Indian Equities Face Headwinds from Oil and US Yields, Jefferies Says

Indian markets are likely to remain range-bound as they navigate significant macroeconomic headwinds, including rising U.S. Treasury yields and elevated oil prices, according to a recent report from Jefferies. The investment bank noted that while small and mid-cap (SMID) growth stocks have performed well, current conditions favor a shift toward quality and defensive equities.

Macro Challenges Mount

Jefferies identified several key challenges for the Indian market. The firm stated that rising U.S. yields expose India to potential funding stress from an international flows perspective, while sustained high oil prices are also not conducive for the market's performance.

The report also pointed to subsiding volatility in artificial intelligence, which could shift investor focus back to AI supply chain-centric countries. The only potential positive macro factor cited by the firm was the possibility of dollar debasement.

SMID Outperformance and Strategy

Despite the headwinds, India's small and mid-cap segment has shown robust performance. The MSCI India small-cap index has outperformed the standard index by approximately 14% this year, according to Jefferies. These stocks are reportedly showing earnings per share (EPS) growth of over 20% and trade at an attractive 1.1 times price/earnings-to-growth (PEG) ratio, compared to 1.4 times for large-cap stocks.

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Jefferies said that growth has been the dominant investment style in India this year. The firm maintains a long-term preference for growth, stating there is no evidence of a major economic cycle shift that would justify a sustained rotation into value or quality stocks. The bank's own SMID GARP and multibagger strategies have gained approximately 15% in 2026.

Valuation Concerns Lead to Underweight Stance

Due to what it describes as poor scores on earnings and valuations, Jefferies maintains an underweight position on India within its emerging markets country model. The firm considers the market expensive, trading at a 20 times price-to-earnings (P/E) multiple with a 13% EPS compound annual growth rate (CAGR).

While Jefferies believes the consensus MSCI India EPS growth forecast of 12% for the fiscal year ending March 2027 is likely to be met, it cautioned that growth acceleration in the following year may fall short of consensus expectations.