Indian markets can hit new highs despite global risks, says SMC Global's Ajay Garg
SMC Global Securities CEO Ajay Garg shares his outlook on Indian markets, crude oil, Q1 earnings, sector winners, FII flows, large caps and market risks.
- Jul 24, 2026,
- Updated Jul 24, 2026 12:27 PM IST
Despite rising geopolitical tensions, elevated crude oil prices and global uncertainty, India's equity markets remain supported by resilient domestic fundamentals. In an interaction with Business Today, Ajay Garg, Director & CEO, SMC Global Securities, discusses the impact of Middle East tensions, the rupee, Q1 earnings, sectoral opportunities, large-cap versus mid-cap strategy, and whether Indian markets can scale fresh highs in the second half of 2026. Read the edited excerpts:
BT: Geopolitical tensions in the Middle East continue to keep investors on edge. How vulnerable are Indian equities if the conflict escalates further, and which sectors are most at risk?
Garg: Indian equities have weathered several geopolitical and economic shocks over the past decade, but any escalation in the Middle East conflict will undoubtedly increase near-term volatility. For India, the biggest transmission channel is crude oil. Since the country imports nearly 85 per cent of its crude oil requirement, a sustained spike in Brent prices can widen the current account deficit, fuel inflation and put pressure on the rupee, all of which eventually impact corporate earnings.
The immediate pressure is likely to be felt in sectors with high fuel or crude-linked input costs, including aviation, logistics, paints, chemicals, tyres and oil marketing companies. Export-oriented businesses could also experience volatility due to currency fluctuations and weaker global demand. On the positive side, upstream oil producers may benefit from higher crude realisations, while defence companies could continue attracting investor interest amid rising global defence spending.
That said, India's macroeconomic position is far stronger than in previous cycles. With foreign exchange reserves of around $675 billion and over $20 billion raised through recent RBI measures to boost foreign currency inflows, along with a well-capitalised banking system and resilient domestic demand, the economy is better placed to absorb external shocks. Investors should therefore avoid reacting to geopolitical headlines and instead focus on companies with strong balance sheets, pricing power and sustainable earnings growth.
BT: The rupee has come under pressure amid rising crude prices and global uncertainty. How do you see currency movements impacting corporate earnings, FII flows and overall market sentiment in the coming quarters?
Garg: The rupee's movement will continue to be influenced by three key factors: crude oil prices, the strength of the US dollar and global capital flows. A gradual depreciation is manageable, but if it is accompanied by persistently high crude prices, it can increase imported inflation and raise input costs for several sectors.
Higher US Treasury yields, currently hovering around 4.5–4.6 per cent, have also kept foreign investors cautious towards emerging markets. This could lead to intermittent FII outflows. However, FIIs don't look at currency in isolation. They also evaluate growth prospects, policy stability, and corporate earnings, in which India continues to compare favourably with most emerging economies.
Sectorally, exporters such as IT services and pharmaceuticals may benefit from a weaker rupee, while aviation, oil marketing companies and businesses with high import dependence could face margin pressure. Despite these headwinds, India's healthy foreign exchange reserves, robust domestic demand and continued infrastructure spending provide an important cushion. Unless currency volatility becomes excessive, we believe earnings execution and domestic growth will remain the primary drivers of market performance over the medium term.
BT: With the Q1FY27 earnings season underway, what are your expectations from India Inc.? Which sectors are likely to surprise positively, and where could earnings disappoint?
Garg: We expect Q1FY27 earnings to be mixed, reflecting the divergence between India's resilient domestic economy and a challenging global environment. Elevated crude prices, currency volatility and softer external demand have prompted several global brokerages to moderate FY27 earnings growth expectations from around 16 per cent to nearly 12–13 per cent.
Financials are likely to remain the strongest contributor this quarter. Credit growth continues in the low double digits, asset quality across banks is near multi-year lows, and retail lending remains healthy. Automobiles could also deliver steady earnings, supported by premiumisation, healthy rural demand and improving exports. Capital goods, infrastructure, and defence companies should continue to benefit from sustained government capital expenditure and a healthy project pipeline.
