In fiscal 2027, the challenge staring at India is no more the energy shock stemming from the West Asia conflict but managing its delayed effects on financial conditions.
In March 2026, India’s financial and currency markets felt the first round of impact of the West Asia conflict in the form of a surge in crude oil prices, given the high import dependence, which adversely affected investor sentiment. This triggered foreign portfolio investor (FPI) outflows, a sharp fall in the rupee and firmed-up bond yields. Domestic liquidity also tightened due to tax outflows.
In March, FPIs saw their largest monthly net outflow since the pandemic, at Rs 1.23 lakh crore, as risk-off sentiment and macroeconomic pressures weighed on markets. The rupee weakened to Rs 94.65 a dollar by the end of March, with an average decline of 2.2% — the steepest monthly fall since October 2022. Brent crude prices climbed to $143.66 per barrel in April. The benchmark 10-year government security yield closed at 7.2%, moving above 7% for the first time since July 2024. Fiscal concerns arose from mitigation steps such as fuel excise cuts and elevated international fertiliser prices, which could affect the subsidy bill. The yield rose further in April by 21 basis points to 6.96%, compared with the March average of 6.75%.
While the West Asia conflict initially triggered considerable market volatility, conditions gradually stabilised toward the end of June. Brent crude prices reduced to $70/bbl in the end of June, easing concerns over imported inflation. Investor sentiment also improved, with net FPI outflows at ~Rs 0.49 lakh crore as geopolitical uncertainties eased. Meanwhile, the benchmark 10-year G-sec yield moderated to 6.76% by the end of June, reflecting easing inflation expectations and improving market confidence. The rupee is still under pressure at Rs 94.59 a dollar as geopolitical uncertainties persist. Overall, key financial indicators showed moderation.
Industrial expansion continues but momentum wanes
The energy shock is significant to the economy because of its dependence on imports of crude oil, fertilisers and multiple industrial inputs. The partial closure of the Strait of Hormuz and damage to the oil and gas infrastructure in West Asia have disrupted markets, increased financial volatility and weakened the consumption demand in the past four months. Even if spot crude oil prices soften, import costs, freight charges, refinery margins, fertiliser prices and energy-related costs may normalise only gradually.
Source: Ministry of Statistics and Programme Implementation (MoSPI)
The Index of Industrial Production (IIP), which measures overall short-term changes in production volume majorly across mining and quarrying, manufacturing, electricity, gas, water supply, sewerage and waste management, has shown limited impact in the initial months of the conflict amid the critical input shortage in energy-related sectors and sluggish export demand. Industrial growth slowed on-year in March, touching a five-month low of 3%.
While a ~16% rise in capital goods led to IIP growth of 4.9% in April, infrastructure goods showed a steady rise. Growth in manufacturing and electricity moderated by 6.2% and 4.9% respectively while mining contracted by -5.1%. Industrial production remained subdued due to weaker global demand and supply chain disruptions. In May, gradual but uneven recovery was seen in industrial activity as IIP inched up to 5.1% owing to 9.9% electricity growth, driven by elevated temperatures and low base. Infrastructure (5.9%) and capital goods (12.9%) reflected growth, while IIP reflects resilience in consumption
Index of Eight Core Industries
Source: Office of the Economic Adviser *May-26 data is provisional
The Index of Eight Core Industries tracks output growth across coal, steel, electricity, crude oil, natural gas, cement, fertilisers and refinery products. Overall, growth in core sector output weakened to a seven-month low of 0.5% on-year in May from 1.8% in April, as refinery products, coal, crude oil, natural gas and steel recorded weaker performance over the month. Coal and refinery products fell 9.3% and 8.7%, respectively, indicating the adverse impact of the West Asia conflict on related output. Also, the composite PMI, widely used to anticipate evolving economic and market trends, moderated to 57.3 in June from 59.8 in May. Despite the decline, the index has remained above the 50-point expansion threshold, indicating continuity in business activity expansion but at a slower pace. Demand growth has eased for Indian goods and services, while rising input costs and global uncertainties continue to weigh on business sentiment.
Where it hurts the most: Inflation and monetary policy
The early months of the conflict impacted inflation based on the WPI more than it did retail. WPI-based inflation captured the immediate rise in crude oil, fuel, power, transport and manufacturing input costs, while Consumer Price Index (CPI)-based inflation remained contained because of an incomplete pass-through to consumers. However, the pass-through is becoming more visible. Inflation based on the CPI rose to 3.5% in April and 3.9% in May from 3.4% in March. Meanwhile, led by crude oil and fuel costs, WPI inflation accelerated to 8.3% in April and 9.7% in May from 3.9% in March.
