Global Risks May Keep Indian Markets Under Pressure, But Festive Demand Could Lift Select Stocks

Indian equities could remain under pressure in October as geopolitical tensions, elevated crude oil prices and the possibility of further US interest rate hikes weigh on investor sentiment. However, strong domestic festive demand could provide selective support to consumption-focused sectors, according to a report by OmniScience Capital.

The report said the festive period covering Navratri, Dussehra and Durga Puja could improve domestic market sentiment and benefit companies linked to consumer spending.

"Navratri, Dussehra and Durga Puja related festive consumption could spike positive sentiment for the markets domestically or at least for consumption-related stocks, including consumer staples, consumer durables and automobiles," it said.

Financial services companies could also benefit from stronger consumer spending, particularly banks and non-banking financial companies (NBFCs) involved in consumer lending. Housing finance companies could similarly see increased demand if the festive season triggers higher activity in the housing market.

The report noted that the September market sell-off was not specific to India and suggested that investors closely monitor the Reserve Bank of India's monetary policy decisions, the domestic interest-rate trajectory and liquidity conditions for further signals.

Global developments, particularly the conflict involving the US and Iran, remain a major risk. The report expects the confrontation to continue through October and potentially intensify, which could keep crude oil prices elevated.

Persistently high oil prices could add to US inflationary pressures and increase the possibility of further interest rate hikes by the US Federal Reserve. Higher US rates could keep bond yields elevated and make investors more cautious about adding to equity positions.

However, the report also identified a potential upside scenario. A ceasefire agreement between the US and Iran ahead of the US mid-term elections could ease geopolitical concerns, push bond yields lower and trigger a broad recovery in equity markets.

Even if the conflict were to intensify before the elections, the report said the US administration could potentially declare a unilateral ceasefire after claiming that its objectives had been achieved, which could similarly encourage investors to return to equities.

Another factor affecting foreign flows into India has been the growing concentration of artificial intelligence-related earnings in Taiwan and South Korea. According to the report, this has attracted some emerging-market investment away from Indian equities, contributing to a rotation in foreign investor flows.

Despite the near-term risks, OmniScience Capital believes Indian equities appear undervalued and suggested that investors could consider maintaining a slightly higher tactical allocation to equities than their long-term strategic allocation.

Among sectors, Indian banks, including both public sector and private lenders, were identified as attractive. The report also highlighted power companies, citing expected medium-term demand from electric vehicles, railways and, particularly, AI data centres.

Housing finance companies, infrastructure and engineering, procurement and construction (EPC) firms, as well as logistics and business services companies, were also identified as attractive over a three-to-five-year investment horizon.

The report's overall assessment suggests that while global macroeconomic and geopolitical risks could keep the broader market volatile in the near term, India's domestic consumption cycle and selected structural growth themes could continue to create opportunities for investors.