On the other hand, metals may remain under pressure due to softer global commodity prices, while downstream oil & gas companies could see margin compression if crude prices remain elevated. For IT companies, investors are likely to focus less on quarterly numbers and more on management commentary around AI-led demand, discretionary spending and deal wins.
Overall, we believe this earnings season will reinforce that stock-specific fundamentals, rather than broad market momentum, will determine returns going forward.
BT: The broader market has outperformed large caps for an extended period despite elevated valuations. Do you expect this trend to continue, or is it time for investors to rotate towards large-cap stocks?
Garg: The rally in mid- and small-cap stocks over the past two years has been supported by abundant domestic liquidity, strong retail participation and improving earnings. Interestingly, while several broader market indices delivered healthy returns, the Nifty 50 has remained broadly flat over the last two years, highlighting that gains have been concentrated in select pockets rather than across the benchmark.
At the same time, monthly SIP inflows have consistently remained above Rs 30,000 crore, providing strong liquidity support to equities. However, valuations in several segments of the broader market have become demanding, leaving limited room for disappointment.
We believe the next phase of market performance is likely to be driven more by earnings than liquidity. In such an environment, quality large-cap companies with stronger balance sheets, better governance standards and relatively more reasonable valuations appear well positioned to regain leadership.
This does not mean investors should avoid mid- and small-caps altogether. There are still excellent businesses in this space. However, returns are likely to become increasingly selective. A balanced portfolio with greater emphasis on quality large caps, while remaining selective in the broader market, appears to be the more prudent strategy at this stage.
BT: Crude oil prices remain a key macro risk for India. If Brent sustains at elevated levels, which sectors are likely to emerge as winners and losers, and how should investors position their portfolios?
Garg: Crude oil has always been one of India's most critical macro variables because the country imports nearly 85 per cent of its crude oil requirement. Every sustained increase in Brent prices has a cascading impact on inflation, the current account deficit, the rupee and corporate profitability. Some estimates suggest that if crude prices remain elevated for an extended period.
According to CRISIL, India's current account deficit could widen to around 1.5 per cent of GDP in FY27 if elevated crude prices persist, underscoring the broader macroeconomic impact beyond corporate earnings.
From a sectoral perspective, aviation, logistics, paints, chemicals, tyres and oil marketing companies are likely to face higher input costs and pressure on operating margins. Higher fuel prices can also weigh on discretionary consumption by reducing household purchasing power.
Conversely, upstream oil producers generally benefit from higher crude realizations. At the same time, sectors driven by domestic structural themes such as banking, infrastructure, defence and capital goods should remain relatively resilient, supported by healthy credit growth and sustained public investment.
Rather than taking tactical positions based solely on commodity movements, investors should focus on companies with pricing power, strong cash flows and healthy balance sheets. Commodity cycles are inherently difficult to predict, but businesses with sustainable competitive advantages have historically been better positioned to navigate such periods and continue to
BT: Despite global uncertainties, domestic macros remain supportive with healthy credit growth, easing inflation and strong SIP inflows. Do you believe Indian markets can continue to hit new highs in the second half of 2026, or are valuations becoming a concern? Garg: India's long-term growth story remains compelling despite the uncertain global backdrop. Domestic demand continues to be resilient, inflation has moderated from earlier peaks, bank credit growth remains healthy, and monthly SIP inflows have consistently stayed above Rs 25,000 crore, reflecting increasing retail participation and confidence in equity investing. At the same time, the government's continued focus on growth is evident from the Rs 12.22 lakh crore capital expenditure allocation in FY27, with effective capital expenditure estimated at Rs 17.15 lakh crore, providing sustained support to infrastructure, manufacturing and private investment.
Having said that, valuations in certain pockets of the market have become rich after the strong rally over the past few years. Going forward, returns are likely to depend more on earnings delivery than on further valuation expansion. External factors such as crude oil prices, geopolitical developments, US interest rates and foreign capital flows will continue to influence near-term sentiment.
We remain constructive on Indian equities over the medium- to long-term because the structural drivers of growth remain intact. If corporate earnings remain resilient and external risks moderate, Indian markets could continue their upward trajectory in the second half of 2026, although periods of consolidation and volatility should be expected. Investors should therefore avoid chasing momentum and instead focus on diversified portfolios comprising fundamentally strong businesses with consistent earnings visibility.