Data for April and May is provisional in WPI series. Revised series for WPI is used where 2022-2023 is the base year. Data for May is provisional in CPI series Source: MoSPI
The CPI breakup shows that the pass-through became visible across select consumer categories in May. Restaurants and accommodation services increased to 5.75% in May from 4.22% in April, followed by transport, which rose to 1.75% from -0.01% as fuel costs filtered through. Food and beverage also rose to 4.55% from 4.01%, indicating a reversal in earlier food-price moderation. Paan, tobacco and intoxicants remained elevated at 4.83%, while personal care, jewellery and others continued to be the highest inflation category at 18.46%, reflecting sustained pressure from precious metals.
Fuel and power inflation in the WPI basket increased significantly between March and May, while manufactured products also recorded stronger price momentum. Primary articles rose to 3.78% in April and 4.99% in May from 2.58% in March, while fuel and power elevated to 24.89% in April and 30.33% in May from 3.20% in March. Manufactured products also strengthened to 6.68% in April and 7.48% in May from 4.80% in March, indicating a clear build-up of inflationary pressure from March onwards. As a result, producer-level cost pressures are gradually moving into consumer prices.
The Monetary Policy Committee responded cautiously in its June meeting by maintaining the repo rate at 5.25% due to slowing growth and rising inflation risks from elevated crude oil prices, supply-chain disruptions and geopolitical uncertainties. In addition, the Reserve Bank of India (RBI) revised its CPI inflation forecast for fiscal 2027 to 5.1% from 4.6%, citing a more challenging inflation outlook and potential fuel price pass-through into broader prices
Retail inflation may remain under pressure, even if crude prices normalise from their peak. Fuel, freight, food logistics, restaurants, accommodation, personal care and manufactured products usually respond with a lag. Depending on demand and pricing power, companies tend to pass on higher costs gradually. By the end of June, crude prices eased from their conflict-driven highs, but CPI-based inflation is likely to continue to increase as retail pass-through occurs with a lag. Additionally, weather-related disruptions due to El Niño conditions and IMD’s expectation of below-normal monsoon are likely to exert pressure on food inflation. Consequently, CPI inflation may face upside pressure over the near term.
Risks persist amid normalisation
The West Asia conflict disrupted oil and gas flows through the Strait of Hormuz, a critical energy chokepoint carrying about one-fourth of global seaborne oil trade and significant liquefied natural gas and fertiliser volumes. The disruption impacted energy markets, maritime transport, air cargo, port logistics and global supply chains. Oil markets reacted quickly, with Brent crude prices peaking to ~$140/bbl on April 9, 2026. Higher energy, fertiliser and transport costs pushed up food prices and cost-of-living pressures, particularly in economies such as India, which are largely dependent on oil imports.
In March, the Government of India regulated production, supply and distribution of natural gas to ensure equitable distribution and continued availability to classified priority sectors. Crude oil supply was diversified to 40+ global suppliers to secure higher volumes than previously arrived through the Strait of Hormuz. To prevent further supply gaps, every Indian refinery operated at 100% utilisation. Centre’s Excise duty on petrol and diesel was also reduced by Rs 10/litre to shield consumers from high crude oil prices and export levy was imposed on diesel and aviation fuel to ensure domestic availability.
Crude oil prices eased from their conflict-driven highs
Data as of June 30, 2026 Source: Refinitiv Eikon, U.S. Energy Information Administration
By the middle of June, traffic through the Strait of Hormuz began to pick up, easing concerns around supply shortages. Consequently, the crude oil market started moving towards pre-conflict levels as the immediate disruption eased, demand was curtailed in parts of Asia and markets began pricing in a post-conflict supply rebound. After restoration of normal supply arrangements, the Indian government withdrew the temporary limit of the sale of 200 litre of high-speed diesel at retail outlets. Additionally, sectoral restrictions were removed on the supply of LPG and supplies were restored to the levels prevailing prior to the West Asia conflict.
A sustained easing in crude oil prices is expected to reduce pressure on India’s import bill, current account deficit, rupee and inflation outlook. However, the external sector remains exposed to renewed escalation in geopolitical uncertainties, shipping disruptions, higher insurance costs and weak global demand. India’s exports may remain subdued, if global growth slows further. Energy-intensive export sectors and sectors dependent on imported raw materials may continue to face pressure. Simultaneously, import diversification can protect supply availability but raises procurement costs as alternative sources can cost more.
Outlook
The normalisation in crude oil prices does not immediately eliminate inflation risks as WPI pressures transmit to CPI with a lag. India will still need to manage volatility in fertiliser imports, shipping routes, petroleum products, currency markets and global financial conditions. While the crude shock is easing, India’s macroeconomic challenge has shifted to managing its lagged effects on inflation, domestic demand, policy space and external stability.
If crude oil price falls further and freight costs ease, WPI inflation could soften faster, supporting the rupee and lowering bond-yield pressure. However, if the conflict escalates or recovery of the damaged energy infrastructure is delayed, crude oil and fertiliser prices could rise sharply. This will increase the import bill, weaken the rupee, push up bond yields and further reduce the RBI’s room to cut rates. The impact will be most visible in fuel, transport, food, manufacturing input costs and energy-intensive sectors.
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