![\"India\u2019s](\"https:\/\/static.toiimg.com\/thumb\/msid-130116932,imgsize-119000,width-400,height-225,resizemode-4\/indian-economy.jpg\" "\\"RBI\u2019s")
<\/div>\n<\/div>\n<\/div>\nThe US-Iran war has caused major disruptions for global markets and economies, and India as the world\u2019s fifth largest economy is not immune to the shock. Heavily dependent on imports to meet its crude needs, a rise in global oil prices above $100 per barrel and the supply bottlenecks created due to the de facto closure of Strait of Hormuz have hit various sectors of the economy. But how big is the hit likely to be? Is India\u2019s growth story at the risk of being derailed by the Middle East conflict?The Reserve Bank of India in its first monetary policy review of 2026-27, while keeping repo rate<\/a> unchanged, has expressed confidence in India\u2019s fundamentals, firmly stating that they are on a \u2018stronger footing\u2019 at present than they have been in past crisis episodes as well as relative to many other economies. The central bank says that this strength provides it with greater resilience to withstand shocks,\u201dKeeping the ongoing West Asia crisis in mind, the RBI<\/a> has estimated a 6.9% GDP growth for India in FY 2026-27 and an average inflation of 4.6%. These numbers assume an average oil price of $85 per barrel. The GDP growth for FY26 has been estimated at 7.6%. \u201cGoing forward, elevated energy and other commodity prices, as also shocks to availability of inputs due to disruptions in the Strait of Hormuz are likely to impact growth in 2026-27. The government has, however, been proactive in ensuring supply of inputs across critical sectors to minimise the impact of supply chain disruptions,\u201d said RBI governor Sanjay Malhotra.\u201cSustained momentum in services sector, persisting impact of GST rationalisation, and healthy balance sheets of financial institutions and corporates should continue to support economic activity. The agricultural sector’s prospects are supported by healthy reservoir levels. Business expectations remain optimistic, and leading indicators point towards continued resilience in manufacturing and services sectors,\u201d he said. \u201cMoreover, the Government\u2019s focus on scaling up domestic manufacturing in several strategic and frontier sectors augurs well for India\u2019s ensuing growth trajectory,\u201d he added.But even as it is confident of India\u2019s ability to come out of the fresh global uncertainty, RBI has flagged five risks due to the US-Iran war that could negatively impact the economy.<\/span><\/p>\n RBI\u2019s message is clear: the initial supply shock can potentially transform into a demand shock over the medium term if the restoration of supply chains is delayed. RBI governor Sanjay Malhotra has listed five channels of transmission through which the <\/span>Indian economy<\/span> may take a hit due to the Middle East conflict. These are:<\/span>Current Account Deficit:<\/span>What the RBI governor said: Elevated crude oil prices could increase imported inflation and widen the current account deficit. What it means: The west Asia crisis has significantly impacted supplies of oil thereby raising the price of crude oil. Given that India is still a net energy importer , this will have a significant impact on the current account deficit, explains Vivek Iyer, Partner and Financial Services Risk Advisory Leader at Grant Thornton Bharat. <\/p>\n The numbers highlight the sensitivity:<\/p>\n This makes crude oil arguably India\u2019s largest macro variable outside domestic policy control.Impact of energy disruptions<\/span>What the RBI governor said: Disruptions in energy markets, fertilisers and other commodities may adversely impact industry, agriculture and services, reducing domestic output.What it means: Supply chain risks will cause the prices of commodities such as oil, fertiliser and other products that pass through the impacted shipping routes to increase resulting in imported inflation in India. Hence this is an upside risk to inflation, says Vivek Iyer.Safe Haven Demand<\/span>What the RBI governor said: Heightened uncertainty, increased risk aversion and safe haven demand could impact domestic liquidity conditions, economic activity, consumption and investment. What it means: According to Iyer, this will result in foreign investment slowing down and money moving out of the country, elevating the currency risk exposure from a rupee depreciation standpoint.Reduced remittance flow<\/span>What the RBI governor said: Weaker global growth prospects may dampen external demand and reduce remittance flows.What it means: \u201dThis has the potential to impact inward remittances that today serve as a cushion against reduction in merchandise exports and rise in import costs of various commodities including oil and fertilisers amongst others,\u201d the Grant Thornton Bharat expert says.Higher cost of borrowing<\/span>What the RBI governor said: Adverse spillovers from global financial markets could tighten domestic financial conditions and raise the cost of borrowing.What it means: \u201dSpill overs from international financial markets may raise the cost of borrowing in India – with risk aversion across, capital will be offered at a risk premium globally having a second order impact on rising cost of capital for India,\u201d Iyer adds.