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The Reserve Bank of India (RBI) has recently referred to the current period of low inflation and high economic growth in the country as ‘unprecedented times’.
However, the ongoing conflict in the Middle East and the resulting disruption in the oil markets have unexpectedly impacted India’s impressive economic growth, rendering the current situation fragile.
What Is the Impact?
The most severe impact has been on the Indian currency, the rupee, which has suffered its largest depreciation ever. Compared to last year, the Indian rupee has devalued approximately 10% against the US dollar.
Although the central bank intervened to provide some relief, economists suggest this effect may only be temporary. The likelihood of an extended conflict means the rupee could face further depreciation in the future.
In a worst-case scenario, if the conflict extends to 2026, Bernstein estimates the rupee could be devastated, potentially reaching 110 rupees per US dollar or higher. Even if the war ends soon, its effects are expected to persist.
Continued currency weakness will negatively impact multiple sectors. Consumer inflation is likely to rise, corporate profits could decline, government deficits may increase, and investment in the stock market might fall.
Due to foreign currency outflows, key economic indicators in India have already dropped by 12% early this year. This has eroded people’s wealth and reduced spending habits, thereby hampering efforts by the affluent to boost consumption and sustain economic momentum.
Global tensions have begun to adversely affect inflation and economic growth calculations in the country.
India’s Finance Ministry’s latest monthly review notes that rising import and transportation costs may reduce remittances from the one million Indians living in Gulf countries, potentially impacting the economy further.
All these recent negative impacts indicate ‘supply disruptions and increased pressures in various sectors, along with signs of some control over economic activities.’
How Much Will Growth Be Affected?
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India’s Gross Domestic Product (GDP) was forecasted to grow by 7% in the 2026–27 fiscal year. However, the crisis in the Gulf region is expected to reduce this growth rate by nearly 1%.
If growth slows, India’s ambition to surpass Japan as the world’s fourth-largest economy will be deferred for some time.
On the inflation front, food prices are rising, although petrol prices at pumps remain controlled by the government, limiting drastic increases.
Ahead of key state elections, the government has cut excise duties on petrol and diesel to provide relief to consumers and imposed a ‘windfall tax’ on exports.
Comprehensive Impact of the Energy Crisis
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The energy crisis is widely impacting various sectors.
India is the world’s third-largest crude oil importer and imports 60% of its natural gas and 90% of its cooking LPG from abroad, mostly from the Middle East. Therefore, Delhi faces serious challenges due to the current crisis.
About one-quarter of India’s imported chemical fertilizers come from Middle Eastern countries; any supply disruption could severely impact the agricultural economy.
“The biggest worry is the shortage of these materials,” said Shilan Shah and Mark Williams of Capital Economics. “This has led to partial closures of restaurants and hotels and has already affected the food processing and ceramics industries.”
Former Chief Economic Advisor Arvind Subramanian told India Today Television that this crisis could bring significant ‘stagflationary pressures,’ leading to increased inflation but slower economic growth.
Signs of worsening conditions have surfaced as supply problems with LPG have led many migrant workers to leave major cities like Mumbai, reminiscent of the lockdown period.
Economists worry this could exacerbate labor shortages and upward pressure on wages.
How Is the Government Responding?
The government has proposed a $6.2 billion ‘economic stabilization’ fund and sought permission to increase subsidies for food items and fertilizers to counter the crisis.
However, since resources are limited, funding for road and railway infrastructure may need to be cut, and according to Bernstein, these measures alone may not be sufficient given the scale of the challenge.
Due to the uncertainty over when the conflict will end, the central bank is likely to keep interest rates steady in its upcoming announcement.
“The ‘wait and watch’ approach will help the RBI make future policy decisions more easily and assess the inflation risks,” said Care Ratings.
Despite the crisis, some hopeful signs have emerged.
A cheaper rupee could enhance India’s export competitiveness, and the available foreign exchange reserves will help the country endure this crisis.
However, similar to the trade difficulties caused by tariffs during the Trump era, Subramanian emphasizes the need for immediate and long-term strategies to reduce risks in the energy sector.
Such strategies include expanding stockpiles, diversifying reserves and transitioning rapidly toward renewable energy in the long term.
