Indian assets eye turnaround after tumultuous quarter rocked by Iran war

MUMBAI: Indian stocks, bonds and the rupee showed signs of recovery in the April-June quarter in which oil prices whipsawed between $70 a barrel and above $120 before retreating, as investors tracked the fallout from the Iran war and subsequent ceasefire.

The rupee hit a record low, bond yields climbed and stocks slumped as investors fretted over the hit to India’s energy-import dependent economy from the war.

The South Asian nation’s policymakers dusted off playbooks from past crises, aiming to steady the currency by shoring up dollar inflows, offering incentives for overseas borrowings and deposits, while also removing taxes and easing foreign investment rules for government debt.

Alongside a ceasefire in the Middle East, the salvo of policy changes helped arrest the spiral in Indian assets.

The rupee has recovered about 2% from its record low, the 10-year bond yield is down over 40 bps from its quarterly peak and the Nifty 50 index has reclaimed 8% from a 12-month low it slid to in April.

Fortunes turn

“In midst of the U.S.-Iran conflict, India’s balance of payments was on course to register a third consecutive annual deficit in FY27,” which would have been the longest such run, Radhika Rao, senior economist at DBS said in a note.

“With the ceasefire in place and oil prices having corrected sharply … we now expect a BOP surplus.”

Analysts have raised India’s growth forecasts and cut inflation projections, boosting the outlook for its stocks that had lagged Taiwan and South Korea amid weaker earnings and limited AI exposure.

Currency weakness, driven by outflows and higher oil prices, was the key pressure point but has now turned into a tailwind, said Abhay Laijawala, chief investment officer for India at Lighthouse Canton, which oversees assets worth $5 billion.

Relaxed foreign investment rules and growing hopes of global index inclusion have meanwhile supported Indian bonds.

The benchmark bond yield is down 32 basis points through June, its biggest quarterly drop since January-March 2020.

Overseas investors have net bought nearly $3 billion of government bonds under the Fully Accessible Route (FAR) in June, the highest monthly inflow on record, clearing-house data showed.

Treading cautiously

Investor optimism, however, is measured.

“Though bond yields have fallen sharply we do not expect the 10-year bond yield to sustain below 6.70% given that central banks across the world have been hiking rates and monsoons continue to be deficit,” said Puneet Pal, fixed income head at PGIM Mutual Fund.

A lasting upgrade for Indian equities still hinges on earnings, while the RBI may absorb renewed inflows to rebuild FX reserves rather than allow significant rupee gains, according to global fund managers.