The West Asia oil shock, the first rate hike in three years and two years of de-rating: what it means for your SIPs

The Macro Picture

• Oil went round trip: Brent eased to about $87 in late August on hopes Hormuz would reopen, then climbed back above $100. The strait remains effectively shut.

• The rupee is stable, but at a cost: At 96.7 it is where it was in May, but reserves have fallen about $50 bn in three weeks from a $786 bn peak as the RBI defends it.

• Growth is holding up: Q1 FY27 GDP grew 7.8%. The RBI now projects 7.1% for FY27.

• Inflation has crossed the line: CPI has risen every month since May, to 4.82% in August, led by food at 5.95%.

• The RBI has turned: On 7 October it raised the repo rate 25 bps to 5.50%, its first hike since February 2023, and moved to "calibrated tightening"

Inflation has risen for four straight months and is now above target. The RBI's own path has it peaking near 5.9% in the October–December quarter, which is why a second hike in December is being discussed.

Who is selling, who is buying

Two years of falling prices, three different stories

Index level, trailing earnings and P/E at the end of September, 2024 to 2026.

Table 1 - Index levels, Earnings and Evaluations

Every index except smallcaps is cheaper than it was two years ago. EPS is trailing twelve months. All growth and change figures are absolute (cumulative, not annualised) and over two years unless marked 1Y.

Prices fell less than valuations did, because earnings kept growing. The 2025 dip was broad. The 2026 recovery came from mid, small and microcaps, while the Nifty 50 kept sliding

Earnings did the work, valuations took the hit

Price change is roughly earnings growth plus the change in P/E. Midcaps grew earnings by 58% in absolute terms, which absorbed a 38% de-rating. Smallcaps went the other way.

Where value sits now

Five indices, five takeaways.

1. Large caps are the cheapest in this period, but not on earnings strength. The Nifty 50 trades at 19.4x against 24.3x in 2024, but earnings grew only 3.3% last year.

2. Nifty Next 50 offers growth at the lowest price. 16.2% EPS growth in the past year at 18.3x, the lowest P/E of the five.

3. Midcaps earned their way through. EPS rose 57.6% (absolute) in two years, taking P/E from 45.7x to 28.4x while prices slipped only 2%.

4. Smallcaps are the outlier. They are the only index where earnings fell (−6% over two years, −7.3% in the last year) and P/E rose. At 34.5x they are now more expensive than midcaps.

5. Microcaps are the only index up over two years (+2.1%), on 38% earnings growth. Cheaper at 27.3x, but liquidity risk is high.

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