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Informist, Wednesday, Apr. 22, 2026

 

NEW DELHI – Higher energy prices and rising input costs owing to the war in West Asia are likely to widen India's trade deficit and increase fiscal risks through rising subsidy requirements, Moody's Ratings said in a report. Considering this, it becomes essential for the government to maintain investor confidence and manage macroeconomic trade-offs to preserve credit stability, the rating agency said.

 

Moody's expects India's GDP growth to ease to 6.0% in 2026-27 (Apr-Mar), from an earlier projection of 6.8%, mainly due to more subdued private consumption and softer industrial activity owing to the war in West Asia. India, with 'Baa3' rating, depends highly on oil and gas imports from West Asia. This dependence "raises near-term supply-disruption risks, although strategic petroleum reserves and commercial inventories will mitigate economic disruption over the next few months," Moody's said.

 

As India is a major importer of oil, liquefied natural gas and liquefied petroleum gas, the rating agency said the country faces significantly higher import costs if elevated energy prices persist. Currently, oil and gas accounts for about 35% of India's energy mix. Brent crude oil prices traded at $97.84 per barrel Wednesday, compared to $72.87 per barrel before the war in West Asia started on Feb. 28. Since the beginning of the war, crude oil prices have surged to as high as $119 per barrel.

 

Higher energy prices will dampen India's GDP growth, widen the trade deficit, and increase fiscal risks through rising subsidy requirements, the report said. To insulate the economy from oil price shock, the government has already taken a slew of measures, including an excise duty cut of INR 10 per litre on fuel, which may add pressure on the year's fiscal math. 

 

Finance Minister Nirmala Sitharaman had last month said the government will manage its fiscal deficit for FY27 despite foregoing revenue from the excise duty on petrol and diesel. While the Union Budget pegged the FY27 fiscal deficit at 4.3% of GDP, the deficit is now likely to be 4.5% of GDP following the downward revision of India's nominal GDP on Feb. 28 as per the new series. 

 

The impact of war has also boiled down to India's remittance inflows, as India receives one-third of its total remittances from the West Asia region. "A more prolonged disruption in economic activity in the Gulf Cooperation Council will weigh on remittance inflows that, coupled with a wider trade deficit, will worsen India's current account deficit," Moody's said. 

 

The rating agency has projected India's current account deficit to widen to 2% of GDP in FY27 from the estimate of 0.4% of GDP for FY26. India's current account deficit was 1.3% of GDP for the December quarter. India's trade deficit fell to $20.67 billion in March from $21.69 billion a year ago and $27.10 billion in February. In FY26, the merchandise trade deficit widened to $333.2 billion from $283.50 billion a year ago.

 

These pressures are most likely to add up to the rupee's depreciation against the dollar, according to the rating agency. After the onset of the war in West Asia, the rupee depreciated as much as nearly 5% in March to INR 95.22 against the dollar. At 1246 IST, the rupee was at INR 93.84 against a dollar. The pressure on the rupee has been lingering even before the war due to uncertainty in the finalisation of the India-US trade deal. Despite these challenges, "India's external position remains relatively sound on account of a large stock of foreign-exchange reserves, low external debt and limited reliance on cross-border financing," Moody's said.

 

The rating agency sees more material challenges if the war continues with entrenching inflation, straining fiscal and monetary policy flexibility and testing external investor confidence. "The effectiveness and timeliness of policy actions will remain central to preserving macroeconomic and credit resilience amid this external shock," Moody's said.  End

 

US$1 = INR 93.85

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

 

Reported by Shweta

Edited by Tanima Banerjee

 

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