Mumbai

A possible agreement between Iran and the United States to end the ongoing conflict in West Asia could bring significant relief to the global energy market and improve India's macroeconomic outlook, according to a report by Kotak Institutional Equities.

The brokerage noted that financial markets are closely monitoring developments surrounding a potential peace agreement, which could reopen the Strait of Hormuz to normal shipping activity and enable Iran to resume unrestricted crude oil exports.

Kotak said a successful resolution of the conflict would likely lead to a further decline in oil and gas prices, reducing pressure on India's economy.

"We await the final agreement between Iran and the US that could bring the ongoing West Asian war to an end. Such a resolution may result in additional moderation in energy prices and provide relief to India's macroeconomic indicators," the report stated.

According to the brokerage, the proposed memorandum of understanding outlines a permanent cessation of hostilities, restoration of maritime trade routes, and a framework to achieve a comprehensive settlement within 60 days. Kotak believes the major parties involved have sufficient political and economic incentives to pursue a constructive outcome.

The report highlighted that softer crude prices would benefit India's external and fiscal balances. It observed that a quicker normalisation of energy supplies and shipping channels could substantially ease economic stress, particularly if oil prices fall below Kotak's FY27 base-case estimate of USD 95 per barrel.

Under its current assumptions of crude averaging USD 95 per barrel, Kotak expects India's current account deficit to remain at 2.2 per cent of GDP in FY27. However, a steeper decline in oil prices could lead to a lower deficit and reduce pressure on the country's balance of payments.

Despite this optimism, the brokerage cautioned that weather-related risks remain. It pointed out that forecasts indicating below-normal monsoon rainfall could adversely affect India's growth and inflation trajectory, even if energy prices ease.

Kotak currently projects India's real GDP growth at 6.1 per cent for FY27, while average consumer inflation is expected to remain around 5 per cent.

On the corporate front, the report suggested that lower commodity and energy costs could improve profitability for a broad range of sectors. Companies dependent on raw materials may benefit from reduced input costs, although businesses linked directly to commodity production could face earnings headwinds.

"A sharp fall in global energy and commodity prices could exert downward pressure on India's FY27 earnings growth, given that commodity-related sectors account for nearly 40 per cent of our estimated incremental earnings growth for the year," the report said.

At the same time, sectors driven by consumer demand and capital expenditure could see improved margins. Kotak also expects concerns surrounding asset quality in the banking sector to ease under a more favourable macroeconomic environment.

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The brokerage forecasts Nifty-50 earnings growth of 18 per cent in FY27 and 14.2 per cent in FY28. It added that financial stocks continue to offer attractive opportunities from both valuation and macroeconomic perspectives, even though recent market corrections have been led largely by banking and information technology counters.