The investment outlook for Asia's third-largest economy is buoyant, but the start of earnings season could prove to be the thorn in the market's side, forecasts show.
Companies listed on India's benchmark Sensex stock index are expected to record flat quarterly earnings growth for the October-December period, India's third-quarter of the 2015 financial year, according to a report from Citi published on Monday. That would mark the weakest growth in five quarters.
"There's a lot going for India, but it's not this quarter's earnings," economists at the bank said, referring to the country's current status as a top emerging market pick.
Edelweiss Financial Services also expects companies in India to yield zero growth in profits after tax (PAT), adding that earnings downgrades are likely in the coming months.
A more than 50 percent tumble in Brent crude prices over the past six months has been a blessing for the Indian economy, as India imports over 70 percent of its oil needs. That helped New Delhi rein in consumer price inflation to 5 percent on year in December from double digit levels in 2013, pushing the Sensex up 30 percent in 2014.
However, the same can't be said for Indian oil and gas companies, which account for 13 percent of the Sensex index, excluding oil marketing firms, since lower crude prices hurt the profit margins of energy producers. Citi sees growth in the energy sector declining 11 percent on quarter for the three months that ended in December.
Meanwhile, a stronger rupee is expected to weigh on export-oriented industries such as pharmaceuticals and information technology (IT). Growth in the former sector is seen falling 0.6 percent on quarter, according to Citi, following the currency's 10 percent spike against the euro over the past six months.