Ongoing West Asia conflict may feed through imported inflation; prolonged crisis could impact exchange rate, CAD: Finance Ministry
Fiscal resources have to be found, need for stress-testing balance-of-payments periodically under various scenarios, says monthly economic review.
The ongoing US-Israel strike on Iran has heightened geopolitical risk around the Strait of Hormuz, driving oil prices upward, which could feed through higher imported inflation, by raising fuel costs and weakening the rupee, complicating the inflation outlook for India, the Ministry of Finance said in its monthly economic review for February released Friday. If the crisis persists, it could have “material implications” for the exchange rate, the current account deficit, the Ministry said.
Subdued capital flows, accentuated by a flight to safety, could put pressure on the currency, the review noted. Some sectors dependent on LNG and crude, like fertilisers and petrochemicals, could also be affected if the crisis is prolonged, it said.
“This conflict has already driven Brent crude up around 9% to near $80/bbl. And LNG prices by around 50%. Despite the country’s high import dependency on crude oil, it has sufficient foreign exchange reserves, a low CAD (which stands at 0.8% of GDP in H1 FY26), and low inflation rates, which collectively allow it to effectively mitigate the impacts of rising global crude oil prices and ensure domestic energy security. However, if the crisis persists, it could have material implications for the exchange rate and the current account deficit and could stoke inflationary pressures (which otherwise have supportive supply-side dynamics),” the Ministry said.
The US-Israel strikes on Iran on February 28 killed Iran’s Supreme Leader Ayatollah Ali Khamenei and sparked retaliatory threats, which have disrupted shipping through the Strait of Hormuz which handles about 20% of global oil flows. This marks a pivotal escalation echoing the 1991 Gulf War oil shocks, potentially reshaping global energy geopolitics for decades, the Finance Ministry stated.
The Ministry pointed out that the implications of this conflict for India are significant and may be longer-lasting in ways that are not immediately understood. As cited in the preface to the Economic Survey FY26, this war brings closer the third of the three risk scenarios mentioned in it. “If it is the baseline scenario, then maintaining steady, if not high, growth and macro and financial stability become paramount considerations for policy, as stability itself will be at a premium globally. Further, a few other priorities push themselves into the reckoning,” it said.
The Economic Survey 2025-26 had detailed three possible scenarios of global crises — ‘business as in 2025’, disorderly multipolar breakdown, and a systemic shock cascade in which financial, technological, and geopolitical stresses amplify one another rather than unfolding independently. The Survey, while assigning a lower probability to this scenario, had said its consequences would be significantly asymmetric and the macroeconomic impact could be worse than that of the 2008 global financial crisis.
Fiscal resources have to be found, and reprioritisation may be necessary in the coming years for both states and the central government, the Ministry said. It noted that the importance of the certainty, predictability, continuity, and stability of tax policies and tax administration for attracting foreign direct investment has risen a few notches in the current global political scenario.
The Ministry also flagged the need for stress-testing balance-of-payments periodically under various scenarios. “Even if only latent for now, the risks to India’s balance of payments may have become elevated due to this conflict,” it said. Noting that there is no time for complacency, the Ministry said scenario-building exercises on the macroeconomic impacts of higher oil prices suggest that crude oil prices must remain above 100 per barrel for a sustained period for macroeconomic aggregates to reflect the strain. Crude oil may be one obvious stress marker, but the supplies of natural gas and cooking gas also matter along with safety of sea lanes for overall exports and capital flows, it said.
The Ministry, however, said that the external sector is stable despite elevated global trade uncertainty. “India’s active trade diplomacy, including progress on the India-EU FTA, the India-US Interim Trade Arrangement and the India-Oman CEPA, together with Budget initiatives aimed at improving trade facilitation, logistics efficiency and export competitiveness, is expected to diversify export destinations and strengthen external resilience over the medium term,” the Ministry said.
India’s economy has maintained strong momentum in FY26, with real GDP growth estimated at 7.6% and real GVA growth at 7.7%, the Ministry said. “Strong macroeconomic fundamentals and continued reform momentum position the economy well for expansion. In view of positive developments, including recent successful trade deals and consecutive strong growth of 7+ over the previous three years, real GDP growth has been upgraded to 7.0-7.4% for FY27,” the review said.
Given the new GDP series has resulted in the size of the economy in terms of nominal GDP about 3% below the previous estimate for FY26, the Indian economy is likely to become the world’s fourth-largest economy in FY28, the Ministry said. “The new series cemented India’s post-Covid growth rate at slightly over 7% but left the size of the economy (nominal GDP) about 3% below the previous estimate as of the end of March 2026. As a result, the fiscal deficit ratio for FY26 ticks up slightly, but the gross public debt ratio ticks up a tad more than ‘slightly’. Given the depreciation of the Indian rupee in FY26 and the decline in the nominal GDP value from 357.1 trillion to 345.5 trillion rupees, the Indian economy may likely become the world’s fourth largest economy in FY28,” it said.
