Whalesbook
S&P Sees India's Resilience, But Challenges Grow
S&P Global Ratings believes India's economy is resilient and concerns about foreign investment outflows are overstated. According to YeeFarn Phua, director for sovereign and international public finance ratings in Asia, these outflows often result from profit repatriation, not a major sell-off, as gross inflows remain strong. This view supports India's economic stability, especially after S&P's BBB upgrade in August. However, rising geopolitical events and their economic impacts are testing this outlook.
Oil Price Surge and Rupee Plunge Hit India
The conflict involving Iran has caused a sharp rise in global oil prices, with Brent crude topping $100 a barrel multiple times in early May 2026, hitting around $104.4 on May 11. This price surge directly affects India, which imports over 85% of its crude oil. The surge has sharply weakened the Indian rupee, pushing it to record lows around 95.60 against the US dollar on May 12, 2026. The rupee has fallen about 12.45% in the past year and 5.2% since the Iran conflict escalated. Foreign exchange reserves have dipped from a February 2026 peak of $728.49 billion to about $690 billion in early May.
Deficits Widen, Growth Forecasts Cut
The rising cost of oil imports is set to widen India's current account deficit (CAD). Projections show the CAD could reach nearly 2% of GDP for 2026-27, a notable rise from earlier estimates. This wider deficit, along with continued foreign portfolio outflows of over $20 billion from Indian equities since the war started, further pressures the rupee and India's external finances. As a result, economic growth forecasts are being adjusted. Moody's Ratings has lowered its 2026 GDP growth forecast for India to 6%, down from 7.5%. The Asian Development Bank (ADB) forecasts 6.9% growth for fiscal year 2026, and Goldman Sachs projects 6.9% real GDP growth for 2026. Inflation, measured by the Consumer Price Index, rose slightly to 3.48% in April 2026, mainly due to higher food prices.
Structural Risks and Investor Caution
While India has shown relative resilience compared to some emerging markets during the conflict, its structural weaknesses are still significant. The country's heavy reliance on imported energy makes it vulnerable to global supply disruptions and price swings. The ongoing geopolitical uncertainty also risks hurting business confidence and investment plans, possibly leading to stalled decisions and delayed spending. Foreign investors have become more cautious, withdrawing capital from Indian markets due to global risk aversion. Acknowledging these pressures, the government has urged citizens towards austerity, suggesting they postpone gold purchases and limit non-essential imports to conserve foreign exchange. The benchmark Nifty 50 index fell over 5% in the financial year ending March 2026, reflecting wider market worries.
Uncertain Outlook Amid Global Shocks
India's economic path in 2026 largely depends on how long the Middle East conflict lasts and its impact on energy prices and global trade. Domestic demand and policy reforms provide some support, but the short-term outlook is clouded by external shocks. The Reserve Bank of India has intervened to stabilize the rupee, but ongoing pressure from import costs and capital outflows remains a challenge. The combination of high oil prices, a falling rupee, and widening deficits requires careful management from policymakers and investors.