Despite rising geopolitical tensions, elevated crude oil prices and global uncertainty, India's equity markets remain supported by resilient domestic fundamentals. In an interaction with Business Today, Ajay Garg, Director & CEO, SMC Global Securities, discusses the impact of Middle East tensions, the rupee, Q1 earnings, sectoral opportunities, large-cap versus mid-cap strategy, and whether Indian markets can scale fresh highs in the second half of 2026. Read the edited excerpts:
BT: Geopolitical tensions in the Middle East continue to keep investors on edge. How vulnerable are Indian equities if the conflict escalates further, and which sectors are most at risk?
Garg: Indian equities have weathered several geopolitical and economic shocks over the past decade, but any escalation in the Middle East conflict will undoubtedly increase near-term volatility. For India, the biggest transmission channel is crude oil. Since the country imports nearly 85 per cent of its crude oil requirement, a sustained spike in Brent prices can widen the current account deficit, fuel inflation and put pressure on the rupee, all of which eventually impact corporate earnings.
The immediate pressure is likely to be felt in sectors with high fuel or crude-linked input costs, including aviation, logistics, paints, chemicals, tyres and oil marketing companies. Export-oriented businesses could also experience volatility due to currency fluctuations and weaker global demand. On the positive side, upstream oil producers may benefit from higher crude realisations, while defence companies could continue attracting investor interest amid rising global defence spending.
That said, India's macroeconomic position is far stronger than in previous cycles. With foreign exchange reserves of around $675 billion and over $20 billion raised through recent RBI measures to boost foreign currency inflows, along with a well-capitalised banking system and resilient domestic demand, the economy is better placed to absorb external shocks. Investors should therefore avoid reacting to geopolitical headlines and instead focus on companies with strong balance sheets, pricing power and sustainable earnings growth.
BT: The rupee has come under pressure amid rising crude prices and global uncertainty. How do you see currency movements impacting corporate earnings, FII flows and overall market sentiment in the coming quarters?
Garg: The rupee's movement will continue to be influenced by three key factors: crude oil prices, the strength of the US dollar and global capital flows. A gradual depreciation is manageable, but if it is accompanied by persistently high crude prices, it can increase imported inflation and raise input costs for several sectors.
Higher US Treasury yields, currently hovering around 4.5–4.6 per cent, have also kept foreign investors cautious towards emerging markets. This could lead to intermittent FII outflows. However, FIIs don't look at currency in isolation. They also evaluate growth prospects, policy stability, and corporate earnings, in which India continues to compare favourably with most emerging economies.
Sectorally, exporters such as IT services and pharmaceuticals may benefit from a weaker rupee, while aviation, oil marketing companies and businesses with high import dependence could face margin pressure. Despite these headwinds, India's healthy foreign exchange reserves, robust domestic demand and continued infrastructure spending provide an important cushion. Unless currency volatility becomes excessive, we believe earnings execution and domestic growth will remain the primary drivers of market performance over the medium term.
BT: With the Q1FY27 earnings season underway, what are your expectations from India Inc.? Which sectors are likely to surprise positively, and where could earnings disappoint?
Garg: We expect Q1FY27 earnings to be mixed, reflecting the divergence between India's resilient domestic economy and a challenging global environment. Elevated crude prices, currency volatility and softer external demand have prompted several global brokerages to moderate FY27 earnings growth expectations from around 16 per cent to nearly 12–13 per cent.
Financials are likely to remain the strongest contributor this quarter. Credit growth continues in the low double digits, asset quality across banks is near multi-year lows, and retail lending remains healthy. Automobiles could also deliver steady earnings, supported by premiumisation, healthy rural demand and improving exports. Capital goods, infrastructure, and defence companies should continue to benefit from sustained government capital expenditure and a healthy project pipeline.
On the other hand, metals may remain under pressure due to softer global commodity prices, while downstream oil & gas companies could see margin compression if crude prices remain elevated. For IT companies, investors are likely to focus less on quarterly numbers and more on management commentary around AI-led demand, discretionary spending and deal wins.
