Macro Economy | Bracing for uncertainty

As the US-Iran war drags on, the big concern for Indian policymakers is the overall impact on the economy, whether we are talking growth, inflation or fiscal deficit. A credible assessment will be possible only when physical flows of oil and assured supply chains are restored through the Strait of Hormuz.

That process has begun but it is not complete. Crude oil corrected sharply to around $95 (Rs 8,900) per barrel following the five-day pause announced by Donald Trump on March 23, down from the peaks of $108–110 (about Rs 10,250). But fresh uncertainty returned within a day after adverse signals from Iran, pushing prices back above $100 (Rs 9,400).

For India, the swing is significant. At import volumes of about 4.8–5 million barrels per day, a $10 (Rs 940)decline reduces annual import bill pressure by roughly Rs 45,000–55,000 crore. With the corrected numbers, the import bill overshoot, which was threatening to cross Rs 1.2–1.5 lakh crore annually, could moderate to about Rs 69,000–75,000 crore. The current account deficit, too, may remain closer to 2–2.2 per cent of GDP, instead of widening to 2.5 per cent. The rupee, under pressure at Rs 93–95 per dollar, could stabilise in the Rs 91–93 range. A correction of $10–12 in crude typically reduces headline CPI (consumer price index) by about 30–40 basis points, assuming partial pass-through. This could take inflation closer to the 6 per cent upper tolerance band, but perhaps not enough for panic to set in.

However, if disruptions persist beneath the surface, the correction may prove superficial. Freight rates for Gulf routes have already risen by 30–50 per cent in recent weeks. Insurance premiums remain elevated, and delays in cargo settlement continue in some cases. Even with crude below $100, these frictions can keep the effective landed cost of oil (expenses incurred from production to freight and insurance before reaching the importer) high. As a Union minister explained to india today, “The real (economic) pain is felt only after the war is over. The infrastructure of oil and gas is severely damaged in the GCC world as well as in Iran. Oil prices will not go back to pre-war levels anytime soon. The world will have to find a new normal.”

But the current volatility in oil prices threatens to upend FY27 budget assumptions. Even at $97, crude remains $20–25 above the $70–75 baseline used by finance minister Nirmala Sitharaman. That gap implies a potential Rs 90,000 crore–1 lakh crore deviation in fiscal and external calculations. The budget’s nominal GDP, import, subsidy and fiscal deficit projections were built on an exchange rate of Rs 82.5–83.5 per dollar. With the rupee now at Rs 93–94, the effective import cost rises by roughly 10–12 per cent, adding an estimated Rs 60,000–80,000 crore to the import bill.

WHAT IS BEING DONE

There is, however, a nuanced policy cushion emerging in the way economists are reading the situation. As Ashima Goyal, former member of the PM Economic Advisory Council and the monetary policy committee of the RBI, points out, “Both OMCs (oil marketing companies) and the government have space to absorb transient shocks of up to six weeks, since they did not fully pass on the benefits of lower oil prices earlier.” In her view, the fiscal framework itself allows flexibility. “The fiscal glide path is consistent with a rise in crisis time. Countercyclical policy is enabled.” It also aligns with the government’s reliance on state-owned OMCs to absorb part of the shock while shielding retail consumers. In FY26, their gross refining margins were $10-12 a barrel.

That perspective complements the views of former chairman of Punjab & Sind Bank Charan Singh, who expects normalcy to return by September. “The government should pursue accommodative but responsible fiscal policy, as it did during COVID. India was never profligate but always careful and targeted its support where needed.” All of this will converge at the RBI’s monetary policy committee meeting in the first week of April.

WHAT MORE NEEDS TO BE DONE

To meet its immediate funding needs without imposing fresh taxes or cesses, the Centre can raise about Rs 1.2–1.5 lakh crore through short-term sovereign debt instruments—money the government borrows from the open market—such as Treasury Bills and government securities. It can also tap temporary advances from the RBI. Medium-term economic stability hinges on monetary policy. CPI stood at 3.2 per cent in February. If crude holds at $90–95 per barrel, inflation could rise to 5.5–5.6 per cent, forcing the RBI to tighten liquidity by raising policy interest rates.

In the long run, resilience will depend on building stronger structural buffers: maintaining at least six months of oil and gas reserves, ensuring the fiscal space to spend more during downturns and rein in during upswings, and strengthening strategic procurement through better timing and diversified sourcing.