When the possibility of a US-Iran deal became clear in the past weeks as negotiations gathered pace, the talk was that even if Hormuz opened, it would take a while for the oil situation to stabilise. Today, when Iran tensions have hit 100 days, Iran and Israel have begun striking each other again and it appears a full-fledged war might resume. If that happens, India, which has so far absorbed the impact without major disruption, must brace for a larger and more broad-based impact. A few more months of hostilities could send oil prices back up while also depleting strategic reserves.
The fragile calm in the Middle East has collapsed once again as Iran and Israel have resumed an exchange of strikes, threatening to unravel the ceasefire that had held for over 100 days. Yemen’s Iran-backed Houthis fired missiles toward Israel, prompting retaliatory attacks. Israel also launched strikes on Iranian positions, claiming it was responding to missile threats. Diplomatic efforts, including US appeals for restraint, have so far failed to contain the escalation. Analysts warn that renewed hostilities could spiral into a wider regional conflict, putting additional pressure on global oil markets and supply chains. For India, which imports a significant share of its energy needs from the aregion, the consequences could be immediate and far-reaching.
Slowing growth amid rising uncertainty
India’s economic growth, which had been resilient at 7.7% in FY26 and recorded a robust 7.8% in the final quarter, now faces new headwinds from external shocks and domestic pressures. The Reserve Bank of India (RBI) on June 6 left the repo rate unchanged at 5.25%, signalling caution rather than aggressive tightening, while revising the GDP forecast for FY27 downward to 6.6% from 6.9%. Governor Sanjay Malhotra highlighted the risk of inflation generalising beyond fuel and commodities if supply-side pressures persist, reflecting concerns that higher costs could spread economy-wide.Rising oil prices and disrupted supply chains are already feeding into higher input costs. With the Middle East conflict reigniting, analysts expect the intensity and duration of the crisis to weigh on investment and consumption, slowing growth momentum. The RBI has opted to wait for clearer signals before tightening policy further, reflecting a cautious balancing act between supporting growth and containing inflation.
Consumers are becoming pessimistic
Households reported worsening perceptions across multiple dimensions. The net response on the general economic situation fell to minus 16.5 from minus 8.6, while one-year-ahead expectations dropped to 19.5. Employment conditions also weakened, with current perceptions falling to minus 14.4 from minus 9.1, and future expectations easing to 21.8 from 25.2. Price pressures remained high, with around 91.6% of respondents reporting that prices had increased over the past year. Income growth showed signs of stagnation, with the net response on current income falling to 0.9 from 3.0, and overall spending sentiment moderating to 74.0 from 78.4.
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The decline in discretionary consumption was particularly notable. Non-essential spending perceptions turned negative at minus 0.8 from 0.8, even as essential spending remained stable. Professional forecasters mirrored this caution, lowering growth projections and revising macroeconomic assumptions, with real GDP growth for 2026-27 revised down to 6.5% from 6.9%. The most pronounced revision was a 60-basis-point reduction in capital formation, indicating that firms may slow expansion plans amid rising costs and uncertain demand. The survey highlights that consumer pessimism, coupled with inflationary and currency pressures, could dampen near-term demand and exacerbate the slowdown.
The survey indicated a 60-basis-point reduction in capital formation expectations, suggesting that firms may hold back expansion plans amid rising input costs and uncertain demand. Analysts warn that slowing private investment, if prolonged, could undermine growth in manufacturing and infrastructure sectors, which have been key drivers in recent years.
Inflation pressures begin to build up
The June 3-8 poll of 38 economists forecast inflation, measured by the annual change in the consumer price index (CPI), rose to 4.0% in May from 3.48% in April. "May '26 CPI likely crossed the 4% threshold ... driven primarily by vegetables and transport inflation," said Kanika Pasricha, chief economic adviser at Union Bank of India.
Government measures and policy response
Unlike the coordinated policy approach during the Covid-19 pandemic, when the government and RBI announced a series of measures in batches, the current strategy focuses on responding to emerging issues as they arise. This week, for instance, the government coordinated with the RBI to step up overseas investment in government bonds and other instruments, while simultaneously clearing a package for airlines to shield them from the impact of high crude prices. State-owned oil companies are also being supported to absorb part of the surge in crude costs.
Supply-side concerns have been closely monitored. The government has addressed potential shortages in petrochemicals and cotton, ensuring that manufacturing is largely unaffected. In terms of exports, a previously announced package appears to be bearing fruit, with the first two months of the fiscal year recording double-digit growth. However, elevated oil and gold prices continue to exert pressure on the trade deficit.
Officials emphasised that the government is keeping a close watch on supply chains and domestic costs. While the current quarter appears manageable, subsidies for fertilisers and cooking gas remain a critical area of concern. Rising fertiliser prices, driven by global cost increases and import dependence, and escalating LPG costs for households, could put pressure on fiscal calculations. The government’s approach will likely involve targeted measures to maintain stability without destabilising its overall fiscal position.
Fiscal pressures are mounting
The oil import bill is also set to surge if crude prices remain elevated due to Middle East tensions. With the rupee under pressure, the cost of importing essential commodities rises, potentially worsening the trade deficit and fuelling inflation further. The government has so far managed to ensure supplies, but higher retail prices could weigh on discretionary consumption, especially for non-essential goods.
The challenge for policymakers is to navigate these pressures without destabilising the fiscal deficit, budgeted at 4.3% of GDP. The government will need both agility and innovation in managing subsidies, rationing foreign exchange, and making smart policy interventions to shield vulnerable sectors. Flexible, targeted measures that respond to evolving global and domestic conditions will be critical in maintaining macroeconomic stability while sustaining growth momentum.
Preparing for the long haul
The resumption of Iran-Israel hostilities can possibly prolong the Iran tensions, and shocks can quickly ripple through a globally connected economy. India’s economic resilience — strong consumption, robust capital expenditure, strategic fiscal measures, and policy interventions — will be tested in the months ahead, particularly as inflationary pressures mount, subsidy burdens rise, and consumer confidence weakens. Vigilance, nimble policy response, and careful fiscal management will be essential to safeguard the economy against a potentially prolonged crisis.
