‘Rahu Kal’ for markets? Nilesh Shah warns oil spike from Middle East tensions could still sting India

Nilesh Shah is the Managing Director at Kotak Mahindra AMC

• Markets absorb much of initial US-Iran shock
• Opportune time for bottom-up stock picking in in beaten-down names
• Believe banking and financials look more attractive post the sharp correction

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India may not be directly in the line of fire of the Iran conflict, but the economic aftershocks are already being felt, according to Nilesh Shah, Managing Director at Kotak Mahindra AMC.

“The markets have absorbed much of the initial shock, but the situation remains fluid,” Shah told Moneycontrol, noting that while “there are no missiles in our backyard”, the secondary effects of the conflict are beginning to show up in the economy.

The biggest risk, he said, is crude. “Higher oil prices act like the ‘Rahu Kal’ in our economic kundali, disruptive and hard to ignore.”

Even so, Shah believes the volatility could create opportunities for investors willing to look beyond the immediate noise. The current phase, he said, may favour bottom-up stock picking in beaten-down names, with diversification likely to work better than concentrated bets.

He also sees value emerging in banking and financial stocks after their recent correction. “Valuations have turned reasonable, deposit repricing could support NIM expansion in FY27, and asset quality pressures aren’t alarming,” Shah said.

Do you think the Middle East tensions are fully priced into the market considering the recent developments, or could there still be limited downside if the situation escalates?

The recent escalation in Middle East tensions, has sent ripples through global markets, with oil prices spiking sharply before some pullback. Markets react swiftly to unfolding events. In my view, while markets have absorbed much of the initial shock, the situation remains fluid. Higher oil prices act like the “Rahu Kal” in our economic kundali—disruptive and hard to ignore.

On a back-of-the-envelope basis, every 10% jump in crude adversely impacts India’s CPI inflation by about 20-30 bps in primary effect, with secondary ripples pushing it higher. Similarly, it dents GDP growth by around 10-20 bps and widens the Current Account Deficit (CAD) by another 10-15 bps. When you layer in secondary effects, the overall hit can increase further.

India remains insulated from direct war fallout—no missiles in our backyard—but the secondary impacts are real. We have to take care of over 9 million Indians working in the Gulf, their remittances form a large part of our FX inflows. Sustained high oil prices not only fuels inflation but pressures the rupee, bond yields, and equity sentiment. Markets hate uncertainty; volatility rises as investors recalibrate risks in response to events.

Are valuations attractive at current levels given the earnings outlook?

Large and mid-caps appear fairly valued on historical metrics—not cheap, but not in bubble territory. Small caps, however, remain expensive. If you’re chasing 30%+ returns, markets look pricey.

But for low to mid-single-digit positive real returns over the medium term, current levels offer a reasonable entry point for calibrated investments. This is a time for patience, not panic.

After the recent supply shock, do you see the government focusing more aggressively on the oil & gas exploration and production sector?

The supply shock from geopolitical events may prompt the government to double down on oil & gas exploration and production. In crises, our government has always responded decisively. Over the past two decades, India has smartly reduced oil intensity through a booming services sector and aggressive push into renewables and nuclear power.

Now is the moment to accelerate focus on agro-residue-based power generation and local hydrocarbon exploration. Crisis often catalyzes bold reforms—expect proactive steps here.

Do you see any impact of the Iran war on Q4 earnings, or do you think it will remain manageable?

For Q4 FY26 earnings, higher oil will cast a shadow, especially on oil & gas, petrochemicals, plastics, fertilizers, and related sectors. Margins could compress, input costs rise, and pass-through may be incomplete in a competitive environment. That said, the broader impact should remain manageable if the escalation doesn’t prolong dramatically.

Is the banking and financial sector looking more attractive after the recent sharp correction?

Banking and financials look more attractive post the sharp correction. Valuations have turned reasonable, deposit repricing could support NIM expansion in FY 27, and asset quality pressures aren’t alarming. This sector offers resilience amid volatility with domestic focus.

Would you advise buying stocks in sectors such as travel, tourism, and airlines that have been badly hit due to the oil shock and Iran-related tensions?

Sectors like travel, tourism, and airlines have been adversely impacted by the oil shock and flight disruptions. While near-term pain persists, this could be an opportune window for bottom-up stock picking in beaten-down names—diversification over concentration makes sense now.

Is this the time for investors to stay calm and rebalance their portfolios?

Ultimately, investors should adhere to the dharma of asset allocation. Corrections are healthy; use them to add to equities in a calibrated, disciplined manner—via SIPs or staggered buys—rather than chasing momentum or sitting on the sidelines entirely.

India remains a long-term growth story; stay calm, rebalance thoughtfully, and let time compound your decisions. There are asset classes like performing credit, arbitrage funds and precious metal funds to consider for appropriate asset allocation.