Whalesbook
Domestic Strength Amid Global Turmoil
Global financial markets faced heightened trade policy risks and volatility from geopolitical conflicts in February and March 2026. Despite this, India's economy maintained a resilient trajectory, driven by robust domestic demand. However, this resilience also conceals underlying vulnerabilities that investors are watching closely.
Domestic Demand Fuels Growth
India's Gross Domestic Product (GDP) grew by a strong 7.8% in the third quarter of fiscal year 2025-26, based on second advance estimates. This sustained expansion was largely propelled by robust domestic consumption and investment. Recent economic data for February showed a significant increase in both urban and rural demand. This was supported by adjustments to income tax and Goods and Services Tax (GST) rates, healthy cash flows from the kharif harvest, and the ongoing wedding season. Retail sales for two-wheelers, passenger vehicles, and tractors reached record levels that month, highlighting the widespread nature of India's economic growth.
Inflationary Pressures Mount
Despite this domestic strength, inflation showed a modest rise. Headline Consumer Price Index (CPI) inflation increased to 3.2% year-on-year in February 2026, up from 2.7% in January. This was mainly due to a rebound in food and beverage prices, as vegetable prices moved out of deflation. The sharp increase in global crude oil prices, with Brent crude fluctuating between $78 and $112.2 per barrel in March, presents a significant risk. Historically, a $10 per barrel rise in crude oil prices widens India's current account deficit by about 0.3% to 0.4% of GDP, and can push headline inflation up by 0.2% to 0.3%.
Market Responses to Global Turmoil
Indian financial markets reflected global sentiment shifts. Government bond yields rose following the Middle East conflict. Equity markets, such as the Nifty 50 and Sensex, saw corrections in late February and into March, alongside consistent selling in technology stocks. Escalating geopolitical tensions led to a wider market sell-off. The Indian Rupee weakened against the US dollar, moving from approximately 83.0 to 83.5 INR/USD. This pressure stemmed from foreign portfolio investor (FPI) outflows and increased demand for the US dollar as a safe haven. These outflows signal a broader risk-averse sentiment affecting emerging market currencies.
Economic Performance and Vulnerabilities
India's 7.8% GDP growth in Q3 2025-26 outperformed many emerging market peers, where growth rates ranged between 4% and 6% during the same period. However, the strong performance of the services and manufacturing sectors, which boosted corporate operating profits, faces challenges from a global demand slowdown. The current account deficit widened slightly in Q3 2025-26, mainly because of a larger merchandise trade deficit. This is a recurring issue, made worse by higher import costs for crude oil. Although the IT sector typically shows steady demand for its services, its stock valuations can be affected by overall market sentiment and capital flight during times of global risk aversion.
Key Risks and Concerns
While India's domestic demand acts as a strong buffer, several factors call for caution. The rise in headline CPI, fueled by fluctuating food and energy prices, could increase inflation expectations. This might put the Reserve Bank of India in a difficult position, needing to balance supporting growth with controlling inflation, especially with global supply shocks influencing price pressures. Continuous FPI outflows, driven by global risk aversion and a stronger US dollar, threaten currency stability and could increase import costs, potentially leading to a negative cycle. Additionally, India's trade balance and inflation remain structurally sensitive to global oil price swings. This risk is amplified by ongoing trade policy uncertainties, such as those arising from import tariff rulings.
Outlook Faces External Headwinds
Analysts generally forecast continued domestic growth for India, with projections for fiscal year 2026-27 remaining positive. However, external risks have led some to temper their outlooks. The full economic impact of the Middle East conflict and subsequent commodity price shocks on global and Indian economies will become clearer as March data becomes available. This will offer more insight into the sustainability of India's economic momentum amid rising geopolitical and trade tensions.