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Informist, Saturday, Mar. 28, 2026

 

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--CEA: Prices in oil markets appear disconnected from reality 
--CONTEXT: Comments by finance ministry in monthly economic review for Mar 
--CEA: Reopening of Strait of Hormuz would be profoundly positive development 
--CEA: Prudent to assume gradual restoration of 'business as usual' in Gulf 
--CEA: W Asia war impact on growth, CPI, fisc, external balances to be large
--CEA: Need to provide immediate relief to most affected, vulnerable sectors 
--CEA: Need to provide immediate relief to most affected,vulnerable households 
--CEA: Need to generate fisc space to meet strategic, long-term needs 
--CEA: W Asia war highlights need for long-term buffers in commodities 
--CEA: West Asia war impact calls for re-prioritisation of spending 
--CEA: India trade deficit to rise significantly FY27, widening CAD 
--CEA: Govt, households, businesses must share burden to keep CAD manageable 
--CEA: Demand moderation to ease RBI dilemma over apt policy response to war 
--CEA: Considerable downside to FY27 GDP growth estimate due to West Asia war 
--CONTEXT: CEA had upped India FY27 GDP growth estimate to 7.0-7.4?b 
--CEA: Should use W Asia war impact to redouble reform efforts 
--Fin min: Econ outlook more uncertain in wake of West Asia conflict
--Fin min: Data show recent shocks transmitting through higher input costs 
--Fin min: Data show recent shocks transmitting through supply constraints
--Fin min: Early signs of some moderation in econ activity post W Asia war 
--Fin min: Domestic demand conditions relatively stable so far
--Fin min: Balance of risks tilted to the downside despite govt steps 
--Fin min: Econ resilience to depend on strengthening domestic fundamentals 

 

NEW DELHI – Chief Economic Adviser V. Anantha Nageswaran said a slowdown in domestic demand is likely to ease the Reserve Bank of India's dilemma on appropriate monetary policy actions to take after the outbreak of the conflict in West Asia. Signs of a slowdown in economic activity had already begun appearing in March as supply chains were constrained and inputs costs rose, the finance ministry said its Monthly Economic Review for March, released Saturday. 

 

"If demand moderates in response to higher prices, the central bank will be more inclined to treat the inflationary impact as a supply shock. Otherwise, it may be compelled to watch for second-round effects of higher import costs on inflation and respond accordingly", Nageswaran said in the preface to the report. "Higher interest rates burden the entire economy, whereas the pass-through of material prices falls on specific end-users."

 

The Strait of Hormuz has effectively remained closed through the month after US and Israel bombed Iran on Feb. 28 and killed its supreme leader. Since then, the conflict has intensified into the wider Persian Gulf region with only a handful of vessels passing through the strait. The crucial waterway usually transports around a fifth of the world's crude oil supply, including 50% of India's imports. Brent crude futures have consistently remained above $100 a barrel in the second half of March, from around $70 a barrel before the conflict began, increasing fears of rate hikes by the RBI's Monetary Policy Committee in 2026-27 (Apr-Mar).

 

Nageswaran sees "considerable" downside to his estimate for India's GDP growth of 7.0-7.4% in FY27 after revising it 20 basis points higher at the February release of the new series with FY23 as the base year. He expects the combined impact of the conflict to be significant on India's growth, inflation, fiscal and external balances. India's merchandise trade deficit and current account deficit is also expected to widen sharply, requiring the government, businesses and households to shoulder the burden together, the economist said. India's December quarter current account deficit was 1.3% of GDP, latest RBI data showed. The merchandise trade deficit during Apr-Feb in the current financial year has already risen to $310.60 billion, higher than $261.80 billion a year ago, before the rise in oil prices.

 

He cautioned that it would be more prudent for policymakers to plan for a slow and gradual return to business as usual in West Asia rather than an accelerated one, especially due to the damage already done to energy facilities. The reopening of the Strait of Hormuz would be a "profoundly positive development" but oil markets were sometimes disconnected from reality as prices had moderated while supplies remained constrained, Nageswaran said. Meanwhile, domestic economic activity has begun slowing despite the government's efforts and strong macroeconomic fundamentals providing some buffers to the hit, the finance ministry said.

 

"However, the data reflect that the recent shocks are being transmitted through higher input costs, supply constraints, and pressures across sectors, with early indications of some moderation in economic activity," Nageswaran wrote in the preface to the finance ministry's Monthly Economic Review for March. "While domestic demand conditions have remained relatively stable so far, risks to growth are increasingly evident, particularly for sectors dependent on imported inputs."

 

The war had highlighted the need for India to build long-term buffers in several non-oil commodities and materials in addition to oil stocks, with fiscal risks rising from a potential rise in subsidies on food and fuel if the conflict continues, the report said. Crude oil imports made up 25% of India's total merchandise imports, making it one of the most affected countries by the logjam in the Strait of Hormuz and war in West Asia now continuing for a full month. The rupee has fallen over 4.2% against the greenback so far in March to a record low of 94.84 a dollar on Friday.

 

The finance ministry said the oil price shock posed an unexpected inflation risk in the medium term. Higher input costs were being transmitted into domestic prices already, with fuel-intensive sectors bearing the brunt of supply disruptions and higher costs. An extended rise in oil and gas prices will lead to the inflationary impact spilling over to other sectors, the report said. Prices of perishables were under check as exports had been constrained, and the supply made its way back into the domestic market.

 

The government has taken steps to ensure domestic fuel availability and has said there was no shortage of liquidified petroleum gas, petrol and diesel in the country. LPG output has been increased sharply from before the conflict, with domestic needs being prioritised at the cost of industries and business. At the same time, various media reports show fuel pumps being closed down or out of the fuel, while lines for LPG cylinders. The government has attributed this to panic and black-marketing. State-owned oil marketing companies have raised prices of domestic LPG cylinders and premium auto fuels, along with a 25% rise in the price of industrial diesel.

 

"This calls for re-prioritisation of spending and targeted relief for the most affected and vulnerable businesses and households," Nageswaran said. At the same time, the chief economic adviser called for the government to generate enough fiscal space to meet its strategic and long-term needs.

 

On Friday, the government cut excise duty on petrol and diesel by INR 10 per litre while keeping pump prices unchanged, helping oil companies mitigate under-recoveries from the sharp rise in crude oil prices. At the same time, it imposed export duties on diesel and aviation turbine fuel. The exchequer will give up around INR 55 billion per fortnight from the move, according to government estimates. S&P Global Ratings sees a risk to India's fiscal deficit target of 4.5% of GDP in FY27 if oil prices continue to remain high. Emkay Securities pegged the annualised fiscal outlay at 0.2% of GDP from the duty changes so far.

 

"While these interventions, along with existing macroeconomic buffers, provide some support, the balance of risks remains tilted to the downside," the finance ministry said. "In this context, continued vigilance and proactive policy measures will be important to mitigate the impact of evolving global uncertainties."  End

 

US$1 = INR 94.81

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Reported by Aaryan Khanna

Edited by Deepshikha Bhardwaj

 

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