India has only two broad macro risks, everything else is manageable.
In the short term, it is the market impact of high Oil prices.
In the long term, it is the social impact of the inability to create enough jobs.
This has been our considered response for over two decades. Given the structural story of 6.5% real GDP growth, double-digit nominal GDP growth, its balanced economy and domestic and diaspora savings pool, India has the potential to deal with short term cyclical swings caused by global interest rates and liquidity, inflation and deficits, sectoral trends, wars and conflicts. India also has the potential to deal with a few structural trends of global growth, debt cycles, domestic and global economy shifts.
The 80% Dependency: Why Oil Dictates India’s near term Macro Stability
However, given that India imports ~80% of its energy needs (oil and gas), energy price spikes have an impact on macro parameters. High energy prices lead to an increase in India’s import bill, which widens the current account deficit (difference between goods and services exports minus imports) and hence requires larger capital inflows to keep the currency stable. Irrespective of it, the Indian currency tends to depreciate more than its long-term average during such periods.
From CAD to Currency: The Financial Ripple Effect of Crude Spikes
High energy prices then feed through to producer and consumer price inflation forcing RBI to keep interest rates higher and liquidity tighter to constrain demand.
The government cognizant of a per-capita income country of less than US$3,000 must subsidize retail energy prices and hence increase its fiscal deficit which can lead to higher market interest rates.
Oil and Gas prices thus have a clear short-term impact on India. Over the medium-term, the impact is managed through demand restraint, alternatives, and other export sources.
A decade ago, oil prices sustaining above $80/brl would trigger the short-term macro risk and markets (equities, bonds and currency) would start adjusting to that reality. However, with the increase in goods exports, the spurt in software exports and the rise in remittances, India can manage higher oil prices before it becomes a concern.
However, over the last decade, that concern has never really materialized. Oil prices have spent most of the time below US$80/brl. Oil prices spiked above US$100/brl in 2022 post the Russian advance into Ukraine. However, as the chart below suggests, Oil prices have not been a talking point in global macro. In fact, low oil prices have been a worry for oil producers and oil producing nations.
Chart 1: Oil prices had ceased to react to middle east tensions. Has that changed now?
The other aspect has been the impact of the middle east countries in dominating production and determining Oil prices. For instance, in the start of 2010s as the region saw the emergence of Islamic State (ISIS) and their disruptions, there was a supply shock premium loaded onto Oil prices. We can see that Oil prices remained well above $100/brl for close to 4 years.
It was not a surprise then that India’s current account deficit widened to 5% of GDP in 2013. India faced the ignominy of being bracketed as one of the ‘Fragile Five’ countries and a ‘taper tantrum’ caused global market upheaval and led to the Indian rupee depreciating by more then 20% in a span of six weeks in 2013.
With the United States now becoming a large producer of Oil and LNG, the dependence and volatility caused by unrest and cartelization in OPEC (Organization of Petroleum Exporting Countries) has limited impact on oil prices.
Thus, oil prices, despite continued geo-political issues, have remained below the US$80/brl mark.
Even in the current conflict with Iran, it is the threat of choking the Hormuz strait and the impact on Qatar’s LNG facilities which has caused the spike in oil and gas prices.
As the charts and images below depict, Asia in general and India in particular is crucially impacted by the recent events.
While US sanctions forced India to stop imports from Iran a few years back and Donald Trump now threatening India to cease Russian oil imports, India is vulnerable and hostage to a few options to meet its energy requirements.
It is crucial that the oil flows through Hormuz and Qatar restarts its LNG and fertilizer supplies.
Chart 2 and 3: India is crucially impacted by this conflict
The war couldn’t have come at a worse time for India.
As I wrote in my Complicated 2025, Simpler 2026 outlook piece, I had expected India’s nominal growth to rise, Indian corporate earnings to get back to double digit growth and for the Indian rupee to remain stable or depreciate at its long-term average.
Given the above and India’s relative underperformance against emerging markets, I was hoping for foreign allocations to increase this year.
I started off this Global India Insight series with the idea of a Global Reset. Global allocations will move away from the US and seek other destinations. India stands to gain and deserves a decent allocation out of that global re-balancing.
2025 of course was the year of AI. With ‘India not AI’, allocations moved away from India in search of global AI plays to US, Korea, Taiwan, China etc.
I then wrote that, India should be seen as a diversification to the AI story. When global capital gets worried about the AI bubble and wants to diversify away its AI exposure, it can very well do so by allocating to India.
Global Capital Flows: Why Geopolitical Tensions may Delay ‘Rebalancing’
Given that foreign investments, FDI and FPI have seen net outflows and that foreign investors are anyways under-invested in India, I had argued that India should scrap capital gains tax on foreign investors to attract the global capital which is in search for large, dependable, diverse, predictable markets.
The war does put in some short-term worries on inflation and currency depreciation. This may delay the rebalancing of flows towards India.
Disclaimer:
Arvind Chari is a Chief Investment Strategist and has been with Quantum Advisors India group since 2004. Arvind has over 20 years of experience in long-term India investing across asset classes. Arvind is a thought leader and guides global investors on their India allocation.
This article is for educational and discussion purposes only and is not intended as an offer or solicitation for the purchase or sale of any investment in any jurisdiction. No advice is being offered nor recommendation given and any examples are purely for illustrative purposes. The views expressed contain information that has been derived from publicly available sources that have not been independently verified. No representation or warranty is made as to the accuracy, completeness, or reliability of the information.
The views and opinions expressed in this article are my personal views and should not be construed of the Firm. There is no assurance or guarantee that the historical result is indicative of future results, and the future looking statements are inherently uncertain and cannot assure that the results or developments anticipated will be realized.