If someone had told me in December 2025, while I was contemplating the year-ahead outlook for the Indian economy for 2026, that two months into the year, a war in West Asia would send global crude oil prices rocketing past $100/bbl, the Strait of Hormuz would be shut for at least six months and 54% of India’s gas imports would get stuck, I am sure I would have painted a rather gloomy picture. But here we are, oscillating between having a peace deal and a ceasefire violation, oil at $70/bbl in one instance and $100/bbl in another, and the Strait of Hormuz open & free and closed & chargeable. Despite such a backdrop, India’s growth in the April-June quarter is estimated to be at least 7% year-on-year (y-o-y).
After the war in West Asia broke out, it became apparent that India was more at risk of a “gas shock” than a “crude oil shock,” given access to alternate suppliers and strategic reserves for the latter. Accordingly, the Essential Commodities Act was invoked, industries were tiered depending on national importance, and rationing of gas supplies began. The outcome was predictable: a sharp, short-lived contraction in fertiliser production; production lines in ceramics and glass factories grinding to a halt; the hotel and restaurant industry facing intermittent shutdowns; petrochemical factories focusing on LPG throughput; and civil aviation and port cargo traffic taking a hit. While these disruptions were severe and extended beyond production lines to livelihoods, a return to normalcy began by mid-April.
At the time of writing this, high-frequency activity indicators were showing steady improvement, even with lingering uncertainty surrounding the truce and widening concerns around other maritime routes. Arguably, these developments guided the Reserve Bank of India to revise its gross domestic product (GDP) growth forecast up by 10 basis points (bps) to 6.7% y-o-y at the August Monetary Policy Committee (MPC) meeting. With the current crude oil price lower than the assumption used in June, the Consumer Price Index ( CPI) inflation forecast was also revised down by 10 bps to 5% y-o-y. A sharper downward revision of the core CPI inflation forecast by 40 bps to 4.3% y-o-y was notable. It reinforces the view that current and imminent inflationary pressures are led by a supply-side shock and administered price increases are not a reflection of demand-push inflation. That said, the MPC statement underscored that it will maintain a close vigil and remain resolute in its commitment to align inflation with the target of 4% in the medium term, noting that “although generalised inflation pressures continue to remain modest so far, the risks of higher food, fuel and other input prices translating into a broad-based increase in inflation persist”.
So, with inflation rising to 5%, do we expect RBI to hike rates soon? Not necessarily. Even though the mandate for the MPC is to keep CPI inflation at 4% (+/- 2% band), the composition and the path matter. With core inflation closer to 4% and adjusted for precious metals, still below 4%, the MPC may opt to wait and watch before commencing the hiking cycle. As for stance, a “neutral” stance gives two-way optionality in terms of rate action, and unless RBI has reasonable clarity about the next move, it could retain a neutral stance. So, while August delivered a neutral pause, we expect it to persist through the remainder of 2026.
It would be remiss to conclude a monetary policy discussion without referring to currency. Having addressed the capital account crunch concerns by announcing a slew of measures to attract foreign capital inflows, RBI and the ministry of finance did the heavy lifting alongside the June 2026 meeting. With more than $50 billion of flows on account of these measures already in (and more to follow), the balance of payments (BoP) situation appears on track to turn to a likely surplus of $30 billion in FY27 (from an expected deficit before these steps came into effect). This erases the tail risk for the currency, allaying fears of any outsized depreciation of the rupee vis-a-vis emerging market peers. So, to the extent fundamentals warrant, any rupee depreciation could be modest and gradual.
With resilient growth, contained demand-driven inflation, and an outlook for gradual currency depreciation, one would have expected Indian government bonds to get a place in the Bloomberg Aggregate Index, but the wait appears to have gotten longer than previously envisaged. Should operational difficulties get ironed out, leading to index inclusion, foreign portfolio investment in Indian government bonds could rise, offering additional support to the currency.
The tensions in West Asia have exposed India’s energy import dependence yet again, and as the economy steers through this volatile geopolitical global environment, looking inward and beefing up energy security is fast becoming a policy priority. Ramping up strategic petroleum reserves, greater focus on renewable energy, dedicated resource allocation for oil and gas exploration and other such initiatives are some of the steps that the government has already announced to insulate India’s external account from energy price and availability gyrations in the future.
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The next phase of India’s economic journey will depend as much on the availability of short-term buffers to navigate crises as on using the lessons of this period to deepen reforms, strengthen energy security and attract global capital.
Aastha Gudwani is India chief economist, Barclays. The views expressed are personal