India's Cyclical Recovery at Risk as Oil Supply Shock Looms

India's cyclical recovery is facing rising risks from an oil supply shock, fading domestic stimulus, and weaker artificial intelligence (AI) capital expenditure, according to a Nuvama Institutional Equities report. The impact of the oil supply shock on corporate margins is expected to emerge from Q2FY27, following a similar lag observed during the 2022 war.

The report notes that inventory gains, which prevented margin contraction in Q1FY27, will reverse from Q2FY27. This could hit small- and mid-cap companies and cyclical sectors hardest, as they suffered a larger hit to profits last time around.

Meanwhile, the AI investment boom is no longer giving a strong boost to financial markets, possibly because the growth in AI-related spending is slowing. As per Nuvama, if this trend continues, 'the positive impact of AI investment on exports and metal prices could weaken from the second half of FY27.'