The Reserve Bank of India's monthly State of the Economy report has warned that elevated crude oil prices and supply pressures could fuel inflation risks and strain India's external sector despite resilient growth. According to the RBI report, Brent crude prices, which declined to $100.71 per barrel on Friday, are still up 36.3% from late February when the conflict began. The central bank noted that financial conditions, crude oil prices and capital flows continue to pose challenges to the external sector outlook, with yields on treasury bills and dated government securities edging up in May. The merchandise trade deficit widened in April compared with March, with the import bill rising mainly due to crude oil and gold imports. The Indian Rupee has weakened more than 6% since the Iran war began, falling to consecutive record lows, including an all-time low of 96.96 per dollar on Wednesday. The central bank intervened to stabilise the currency, with forex traders indicating the RBI will conduct a dollar/rupee buy/sell swap auction of $5 billion for a tenor of three years.
Bank of Baroda economists have warned of a ₹2.1 trillion fiscal shortfall in FY27 as the West Asian crisis intensifies economic pressures. The fiscal deficit could slip to 4.7-4.8% of GDP against the budgeted 4.3%, with the absolute deficit rising from the projected ₹17 trillion to ₹18-18.5 trillion. According to Bank of Baroda economists, the fiscal strain stems from three main pressure points: the fertiliser subsidy burden, excise duty cuts on petrol and diesel, and ongoing losses by oil marketing companies. Sonal Badhan, economist at BoB, noted that maintaining the deficit level around 4.3% would require reducing capital expenditure and cutting expenditure in other ministries on the revenue side. The RBI has transferred an all-time high dividend of ₹2.86 lakh crore to the Centre amid the ongoing global headwinds, marking a record surplus transfer that would cushion government finances at the start of financial year 2026-27.
The economic disruption has triggered substantial inflationary pressures, with Wholesale Price Index (WPI) inflation rising to 8.3% in April from 3.9% in March, touching a 42-month high. The sharp increase in WPI inflation was largely driven by the fuel and power group, with the fertiliser subsidy burden having increased from ₹1.7 trillion to ₹2.4 trillion, creating an additional fiscal burden of ₹70,000 crore. The fertiliser subsidy, budgeted at ₹1.7 trillion for FY27, is expected to overshoot by ₹34,000-50,000 crore as rising gas prices push up urea production costs. Consumer Price Index (CPI) headline inflation edged up marginally to 3.5% year-on-year in April from 3.4% in March, primarily due to higher food inflation. The conflict has halted the global disinflation trend underway since 2023, with inflation projected to accelerate from 4.2% to 5.2% in developing economies.
India's economic growth trajectory faces significant headwinds from the West Asian conflict, with GDP projected to grow in the range of 6.5-6.8% in FY27, down from the 7.6% recorded in fiscal 2026. The World Economic Situation and Prospects as of mid-2026 report reveals that global GDP growth is now forecast at 2.5% in 2026—0.2 percentage points below the January projection and well below pre-pandemic norms. The shock is primarily felt in the energy sector—through constrained supply, surging prices, and rising freight and insurance costs—with effects cascading through supply chains and increasing production costs globally. Bank of Baroda economists flagged exports as a key risk, where petroleum products alone account for 12% of total exports, along with investment decisions being disrupted by supply-chain pressures.
India's export sector faces a double hit from the conflict, with weakening global demand combined with trade bottlenecks expected to stifle growth. Import-dependent manufacturing will be particularly hard hit by rising input costs. The conflict also poses significant risks to remittances, as West Asia accounts for approximately 38% of remittances into India, and continued regional tensions put that inflow at direct risk. This creates another dimension of vulnerability for India's economy beyond the immediate energy disruption. The crisis has intensified strains across developing economies, with rising borrowing costs and renewed capital-flow pressures risk deepening debt vulnerabilities and constraining resources available for sustainable development.
On monetary policy, Bank of Baroda expects the RBI to maintain status quo on rates and remain in a wait-and-watch mode, given that only the April CPI print is available so far and the full impact of the crisis is yet to be assessed. Dipanwita Mazumdar, economist at BoB, noted that the RBI will be more watchful and take a data-driven approach. On the rupee, the bank expects it to range between ₹97-98 per dollar in the coming months, driven largely by FII outflows from equity markets into safe-haven assets, and a US dollar that has strengthened 1.5% since February. Madan Sabnavis, the bank's chief economist, noted that while the Indian economy is looking at fairly stable performance notwithstanding war effects, there will be concerns at the micro level, particularly at the industry level.
