Risk of heightened volatility in India's capital markets as high interest rates and oil prices add pressure

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Highlights

Global 10-year bond yields have reached a two-decade high. Tighter financial conditions and higher rates could reduce capital flows into Indian equities.
In October, WTI crude topped $100 per barrel and Brent topped $110, increasing pressure on India's import bill, inflation and corporate profitability.
The 2026 monsoon was at 88 percent of the long-period average, with 'deficient' rainfall in 16 subdivisions, weakening rural demand and consumer sentiment.

This article was translated from the original. Read the original version by our correspondent here.

Market pressure from global rates and energy prices

According to Forbes India, the key concerns for markets at present are high global bond yields, a renewed rate-hiking cycle and a sharp rise in crude oil prices, creating a near-term headwind for Indian equities. Deven Mistry, an analyst at Motilal Oswal Financial Services, says that since their all-time high in September 2024, Indian equity markets have been going through a prolonged correction and consolidation in both time and price.

The article says that the U.S. Fed raised rates by 25 basis points to 3.75 to 4 percent, its first increase in three years. The Bank of Japan raised rates twice to 1.25 percent, and the European Central Bank raised rates by 25 basis points to 2.25 percent, while in India, the Reserve Bank of India also raised the repo rate by 25 basis points and shifted its stance to 'calibrated tightening'.

According to Mistry, the rise in global 10-year bond yields to a two-decade high is particularly concerning, as tighter financial conditions and the relative appeal of developed markets could draw capital away from emerging markets. He says that if yields remain elevated for an extended period, global investors may shift toward fixed income and away from emerging-market equities.

Energy markets remain another major source of risk. Escalating tensions in the Middle East pushed WTI crude above $100 per barrel in October, while Brent remained above $110. Higher oil prices could increase pressure on India's import bill, inflation, the rupee and corporate profitability, while any fresh disruption involving Iran, the Strait of Hormuz or regional energy assets could further heighten market concerns.

At the same time, Prateek Parekh, an equity strategist at Nuvama Institutional Equities, says valuations in Indian markets have not fully cooled. In his view, two years of flat markets have reduced some overvaluation despite earnings growth, but valuations relative to bonds remain around their 2024 peak as pressure on earnings builds. The NSE 500's one-year forward price-to-earnings ratio is now 18 times, in line with its 20-year average, compared with 24 times in September 2024.

Weak monsoon and impact on rural demand

Weather-related risks are also becoming a distinct pressure point for markets, especially as the 2026 monsoon was the weakest in more than a decade. Low rainfall, the impact of El Niño and potential crop losses are increasing risks to both rural demand and food inflation.

Aastha Gudwani, Barclays' chief India economist, says below-forecast rainfall and the persistence of El Niño effects have heightened concerns about kharif sowing, crop yields and price pressures from potential supply shocks. In her view, the backdrop remains challenging as rabi sowing gets underway.

The monsoon ended at 88 percent of the long-period average, below normal and also lower than the India Meteorological Department's forecast of 90 percent. Geographically, rainfall was 'deficient' in 16 of 36 subdivisions, while 25 of 35 states and union territories recorded below-average rainfall, with conditions classified as 'deficient' in 17 states.

According to Gudwani, rural consumer sentiment weakened further toward the end of the monsoon season. Q1 FY27 earnings transcripts and early Q2 commentary indicate that rural consumption has maintained momentum in some sectors, such as farm machinery and autos, but demand uncertainty is affecting earnings in areas such as consumer staples. She says companies' commentary is now less optimistic about rural demand than it was in the fourth quarter of FY26.

Vinod Karki, an equity strategist at ICICI Securities, says that several states moving into the 'deficient' rainfall category have clouded the outlook for rural demand and investor sentiment. Some state governments, including those of Maharashtra and Karnataka, have announced support for drought-relief measures. Karki says a large loan-waiver package is not expected, but further government measures to support drought-hit farmers may emerge.

He also says that non-performing assets linked to agricultural loans could rise in some states, becoming an important indicator of drought-related stress. Overall, high rates, expensive oil, supply risks and weak rural demand could prolong volatility in Indian capital markets.

Our previous report assessed the RBI's tight monetary policy, which emphasized a 25-basis-point repo rate hike and a ‘calibrated tightening’ stance, alongside upward revisions to both the growth and inflation forecasts for FY27. That article also referred to the risks to food inflation and rural demand from a weak monsoon, high commodity and energy prices, and expensive borrowing, as well as steps taken to stabilize liquidity and the rupee.

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