The ongoing pause in hostilities in West Asia has brought immediate relief to the people in the region, but the aftershocks to global energy infrastructure and supply chains persist. The war has disrupted the flow of crude oil and fertilizers creating bottlenecks in logistics and trade. Brent crude remains elevated, and India’s economic outlook is clouded by persistent volatility.
Oil makes up 26-27 per cent of India’s imports, and the oil trade deficit has averaged close to 3 per cent of GDP in recent years (see figure). In FY26, India’s current account deficit was about 0.8 per cent of GDP, cushioned by services exports and remittances. But in a supply shock, that cushion shrinks fast because oil demand is relatively price-inelastic in the short run. Therefore, any price spike quickly inflates the import bill.
Next, the rupee, which had been stable for two years has come under pressure. By March 2026, it fell past the 95 mark against the dollar, nearly 10 per cent depreciation over the fiscal year. This was driven by higher oil prices and persistent capital outflows as global investors reassessed risk. In March alone, foreign portfolio outflows topped ₹1.3 lakh crore. While a weaker rupee can help exporters, it also raises the cost of essential imports and adds to inflation.
Despite these pressures, India’s foreign exchange reserves remain strong, covering more than 10 months of imports. Short-term debt relative to reserves is also low, around 20 per cent. These buffers provide protection, but their resilience depends on how long global volatility persists and how deep the shocks go. For instance, remittances have provided a strong buffer, but these are at risk as nearly 38 per cent come from the Gulf.
RBI’s Response
Against this backdrop, the RBI’s Monetary Policy Committee (MPC) has chosen to keep policy rates unchanged.
The RBI has acted with targeted measures such as limiting banks’ foreign currency positions, easing capital rules, and improving access to working capital for small businesses. Its move to limit net open positions of banks in onshore markets helped the rupee recover a bit. While these actions have provided short-term relief, relying heavily on foreign exchange intervention and engineered stability is not a viable long-term strategy.
The stress on the Indian economy is coming through several channels. First is supply disruption. Energy-intensive sectors are directly affected, but the impact quickly cascades to other sectors. The non-availability of fertilizers and other chemicals may affect the output of agricultural and industrial products, compounding the inflationary impact. Second, logistics costs are rising, as storage and transport are highly energy intensive. Increased logistics costs cascade through the economy, raising the prices of all final products.
Third, Indian exports are taking a hit from both demand and supply sides. The war has affected not only direct trade, but has also caused a slowdown in other major markets. With West Asia accounting for over 16 per cent of India’s exports in 2023-24, any sustained disruption will hit export earnings.
Fourth, fiscal slippage against the budgeted 4.3 per cent of GDP remains a risk, owing to lower excise duty and corporate tax collections, reduced dividend payouts by oil marketing companies (OMCs), and a higher subsidy burden.
Policymakers must remain vigilant. The outcome of the conflict, US tariff investigations, and the monsoon’s performance will all shape the next steps of monetary policy. Until there is more clarity, the RBI’s cautious approach is justified.
Resilience will depend on maintaining a strong services surplus and remittance inflows, while expanding manufacturing so the non-oil tradable base grows. Attracting stable, long-term capital and encouraging local currency financing will be crucial. Structurally, energy security must be addressed.
Bhaduri is Professor and Anand is Ph.D scholar at Madras School of Economics (MSE), Chennai
Published on May 6, 2026