<\/p>\n DK Srivastava, Chief Policy Advisor, EY India notes that RBI\u2019s projected effects on growth and inflation are asymmetric and depend primarily on the average global crude price which is assumed at $85 per barrel for 2026-27. \u201cIndia\u2019s real GDP growth is projected at 6.9% and CPI inflation at 4.6% for 2026-27. However, the RBI estimates that if the crude price averages $95 per barrel in 2026-27, growth would be lowered to 6.7% and inflation would be higher at 5.0%,\u201d he says.\u201cGiven the required time lag for the global crude supply situation to normalize even if the crisis is resolved in the near future, there is a likelihood of average global crude price exceeding $95 per barrel in 2026-27. In such a scenario, India\u2019s growth may be lowered further and inflation may be higher than the baseline projections,\u201d he cautions.\u201cGovernment policies to provide stability to prices may, however, moderate the impact on CPI inflation to some extent. The Monetary Policy Committee has not changed either the repo rate or the policy stance. It is only appropriate to wait for the next review meeting\u2019s assessment of the situation regarding the crude price movements and its impact on inflation,\u201d he adds.Ranen Banerjee, Partner and Leader, Economic Advisory Services at PwC India notes that crude oil prices above a certain level have had a broad based impact on the input prices for various industries that have petroleum based raw material usage. \u201cGiven the pressures on the external front, heightened inflation, stress on exporting entities and lower remittances besides constraints on government\u2019s fiscal headroom to pump prime – will all have an impact on aggregate demand. This will constrain the ability of companies to pass on the higher cost of production to consumers and will therefore impact their margins,\u201d he tells TOI.However, even though there are risks to the growth story, RBI and most economists are of the view that underlying domestic strength will help tide over the challenges. <\/p>\n According to Sachchidanand Shukla – Group Chief Economist at Larsen & Toubro, the RBI has rightly highlighted risks arising from the US-Iran war, but like the central bank, the economist is confident of India\u2019s growth story.Firstly, it is important to note that the risks highlighted are real but largely priced in. India\u2019s domestic-demand engine plus diversification limits growth downside to 6.5-6.9%, which is still one of the strongest large-economy prints globally, he tells TOI.He highlights possible mitigatory factors or offsets available as compared to the past. These are<\/p>\n To sum it up, the imported inflation pass-through is likely limited to a 30-odd bps extra versus an unmitigated scenario. The Current Account Deficit stays manageable (<2% of GDP) with services exports and FDI continuing to cushion.However, breach of ceasefire or further escalation lasting beyond May and Brent crude prices of higher than $100 per barrel for a sustained period or rupee at over 95 will be the factors to watch out for, says Sachchidanand Shukla.Exuding confidence, Vivek Iyer, Partner and Financial Services Risk Advisory Leader at Grant Thornton Bharat sees the risks to India\u2019s growth story as only a comma and not a full stop. \u201cThe fundamentals of the economy continue to be strong and supply side risks on account of geopolitical conflicts have already put India on a path to re-evaluate their trade relationships. This may potentially have an impact on the economic growth for a quarter as we pivot, but we see this impact only as a blip rather than a structural shift,\u201d he tells TOI.In its monetary policy report released today, the RBI\u2019s analysis clearly signals India\u2019s resilience. \u201cDomestic economic activity remains resilient, supported by robust private consumption and continued expansion in fixed investment, even as the external environment remains uncertain. Favourable agricultural prospects, steady services activity, elevated capacity utilisation and healthy balance sheets of corporates and banks are likely to underpin growth going forward. Continued public investment in infrastructure and recently concluded trade agreements are also expected to be conducive for medium-term growth prospects,\u201d says RBI in its Monetary Policy Report at the start of the financial year.It warns that risks to the outlook persist. \u201cMovements in crude oil prices and exchange rate developments warrant continued vigilance. Geopolitical tensions, volatility in global financial markets, uncertainty surrounding global trade policies and weather-related disruptions could pose headwinds to growth and inflation,\u201d the central bank says. Over the medium-term, the growth-inflation dynamics would be conditional on when the supply chain is fully restored as well as where energy prices settle after the end of the West Asia conflict, it says.\u201cAt the current juncture, the situation is highly uncertain and would require continuous assessment of the developments to frame the appropriate policy response. Overall, India\u2019s strong macroeconomic fundamentals and existing buffers provide resilience in the face of destabilising geopolitical developments and rising uncertainties,\u201d it concludes.<\/div>\n\nRBI Flags 5 Risks<\/h2>\n<\/p>\n
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How big are the risks to India\u2019s growth story?<\/h2>\n<\/p>\n
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