The ongoing US-Israel strike on Iran has heightened geopolitical risk around the Strait of Hormuz, driving oil prices upward, which could feed through higher imported inflation, by raising fuel costs and weakening the rupee, complicating the inflation outlook for India, the Ministry of Finance said in its monthly economic review for February released Friday. If the crisis persists, it could have “material implications” for the exchange rate, the current account deficit, the Ministry said.
Subdued capital flows, accentuated by a flight to safety, could put pressure on the currency, the review noted. Some sectors dependent on LNG and crude, like fertilisers and petrochemicals, could also be affected if the crisis is prolonged, it said.
“This conflict has already driven Brent crude up around 9% to near $80/bbl. And LNG prices by around 50%. Despite the country’s high import dependency on crude oil, it has sufficient foreign exchange reserves, a low CAD (which stands at 0.8% of GDP in H1 FY26), and low inflation rates, which collectively allow it to effectively mitigate the impacts of rising global crude oil prices and ensure domestic energy security. However, if the crisis persists, it could have material implications for the exchange rate and the current account deficit and could stoke inflationary pressures (which otherwise have supportive supply-side dynamics),” the Ministry said.
The US-Israel strikes on Iran on February 28 killed Iran’s Supreme Leader Ayatollah Ali Khamenei and sparked retaliatory threats, which have disrupted shipping through the Strait of Hormuz which handles about 20% of global oil flows. This marks a pivotal escalation echoing the 1991 Gulf War oil shocks, potentially reshaping global energy geopolitics for decades, the Finance Ministry stated.
The Ministry pointed out that the implications of this conflict for India are significant and may be longer-lasting in ways that are not immediately understood. As cited in the preface to the Economic Survey FY26, this war brings closer the third of the three risk scenarios mentioned in it. “If it is the baseline scenario, then maintaining steady, if not high, growth and macro and financial stability become paramount considerations for policy, as stability itself will be at a premium globally. Further, a few other priorities push themselves into the reckoning,” it said.
The Economic Survey 2025-26 had detailed three possible scenarios of global crises — ‘business as in 2025’, disorderly multipolar breakdown, and a systemic shock cascade in which financial, technological, and geopolitical stresses amplify one another rather than unfolding independently. The Survey, while assigning a lower probability to this scenario, had said its consequences would be significantly asymmetric and the macroeconomic impact could be worse than that of the 2008 global financial crisis.
Fiscal resources have to be found, and reprioritisation may be necessary in the coming years for both states and the central government, the Ministry said. It noted that the importance of the certainty, predictability, continuity, and stability of tax policies and tax administration for attracting foreign direct investment has risen a few notches in the current global political scenario.
The Ministry also flagged the need for stress-testing balance-of-payments periodically under various scenarios. “Even if only latent for now, the risks to India’s balance of payments may have become elevated due to this conflict,” it said. Noting that there is no time for complacency, the Ministry said scenario-building exercises on the macroeconomic impacts of higher oil prices suggest that crude oil prices must remain above 100 per barrel for a sustained period for macroeconomic aggregates to reflect the strain. Crude oil may be one obvious stress marker, but the supplies of natural gas and cooking gas also matter along with safety of sea lanes for overall exports and capital flows, it said.
The Ministry, however, said that the external sector is stable despite elevated global trade uncertainty. “India’s active trade diplomacy, including progress on the India-EU FTA, the India-US Interim Trade Arrangement and the India-Oman CEPA, together with Budget initiatives aimed at improving trade facilitation, logistics efficiency and export competitiveness, is expected to diversify export destinations and strengthen external resilience over the medium term,” the Ministry said.
India’s economy has maintained strong momentum in FY26, with real GDP growth estimated at 7.6% and real GVA growth at 7.7%, the Ministry said. “Strong macroeconomic fundamentals and continued reform momentum position the economy well for expansion. In view of positive developments, including recent successful trade deals and consecutive strong growth of 7+ over the previous three years, real GDP growth has been upgraded to 7.0-7.4% for FY27,” the review said.
Given the new GDP series has resulted in the size of the economy in terms of nominal GDP about 3% below the previous estimate for FY26, the Indian economy is likely to become the world’s fourth-largest economy in FY28, the Ministry said. “The new series cemented India’s post-Covid growth rate at slightly over 7% but left the size of the economy (nominal GDP) about 3% below the previous estimate as of the end of March 2026. As a result, the fiscal deficit ratio for FY26 ticks up slightly, but the gross public debt ratio ticks up a tad more than ‘slightly’. Given the depreciation of the Indian rupee in FY26 and the decline in the nominal GDP value from 357.1 trillion to 345.5 trillion rupees, the Indian economy may likely become the world’s fourth largest economy in FY28,” it said.
