Dear Readers,
Peace, when it comes, is often priced in before it is proven. That much was evident this week.
After a month of disruption that left economists, policymakers and fund managers struggling to keep pace, the ceasefire abruptly shifted sentiment. Nowhere was this more visible than on Dalal Street. The BSE Sensex, which had been falling by 1,000 to 1,500 points a day earlier, surged almost 3,000 points in a single day.
It was a powerful expression of relief. Yet the pullback that followed just a day later was equally instructive. I believe that sharp reversal is the real story. Markets are not signalling confidence in recovery; they are signalling uncertainty about it. Historically, post-conflict rallies tend to be sharp but short-lived, with nearly 30 to 40 per cent of initial gains retraced if macro clarity does not follow.
So in reality, the ceasefire has given hope, but economic recovery will happen only when corporate capex is pushed. More importantly, I think recovery requires visibility on demand and earnings, not just currency stability. Without that, capex cycles tend to remain frozen, with recovery lagging sentiment by two to four quarters.
War and the Global Economy
What the war has done in the last month is bring extreme uncertainty, pushing geopolitical tensions to elevated levels. After the ceasefire, economies are hoping for certainty, unless there are breaches of the agreement.
Amid the calm, many questions linger. Will pressure on supply chains and global trade ease? Are shipping routes through the Strait of Hormuz out of danger? Has the risk of renewed escalation truly receded? Well, we still do not have clear visibility.
And I think that lack of clarity is itself a macro variable. Global uncertainty indices have spiked to levels seen during major geopolitical shocks, which typically correlate with weaker investment and trade contraction.
Now, the ceasefire has given hope, but it will take time to settle. In the last month itself, not just oil and LPG, but the cost of credit, capital cycles and cargo insurance have all moved up sharply, hitting imports and exports. Trade volumes in some corridors dropped by as much as 20 to 30 per cent at peak disruption.
Globally, the macro backdrop has already weakened, with growth forecasts being revised down and inflation expectations moving up due to the energy shock. Global GDP growth for 2026 is now estimated at around 2.6 per cent.
To put this in perspective, every 10 per cent increase in oil prices typically shaves off 0.1 to 0.2 percentage points from global GDP growth while adding to inflation, creating a stagflationary impulse.
According to the CFOs and financial experts I spoke to, decision-making has become significantly more complex. CFOs with export exposure are dealing with volatile currencies and difficult hedging conditions. Will the ceasefire change this? I doubt it, especially given the lingering uncertainty around its durability.
In such periods, corporates tend to delay commitments and reduce forward exposure, which feeds into weaker order books and lower revenue visibility.
This uncertainty is now feeding directly into corporate earnings expectations. Analysts have started cutting estimates, and there is a growing risk of earnings downgrades over the next two quarters. Early indications suggest cuts in the range of 2 to 5 per cent, with deeper pressure in energy-intensive sectors.
According to Moody’s, Asia-Pacific will bear the brunt of supply disruptions, given its reliance on Middle East-linked energy and supply chains. Credit risks remain elevated, particularly in South Asia, where energy dependency is high.
At the same time, rising oil prices have triggered currency volatility across Asia, forcing central banks to intervene. Foreign exchange reserves in some economies have already seen drawdowns. This adds another layer of pressure on corporate margins and balance sheets.
Indian Economy
First of all, a ceasefire will reduce commodity volatility for India, especially oil, which should ease inflationary pressures and support the rupee.
However, in the last month since the war began in West Asia, India has already felt the impact. There are higher chances that India’s current account deficit will widen, as crude oil prices have surged beyond $100 per barrel alongside rupee depreciation. A $10 increase in crude oil typically raises India’s CAD by 0.3 to 0.4 per cent of GDP. At current levels, the CAD could move closer to 2 per cent.
Additionally, every $1 increase in crude oil raises India’s import bill by nearly $1.8 billion, tightening financial conditions and affecting corporate profitability. This also has second-order effects on fiscal balances.
But I believe macro factors remain relatively supportive. What matters now is how India and Indian Inc respond to these shifts.
There are early signs of change. The alignment between the US and Europe appears to be loosening. The EU, taken together, represents a larger consumption market than the US and could be a meaningful opportunity for India. The EU already accounts for 14 to 15 per cent of India’s exports, and even marginal gains here could be significant.
Of course, currency volatility will remain a key factor. At the same time, global linkages are clearly evolving.
This is a positive time as quarterly results have already begun, and there is hope that performance will drive growth. But I would add that hope is not a strategy. Earnings will need to validate valuations, which remain elevated in several sectors.
The near-term outlook is far from stable. Rising input costs, supply chain disruptions and weak pricing power could compress margins, especially in sectors such as autos, chemicals and metals. Historically, such pressures have led to margin compression of 150 to 300 basis points.
Morgan Stanley, in its recent report, has highlighted that India will show trailing performance, with valuations and earnings supporting a recovery in equities.
That said, I think this recovery will be uneven. Earnings volatility is expected to increase in the next quarter as companies adjust to fluctuating energy prices, currency movements and uncertain demand. Consensus estimates are already being revised downward, and volatility in such phases often doubles compared to stable periods.
There is also evidence of capital expenditure slowing. Private capex is showing early signs of moderation, with indicators such as capital goods imports and project announcements weakening. This could delay the earnings recovery cycle.
Reality Check
The one lesson I take from the past month is that certainty is fragile and often depends on decisions taken at the highest levels.
Even when the storm settles, the clean-up takes time. What is destroyed takes longer to rebuild. Importantly, prices that go up rarely come down. Evidence suggests that 60 to 70 per cent of commodity shocks show downward rigidity.
I think in an interconnected world, people are ultimately looking for business rather than conflict, and markets reflect that instinct.
So, the market has celebrated. Markets are always quick to react. But in reality, economies take time. In most cases, earnings recovery lags market recovery by at least two quarters.
The uncomfortable truth, in my view, is this: the ceasefire may mark the end of escalation, but it does not mark the beginning of recovery. That still lies ahead, and it will take longer than markets are willing to admit.
Please share your feedback, suggestions if any. You can reach me on amol.dethe@timesinternet.in.
As usual, I am adding here the top 5 stories of the week, trust you will find them meaningful.
1.Exclusive: PMO seeks inputs on banning foreign audit firm logos, investor-driven Big Four mandates; flags data security risks
2.India Inc CFOs back RBI’s rate hold, flag Q1 pressure amid West Asia uncertainty
3.Exclusive: PMO weighs curbs on Big Four in PIE audits in sectors linked to national security
4.Will RBI’s curbs on forward contracts raise hedging costs for India Inc?
5.India Inc braces for cautious hiring under new labour codes
Happy Reading
Amol Dethe,
Editor,
ETCFO
(Editor’s note is a column written by Amol Dethe, Editor, ETCFO. Click here to read more of his articles exploring several buzzing topics)
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