Overall, we believe this earnings season will reinforce that stock-specific fundamentals, rather than broad market momentum, will determine returns going forward.
BT: The broader market has outperformed large caps for an extended period despite elevated valuations. Do you expect this trend to continue, or is it time for investors to rotate towards large-cap stocks?
Garg: The rally in mid- and small-cap stocks over the past two years has been supported by abundant domestic liquidity, strong retail participation and improving earnings. Interestingly, while several broader market indices delivered healthy returns, the Nifty 50 has remained broadly flat over the last two years, highlighting that gains have been concentrated in select pockets rather than across the benchmark.
At the same time, monthly SIP inflows have consistently remained above Rs 30,000 crore, providing strong liquidity support to equities. However, valuations in several segments of the broader market have become demanding, leaving limited room for disappointment.
We believe the next phase of market performance is likely to be driven more by earnings than liquidity. In such an environment, quality large-cap companies with stronger balance sheets, better governance standards and relatively more reasonable valuations appear well positioned to regain leadership.
This does not mean investors should avoid mid- and small-caps altogether. There are still excellent businesses in this space. However, returns are likely to become increasingly selective. A balanced portfolio with greater emphasis on quality large caps, while remaining selective in the broader market, appears to be the more prudent strategy at this stage.
BT: Crude oil prices remain a key macro risk for India. If Brent sustains at elevated levels, which sectors are likely to emerge as winners and losers, and how should investors position their portfolios?
Garg: Crude oil has always been one of India's most critical macro variables because the country imports nearly 85 per cent of its crude oil requirement. Every sustained increase in Brent prices has a cascading impact on inflation, the current account deficit, the rupee and corporate profitability. Some estimates suggest that if crude prices remain elevated for an extended period.
According to CRISIL, India's current account deficit could widen to around 1.5 per cent of GDP in FY27 if elevated crude prices persist, underscoring the broader macroeconomic impact beyond corporate earnings.
From a sectoral perspective, aviation, logistics, paints, chemicals, tyres and oil marketing companies are likely to face higher input costs and pressure on operating margins. Higher fuel prices can also weigh on discretionary consumption by reducing household purchasing power.
Conversely, upstream oil producers generally benefit from higher crude realizations. At the same time, sectors driven by domestic structural themes such as banking, infrastructure, defence and capital goods should remain relatively resilient, supported by healthy credit growth and sustained public investment.
Rather than taking tactical positions based solely on commodity movements, investors should focus on companies with pricing power, strong cash flows and healthy balance sheets. Commodity cycles are inherently difficult to predict, but businesses with sustainable competitive advantages have historically been better positioned to navigate such periods and continue to
BT: Despite global uncertainties, domestic macros remain supportive with healthy credit growth, easing inflation and strong SIP inflows. Do you believe Indian markets can continue to hit new highs in the second half of 2026, or are valuations becoming a concern? Garg: India's long-term growth story remains compelling despite the uncertain global backdrop. Domestic demand continues to be resilient, inflation has moderated from earlier peaks, bank credit growth remains healthy, and monthly SIP inflows have consistently stayed above Rs 25,000 crore, reflecting increasing retail participation and confidence in equity investing. At the same time, the government's continued focus on growth is evident from the Rs 12.22 lakh crore capital expenditure allocation in FY27, with effective capital expenditure estimated at Rs 17.15 lakh crore, providing sustained support to infrastructure, manufacturing and private investment.
Having said that, valuations in certain pockets of the market have become rich after the strong rally over the past few years. Going forward, returns are likely to depend more on earnings delivery than on further valuation expansion. External factors such as crude oil prices, geopolitical developments, US interest rates and foreign capital flows will continue to influence near-term sentiment.
We remain constructive on Indian equities over the medium- to long-term because the structural drivers of growth remain intact. If corporate earnings remain resilient and external risks moderate, Indian markets could continue their upward trajectory in the second half of 2026, although periods of consolidation and volatility should be expected. Investors should therefore avoid chasing momentum and instead focus on diversified portfolios comprising fundamentally strong businesses with consistent earnings visibility.