Mumbai (Maharashtra) [India], May 18 : Rising crude oil prices and the ongoing conflict in the Middle East could limit the government's ability to further increase infrastructure spending in the near term, according to a report by HSBC Mutual Fund.
The report stated that the conflict in the Middle East is beginning to exert macro-economic pressure on India through higher crude oil prices and a weakening rupee.
"The Middle East conflict is starting to exert macro-economic pressure on India. Sharp increase in crude price and weaker rupee will be headwinds for FY27 growth if things are not resolved quickly," the report noted.
According to the report, the government is currently absorbing a part of the impact arising from higher energy prices. However, this may affect its financial flexibility to further accelerate infrastructure expenditure in the short term.
"While government is absorbing part of the impact, this will impinge on government's ability in the near term to boost infra spending," the report stated.
Despite these global challenges, HSBC Mutual Fund maintained that India's overall growth outlook remains resilient.
The report said India's investment cycle is expected to remain on a medium-term uptrend supported by continued government spending on infrastructure, policy support to manufacturing and improvement in private investments.
"We believe India's growth remains quite resilient despite the global macro-economic challenges," the report said.
The fund house also stated that potential trade agreements with the European Union and the United States could support private capital expenditure by improving medium-term tariff certainty and export competitiveness.
According to the report, Indian equity valuations have also become more reasonable. "Nifty valuations are trading at 10-year average," it stated.
HSBC Mutual Fund said it remains constructive on Indian equities from a long-term perspective, although near-term market conditions continue to remain uncertain due to geopolitical tensions.
"We remain constructive on Indian equities on a longer-term basis however near-term outlook remains more uncertain due to geo-political conflicts," the report added.
However, HSBC Mutual Fund also warned about weather-related risks to inflation.
The report highlighted that the possibility of a below-normal monsoon could negatively impact food production and increase food inflation in the near term.
"Risk of a below normal monsoon with negative consequences for food production and leading to higher food inflation is also another stress in the near term," the report added.