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(Bloomberg) — India’s finance ministry warned that renewed oil price shocks from a prolonged Middle East conflict remain a key risk to India’s fiscal and current accounts, underscoring the challenges facing policymakers as geopolitical tensions persist.
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The economy remains resilient, supported by structural reforms and infrastructure investments over the past decade, but “upside risk to inflation, fiscal and current account deficits and downside risk to growth remain in the wake of persistent stand-off in the Gulf region,” the ministry said.
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Brent crude has swung sharply this month, initially surging after hostilities between the US and Iran resumed and the conflict spread to the Red Sea before retreating as tensions eased in recent days. The volatility has kept the rupee under pressure, fueling concerns over India’s import bill.
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That has complicated the task for policymakers. The government must contain pressure on public finances, while the Reserve Bank of India balances inflation risks against the need to support growth.
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Bloomberg News reported in June that officials were preparing for the fiscal deficit to widen by as much as half a percentage point to 4.8% of gross domestic product in the fiscal year ending March 2027 if elevated oil prices persisted.
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On Sunday, Finance Minister Nirmala Sitharaman said that the government is not considering revising its budget estimates, saying India has sufficient buffers to withstand pressures stemming from the Middle East conflict.
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While resilient domestic demand should continue to underpin economic activity, renewed geopolitical tensions and commodity price volatility continue to cloud the outlook, the ministry said.
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As global challenges show no sign of easing, India will have to adapt its policy responses “to global imperatives if it has to achieve strategic leverage,” it said.
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The ministry also warned that inflationary pressures have become more broad-based. Unfavorable weather has pushed up food prices, while higher global fuel costs have begun feeding through to retail energy prices, spreading price pressures across a wider range of consumer goods.
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Consumer inflation accelerated last month, rising above the Reserve Bank of India’s target for the first time in nearly a year and a half as food and fuel prices strengthened.
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The RBI also flagged the Iran conflict and a deficient monsoon as risks to the outlook in its monthly bulletin earlier this month. The central bank is widely expected to leave the benchmark interest rate unchanged at their Aug. 5 policy meeting.
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