With the war in West Asia showing few signs of an early resolution, the economic outlook is turning increasingly uncertain. Crude oil prices have climbed back to $106-107 per barrel, pushing the cost of the Indian basket to around $120 per barrel. The resulting energy shock—among the sharpest on record—threatens to weigh on economies worldwide.
For net energy importers such as India, the impact will be disproportionately severe: roughly 80% of crude oil and about half of gas consumption are met through imports, with oil alone accounting for nearly a quarter of the import bill. Uncertainty over the trajectory of the conflict, the extent of supply disruptions, and the direction of oil prices makes forecasting particularly difficult. On a rough estimate, elevated import costs—across oil, fertilisers, and gas—could push the current account deficit (CAD) to 2-2.5% of GDP this year, roughly double the FY26 level of about 1%.
The pressure on the CAD is likely to be compounded by slowing exports, already hit by higher US tariffs and disruptions in West Asian markets. Merchandise exports are projected to grow by just 5-5.5% in FY27. Remittances, which saw strong inflows in FY25 and FY26, may remain subdued until conditions in the Gulf stabilise; the region accounts for nearly 38% of India’s total remittance inflows. Capital flows, too, are unlikely to offer much support in an environment marked by heightened risk and uncertainty. Foreign portfolio investors have continued to pare exposure to Indian equities, with outflows in FY26 amounting to a substantial $19.6 billion. Sentiment remains cautious, reflecting concerns over corporate performance, some softening in macro fundamentals, and a depreciating currency.
Widening Deficits
Foreign direct investment (FDI) flows have also been uneven. After several months of net outflows last year, there was a recovery in March, but volatility is likely to persist. Despite India’s appeal as a large consumer market, FDI may remain subdued until the macroeconomic environment stabilises. The combined effect of a widening CAD and tepid capital inflows raises the possibility of the balance of payments slipping into deficit for a third consecutive year. There is no immediate cause for alarm as India has large foreign exchange reserves of around $700 billion.
However, adjusting for gold holdings and special drawing rights, it falls to about $570 billion, and further adjusting for the RBI’s forward position, the number falls to just below $500 billion. So far, it is still comfortable, providing more than eight months of import cover. Still, pressure on the rupee could endure. For now, the central bank appears inclined to rely on administrative measures to curb speculative pressures rather than intervene aggressively. If oil prices fail to ease towards $75-80 per barrel, the RBI’s FY27 inflation projection of 4.6% could come under strain. Signs of imported inflation are already visible, with rising input costs—particularly for crude-linked intermediates—feeding into prices of goods such as packaging and bottling materials.
Inflationary Risks
Any increase in retail fuel prices—which seems inevitable after the Assembly election results on May 4 if the war persists—would have broader second-round effects, pushing up costs across the economy and potentially putting the Reserve Bank of India’s 6.5% GDP growth projection at risk. Higher inflation would erode household purchasing power and dampen consumption. At the same time, fiscal pressures are likely to keep bond yields—already edging towards 7%—elevated. These are, clearly, testing times for the economy.