NEW DELHI: Just months ago, India’s central bank governor was celebrating what he called a “rare Goldilocks” phase falling inflation, solid growth, and a currency holding its ground. The Iran war that erupted on Feb. 28 ended all of that.
With India being the third biggest oil importer in the world, around 90 percent of its requirement is brought in from abroad, and thus makes its $3.5 trillion economy one of the most vulnerable economies to suffer from the consequences of the war. The blockade on the Strait of Hormuz, which is a major transportation route for one-fifth of the world’s oil and gas trade, has increased the price of oil to almost $120 a barrel (which is a rise of almost 30 percent).
The damage to India’s import bill arrived quickly. Oil-and-gas import costs jumped 53% in April compared with March, and HSBC now estimates the country’s balance of payments deficit could widen to roughly $65 billion in 2026-27, against $25.2 billion or 0.6% of GDP the year before.
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The Reserve Bank of India moved on Friday with a package of stabilisation measures, which HSBC says could pare the BoP shortfall by around $30 billion. On the other hand, the government has reduced gold imports, asked people to reduce traveling abroad, and encouraged the use of public transport to reduce oil demands.
But analysts say these steps address only the surface.
“India is set for a series of supply shocks,” said Michael Langham, emerging markets economist at Aberdeen Investments, pointing to the compounding pressure from oil, fertiliser shortages triggered by the conflict, and an El Niño weather pattern that raises the risk of drought. “The effectiveness of the RBI’s ability to see through the price shock in energy prices from the Strait of Hormuz would become more challenging considering the fact that these types of supply shocks overlap,” he pointed out.
The projected level of inflation is pegged at 5.1%, an increase from 3.48% recorded in April, while the growth rate has been slashed from 7.7% to 6.6% by March 2027. The interest rate swap market is predicting at least 25 basis points of interest rate hikes within the next three months and over 75 basis points over the next year.
Sat Duhra, a portfolio manager at Janus Henderson Investors’ Asia ex-Japan equity team, said the energy shock was compounding longer-standing structural weaknesses. “Any move to rein in public-sector capital expenditure to stabilise conditions would risk further slowing growth,” he said. “This leaves policymakers in a difficult position.”
Retail fuel prices tell a telling story. Petrol and diesel at Indian pumps have risen less than 10% since the war began compared with increases of 50% or more across several other oil-importing Asian economies. The government has resisted full price pass-through given its controlling stake in major fuel retailers, but it has also declined to compensate those companies for losses, a move analysts say will erode dividend flows back to state coffers.
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Further, the government lowered taxes on gasoline and gas oil, resulting in foregone revenue of around 140 billion rupees per month, while it has a fertilizer subsidy burden that will go up by 20% in 2026-27, an important expenditure head in a country whose agriculture sector employs nearly half its population, while the threat of drought is increasing.
The fiscal deficit target is 4.3% of GDP, while economists, polled by Reuters, foresee a figure of 4.7%, or even higher at 5%. India-based ratings agency Crisil warned the pain would spread. “The broader effect will reverberate across the economy through higher transport costs, pushing up both food and core inflation,” it said.
The central bank held rates at its last meeting. That restraint may not last long.
