West Asia Tensions Threaten India's Energy Security, But Domestic Economy Holds Strong

The report noted that energy markets reacted sharply to the geopolitical developments, with Brent crude rising about 13 per cent and European natural gas prices jumping 55 per cent in the week following the escalation.

Jefferies said the surge in energy prices was triggered by fears surrounding the potential closure of the Strait of Hormuz, a critical global oil shipping route. Such disruptions could significantly affect oil-importing countries like India by raising import costs and inflation pressures.

However, the report suggests that markets have so far reacted cautiously, as investors increasingly treat geopolitical shocks as temporary buying opportunities.

India, which imports more than 80 per cent of its crude oil needs, remains particularly exposed to sustained oil price spikes.

Higher crude prices typically affect India through multiple channels, including, rising inflation and fuel costs, pressure on the current account deficit and higher fiscal subsidy burdens if retail prices are controlled.

While the report does not provide a direct forecast for oil's trajectory, it warns that prolonged conflict could intensify global energy market volatility, adding pressure on emerging markets.

Despite the strong domestic story, foreign investors have been pulling back from Indian equities in recent months.

According to the report, foreign investors have sold a net USD 32.7 billion of Indian equities since October 2024, though they made a modest net purchase of USD 1.7 billion in February 2026.

Jefferies said foreign flows are likely to return only when global investors believe the semiconductor and AI investment cycle has peaked, triggering a rotation away from hardware-heavy markets such as Taiwan and Korea toward India.

Domestic inflows remain the biggest stabilising factor for India's equity markets.

Systematic Investment Plan (SIP) contributions averaged around Rs 305 billion (USD 3.4 billion) per month over the three months to January 2026, demonstrating strong retail participation.

In addition, the government-backed National Pension System (NPS) is contributing roughly USD 1.4 billion per month to equities, a trend expected to grow over time.

These steady domestic flows have helped offset foreign outflows and supported valuations.

The report adds that, despite global uncertainty, there are signs of a cyclical pickup in the Indian economy.

The report noted that, "The best evidence of the cyclical acceleration is loan growth which is now rising by 13.6 per cent YoY as of 15 February, up from a recent low of 9.0 per cent YoY in May 2025."

Corporate performance has improved as well, with earnings growth for companies under Jefferies coverage accelerating to 18 per cent year-on-year in the December quarter, an eight-quarter high.

However, the report flags some longer-term challenges for India. One key concern is the potential impact of artificial intelligence on the country's IT services industry, which employs around six million people. Automation and AI-driven efficiencies could reduce demand for traditional IT outsourcing work in the future.

- ANI