At the beginning of the year 2026, the Indian economy was in a sweet spot. GDP for FY26 was estimated to grow by 7.6%; CPI inflation was running at 2.75%; fiscal deficit and current account deficits were well within targets of 4.4% and 1%, respectively; forex reserves at around $720 billion were ample, and Brent Crude was trading at around $62.
RBI Governor described the situation as a ‘rare Goldilocks scenario.’ The fiscal and monetary stimulus provided by the government and the RBI, respectively, in 2025 had boosted the earnings growth prospects for FY27, and Nifty appeared to be resilient, trading around 26000 levels.
However, the West Asia conflict and the consequent energy crisis have changed the Indian macro scenario from Goldilocks to vulnerable.
The sharp spike in Brent Crude from about $70 just before the war to around $110 now will hit the macro economy.
The impact on GDP growth, the fiscal deficit, the current account deficit, the rupee, and corporate earnings will depend on the duration of the war.
If the war drags on for a few more months and Brent crude trades above $110 for an extended period, India’s macroeconomic indicators will be hit hard, and this will be reflected in the stock and currency markets.
If the war ends in, say, one month, and crude declines to around the $80 level, the impact on macros will be contained. In brief, everything boils down to the duration of the war.
The energy crisis is a key risk
It is the energy crisis triggered by the war that has impacted the Indian economy. This energy crisis is not just a price shock; it is a supply shock, too.
The closure of the Hormuz Strait has hit the supply of LPG and LNG, which, in turn, has impacted many businesses like hotels, restaurants, travel and LNG users.
The spike in the price of crude and gas will widen the trade deficit, and the feared dip in remittances will add to the strain on CAD.
Aggravating the crisis is the sustained FPI (foreign portfolio investor) selling in the stock market. This has made the rupee one of the worst-performing emerging market currencies.
Rupee’s weakness may continue
The fall of the rupee is partly a temporary trend, triggered by the oil shock and the consequent impact on the trade and current account deficits.
It is partly structural, too, since India has been depending on FPI inflows to finance CADs.
This dependence on FPI inflows turns adverse during times of FPI flight like what we have been experiencing during the last around 19 months.
There were hopes that the US would end the war soon. But this hope has been belied by the April 1st declaration of President Trump that “we will hit Iran hard in the next two to three weeks.”
Consequently, Brent Crude again spiked to around $110. The danger of widening trade and current deficits is becoming more serious, particularly in the context of sustained FPI selling.
RBI’s directive to banks to cap their open rupee positions in the onshore market at $100 million and barring the banks from offering rupee non-deliverable derivatives has led to a short squeeze, pushing the rupee up to around the 93 level.
However, this is likely to be only a temporary relief since the underlying fundamental issues relating to the rising trade and current account deficits and sustained FII selling are not addressed, and unfortunately, cannot be addressed by the Central bank’s actions.
In the near-term, the rupee weakness is likely to continue.
Stability can emerge from two sources: One, an end to the war and a sharp decline in crude price. Two, a significant decline in FPI selling.
The first can happen any time; perhaps sooner than later. The second will take some time.
This will require clarity on India’s growth, inflation and corporate earnings, which will emerge only when there is de-escalation in the West Asia conflict and opening of the Hormuz Strait.
Disclaimer: The author of this article is the chief investment strategist at Geojit Investments. Views are strictly personal. This article is for educational purposes only. The views and recommendations expressed are those of the expert, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
