India’s Markets Look Resilient Even as the Economy Loses its Shock Absorbers

The failure of the US-Iran ceasefire and crude oil’s return to about $87 a barrel have again exposed India’s sensitivity to events beyond its control. But the central risk is not one conflict or one oil-price spike. Any respite is an intermission, not a conclusion, as geopolitical shocks become recurrent while India’s domestic capacity to absorb them weakens.

The latest West Asia flare-up is therefore best understood as a stress test. India is entering an era of repeated oil, currency and capital-flow disruptions just as nominal growth has slipped below 10%, corporate sales and earnings are slowing, household confidence is fragile, and policy room is narrowing. Yet equity markets still appear to discount double-digit earnings growth, supported increasingly by domestic liquidity rather than a broad revival in demand or private investment. The widening gap between market resilience and economic resilience is India’s real vulnerability.

In 2025-26, nominal GDP grew 9%, while its seven-year compound annual growth rate fell to 9.5%. Excluding the pandemic year, this is the weakest reading in decades. The slowdown is not merely statistical. Corporate sales growth, which has trailed nominal GDP since 2014, is now about 8.8%. For Nifty 50 companies, sales and profit growth have been running at roughly 6.5% over the past eight quarters.

The post-pandemic margin windfall is also fading. Nifty margins remain elevated at 14-15%, against about 10% before the pandemic, but have stopped expanding. With revenue growth slowing and costs rising, earnings growth is being compressed. Our household tracker suggests sales growth could ease further to 4-5%, pointing to near-flat earnings rather than the 12-15% growth embedded in consensus expectations. That makes further downgrades more likely as results emerge. Second quarter of 2026-27 (July-September) will be a critical test of whether revenue growth can stabilise without another burst of fiscal or monetary support.

Policy Squeeze
The fiscal cushion is thinner, too. Net tax collections in 2025-26 were ₹26.2 trillion, missing the Budget estimate by ₹2.14 trillion. Nominal spending growth slowed to 5.4%, against the budgeted 7.4%, while pressure on revenues led to cuts in rural programmes. This creates a damaging feedback loop: weaker growth reduces tax buoyancy, prompting tighter expenditure, which then weakens demand further.

Monetary easing has not repaired that weakness. A cumulative 125-basis-point reduction in the policy rate, ₹14-15 trillion of liquidity and softer regulation have supported credit growth, but much of the impulse appears to have financed leveraged consumption or bridged corporate cash-flow gaps rather than initiated a durable investment cycle. Bank credit growth reached 18.6% in June 2026, even as the Reserve Bank of India’s industrial survey showed weakening order books, sales expectations, inventories, employment and wages. Fast credit growth is not necessarily evidence of economic acceleration when operating cash flows are under strain.

Household indicators point in the same direction. The Reserve Bank of India’s net measure of urban household income sentiment fell to 0.9% in May 2026, from 30.1% in June 2013. Among rural households, the proportion reporting higher incomes declined to 29.6% in May from 42.2% in November 2025. Corporate employee compensation growth slowed to 6% in the final quarter of 2025-26, while several sectors reduced headcount. A consumption recovery cannot become broad or durable when household incomes remain this weak.

Equities have nevertheless been sustained by a powerful domestic wealth creation chimera. Over roughly two years, domestic institutional investors put about $165 billion into equities, offsetting foreign portfolio investor retrenchment of $54 billion. That support matters, but it should not be mistaken for an all-clear on fundamentals. Companies also raised about $95 billion of equity in 2024-25 and 2025-26, absorbing much of the domestic liquidity. Valuations have already de-rated, and could compress further if earnings disappoint. Liquidity can postpone price discovery, but it cannot manufacture revenues, margins or household income. When earnings repeatedly undershoot expectations, even committed domestic savers become more selective, and the market’s support narrows.

The policy response must therefore move beyond another round of credit stimulus or temporary measures to attract foreign flows. India needs to rebuild its shock absorbers by strengthening household purchasing power, restoring rural demand and ensuring that public capital expenditure generates income and crowds in private investment. If crude prices soften sustainably, recent petroleum-price increases should be reconsidered. Household tax relief and rural allocations deserve priority, while luxury consumption can bear a greater share of revenue mobilisation.

At the same time, energy resilience must become a core economic policy objective. Strategic crude reserves, cryogenic gas storage and coal gasification are not glamorous market themes, but they reduce the cost of the next external shock. India cannot prevent geopolitical disruption. It can, however, ensure that each disruption does not arrive when growth, incomes and policy capacity are all losing momentum.

Markets can remain liquid longer than the economy can remain resilient. Policy should act before that distinction becomes impossible to ignore.