Crude oil, remittances & exports: RBI spells out where the Iran war bites India

India’s central bank has offered one of its most detailed assessments yet of how the West Asia conflict is feeding into the domestic economy, outlining a web of interconnected risks that run through energy markets, trade flows, capital movements, and financial conditions.

While reaffirming that India’s macroeconomic fundamentals remain strong, policymakers have stressed that the economy is exposed to multiple external channels that could intensify if the conflict persists or widens.

Also Read: RBI MPC: India's central bank sounds alarm with five risks as Iran war threatens domestic stability


“The fundamentals of the Indian economy are on a stronger footing, providing it with greater resilience to withstand shocks now than in the past. The economy is confronted with a supply shock. It is prudent to wait and watch the changing circumstances and the evolving growth-inflation outlook,” Reserve Bank of India Guv Sanjay Malhotra said.

The Monetary Policy Committee (MPC) of the RBI unanimously kept the repo rate unchanged at 5.25%, and maintained a neutral policy stance.

The decision reflects a deliberate balancing act between sustaining growth and guarding against inflation risks in an increasingly uncertain global environment.

Also Read: RBI MPC Repo Rate: Sanjay Malhotra & Co hold rates steady at 5.25% as war shocks rattle outlook

Oil shock

Among all external factors, crude oil prices remain the most influential variable for India’s macroeconomic stability. “Elevated crude oil prices could increase imported inflation and widen the current account deficit,” Malhotra said.

Higher global energy prices raise the cost of imports directly and transmit into domestic inflation through fuel, transport, fertilisers, and industrial inputs, he added.

The central bank has noted that pass-through effects are already visible in select segments such as LPG, premium petrol, and diesel used for industrial purposes. If sustained, elevated oil prices could widen the current account deficit by increasing the import bill, while simultaneously pushing up production costs across sectors.

India’s dependence on imported crude means that even moderate spikes in global oil prices could affect inflation expectations and fiscal balances.

Also Read: RBI Inflation 2026–27: Sanjay Malhotra & Co peg FY27 inflation projection at 4.6% as war risks cloud outlook

Exports face demand and cost pressures

Merchandise exports are facing a dual challenge, weak external demand and rising logistical costs. Early-year data indicates a slight contraction in exports (around 0.2% year-on-year), reflecting subdued global trade conditions.

“Merchandise imports recorded a double-digit growth of 22.2 percent, largely driven by higher gold imports, resulting in a widening of the trade deficit,” it said.

Disruptions to major shipping routes, particularly those linked to conflict zones, have increased freight and insurance costs. These added costs reduce export competitiveness and compress margins for exporters, especially in labor- and cost-sensitive sectors.

At the same time, global growth slowdown is dampening demand in key markets. This combination of weaker demand and higher costs creates a squeeze on export performance.

Services exports, however, continue to provide resilience. Sectors such as IT services, financial services, and business process outsourcing remain relatively insulated from physical trade disruptions and are expected to sustain inflows.

Remittances

Remittances remain a critical stabiliser in India’s external account. Inflows from overseas workers, particularly from regions affected by the conflict, support household incomes and foreign exchange availability.

While remittances have not shown immediate disruption, policymakers caution that prolonged global slowdown or economic stress in host countries could affect future flows. Labor markets in oil-exporting economies, which are major sources of remittances, are especially sensitive to energy price cycles and geopolitical stability.

“Weaker global growth prospects may dampen external demand and reduce remittance flows,” it said.

Together with services exports, remittances help offset merchandise trade deficits and keep the current account deficit within sustainable limits.

Capital flows and financial markets

Global financial conditions have tightened in response to the conflict. Sovereign bond yields have hardened across major economies, reflecting inflation concerns and fiscal pressures. Equity markets have seen corrections, while currency markets have experienced volatility driven by safe-haven flows.

These dynamics influence India through portfolio investment flows and borrowing costs. Foreign portfolio investment has shown fluctuations, with episodes of equity outflows amid global uncertainty.

Rising global interest rates and risk aversion can also tighten domestic financial conditions, making external borrowing more expensive and influencing corporate investment decisions.

Growth

India’s growth performance remains robust, with real GDP estimated at 7.6% for 2025–26. This expansion has been driven primarily by private consumption and investment, supported by strong credit growth and improving corporate and bank balance sheets.

For 2026–27, growth is projected at 6.9%, with quarterly estimates showing a gradual pickup across the year. However, external headwinds are expected to moderate the pace.

Key growth constraints include:

• Higher energy and commodity prices increasing input costs
• Supply chain disruptions affecting availability of key industrial inputs
• Increased freight and insurance costs due to shipping route risks
• Potential slowdown in global demand affecting exports
• Financial market volatility influencing investment sentiment

On the positive side, domestic drivers continue to support growth. Rural demand is benefiting from agricultural stability, while urban consumption is supported by services activity and policy measures such as GST rationalisation. Infrastructure spending and manufacturing capacity expansion are also contributing to momentum.

Inflation

Headline inflation has remained relatively moderate, rising from 2.7% in January 2026 to 3.2% in February. Core inflation remains subdued, indicating that demand-side pressures are not yet a major concern.

However, the outlook is increasingly shaped by external factors, particularly energy prices. Global oil volatility has already led to partial price adjustments in select domestic fuel categories.

For the full year 2026–27, inflation is projected at 4.6%, with quarterly variations reflecting both base effects and evolving supply conditions. Food inflation remains supported by strong agricultural output, including robust rabi production and adequate buffer stocks, but remains sensitive to weather patterns such as potential El Niño conditions.

Core inflation is projected at around 4.4%, suggesting that underlying inflation pressures are broadly contained, even as headline inflation faces upside risks from imported cost shocks.

Policy stance

The MPC’s decision to maintain the repo rate at 5.25% reflects a careful assessment of risks. While inflation remains within target and growth remains strong, the external environment has become more uncertain due to geopolitical tensions.

Policymakers emphasized that the economy is currently experiencing a supply shock rather than demand overheating. In such a scenario, aggressive policy tightening could unnecessarily dampen growth.

Instead, the neutral stance provides flexibility to respond as conditions evolve. The central bank remains vigilant, closely monitoring developments in global energy markets, trade flows, financial conditions, and weather-related risks.

A widening but manageable exposure

India’s economic structure provides a degree of insulation through strong domestic demand, stable financial institutions, and diversified external inflows. However, increasing integration with global markets means that external shocks, particularly those linked to oil, trade, remittances, and capital flows. are more likely to transmit into domestic outcomes.