

Gupta said India has so far managed supply disruptions effectively, with no visible fuel shortages or rationing, unlike some other Asian economies. However, elevated crude prices have already forced the government to reduce taxes on fuel. 

Most domestic fuel prices remain regulated, and rates for petrol, diesel, and cooking gas have remained unchanged so far. However, if the Hormuz disruption continues beyond April, fuel price hikes may become unavoidable, he said. 

Inflation still comfortable, risks ahead 

India’s retail inflation stood at 3.4% in March, below the Reserve Bank of India’s 4% target, indicating only a limited impact so far from the Hormuz closure. 

Core inflation, excluding gold and silver, remained below 2%, suggesting subdued underlying price pressures. 

Going forward, inflation is expected to gradually move closer to the RBI’s 4% target due to a low base effect, partial pass-through of higher energy prices and the possibility of El Niño weather conditions later this year, which could adversely affect monsoon rains. 

RBI holds rates, stays cautious 

The RBI kept policy rates unchanged in its April monetary policy review, with the impact of the West Asia crisis dominating discussions. While maintaining caution over the economic fallout of the Hormuz disruption, RBI Governor Sanjay Malhotra highlighted upside risks to inflation and downside risks to growth. 

The central bank marginally lowered its FY27 growth estimate to 6.9% while raising its inflation forecast to 4.6%, with core inflation projected at 4.4%. 

Gupta said the RBI also reiterated its commitment to maintaining comfortable liquidity conditions and keeping rates supportive if geopolitical tensions ease. 

Borrowing calendar supports bond market 

In another development, the government announced its borrowing calendar for the first half of FY27 (April-September), which showed a reduction in duration supply. 

Average bond maturity has declined from around 19 years in FY26 to 17 years in the first half of FY27. The share of long-dated bonds (30 years and above) has also fallen from 32% of total issuance in FY26 to 25% now. This has been welcomed by the bond market, where excessive long-end issuance had created demand-supply imbalances and pushed yields higher. 

The spread between 30-year and 10-year bond yields has narrowed from nearly 80 basis points in mid-March to 62 basis points currently, with scope for further correction, Gupta said. 

Rupee may stabilise if war eases 

The RBI has also remained active in the currency market to reduce volatility and depreciation pressure on the rupee. Recent measures to curb speculation in the foreign exchange market have helped support the currency. 

India’s external sector fundamentals remain comfortable, backed by healthy forex reserves and a manageable current account deficit. Gupta said the rupee remains deeply undervalued in real exchange terms and could appreciate once geopolitical tensions subside. 

Bond yields, which had risen sharply due to war-related concerns, are now retracing losses. Gupta said 1–3-year corporate bonds remain the most attractive risk-adjusted fixed-income opportunity due to strong accrual yields and lower duration risk. For investors willing to tolerate volatility, selective exposure to long-duration bonds could also be considered, given reduced supply and elevated term premiums.