 (8).png)
6 days ago
3
ARTICLE AD BOX
Summary
The economy has held up well so far and a package was unveiled on Friday by RBI and the government to attract capital. Yet, policymakers need to stay wary of an adverse global scenario turning out worse than expected. Here are the key risks to track.
The war in West Asia seems to have had little effect on India’s economy, going by the data so far. Official figures released on Friday showed real GDP growth in the last quarter of 2025-26 at 7.8%, year-on-year, taking the full year’s growth to 7.7%. Although nominal growth was low, this counts as good going for a US-tariff-rattled fiscal year that ended in an outbreak of war.
The Iran conflict will impact how we fare in 2026-27, but as domestic tailwinds push against external headwinds, we could log growth of 6.6%, as the Reserve Bank of India (RBI) projects. Last quarter’s momentum was broad-based, with factory output, construction and especially services setting a hearty pace. Since services make up well over half of India’s output, we can expect GDP expansion to stay resilient.
That said, Indian data is yet to capture much of the war’s fallout.
Even as bloated import bills stoke inflation and slow growth, the external scenario is fraught not just with the turmoil of an oil shock, but a foreign capital crunch that showed up even before those hostilities began.
Weak inflows have tilted our balance-of-payments adversely and taken a toll on the rupee’s exchange value. Instability risks led both the Centre and central bank to respond on Friday with measures designed to boost inflows.
The government moved to relieve foreign portfolio investors of taxes on its bonds; RBI held its stance and policy lending rate constant, while acting in concert.
In a parallel move, the central bank not only opened up new issuances of government paper across a larger range of tenors to overseas investment, but eased other bars. It also lifted caps on how much non-residents and overseas citizens can invest in local equities without registration with the capital markets regulator.
Plus, it offered to pick up the risk-hedging tab of banks that raise forex deposits and support foreign loans taken by public sector units via a concessional forex swap facility.
Granted, inflows into debt may not be ideal, as they could return to haunt us later. Yet, to the extent India’s moderate exposure to global dues makes space for such measures to tackle near-term external risks, they should help.
Optimists expect as much as $50 billion to flow in this year, enough to keep external payments on an even keel and the rupee steady. But so long as clouds of uncertainty prevail, a less benign scenario unfolding is more than just a tail risk.
The global context might plausibly take a turn for the worse.
As energy markets do not yet seem to have fully priced in a Gulf supply squeeze that’s taking too long to ease, an oil spike could upset RBI’s calculus. While crude that’s costlier than expected could push RBI into a scramble to quell inflation, especially if weak rainfall in an El Niño year elevates food prices, we must also watch out for its impact on inflows.
Credit in the US may get costlier, as its price-level and payroll data hint. America’s yawning fiscal deficit is funded by the issuance of bonds whose demand is susceptible to geopolitical flux; and if the US Federal Reserve starts offloading assets to shrink its balance sheet, longer-tenor debt yields will likely firm up. A steeper US yield curve would weigh upon the relative appeal of Indian bonds of similar maturity.
The end of an easy-credit era globally has already reduced India’s yield premium over the US and taken the shine off rupee assets for global investors. News of an inflow-easing package made the rupee leap on Friday. But broader market dynamics need to turn favourable too.
English (US) ·