India – Strait of Hormuz closure Impact

We see the Indian Rupee as vulnerable and USD/INR likely rising above the 95 levels if the Iran and Middle East conflict is sustained and the Strait of Hormuz remains closed, with Brent oil prices returning back to the US$100/bbl.

In de-escalation case with oil ~US$80/bbl, 

USD/INR may trade closer to 93.50.

In US$100/bbl case, USD/INR may trade closer to 95.50

In US$120/bbl scenario, USD/INR may trade closer to 97.50 and even higher will look achievable. Of course, it is important to stress that there are many shades of grey here including the duration of the crisis, but overall we see these as reasonable given the meaningfully different nature of the crisis. 

INDIA IS DEPENDENT ON THE MIDDLE EAST ACROSS A RANGE OF ENERGY PRODUCTS, WITH AROUND 45% OF CRUDE OIL, 60% OF NATURAL GAS, AND MORE THAN 90% OF NATURAL GAS LIQUIDS SUCH AS LPG COMING FROM THE MIDDLE EAST. 

▪The indirect effects across a range of sectors could also be meaningful for India beyond the first order impact, and ultimately points to a stagflationary environment of higher inflation and weaker growth with a weaker Indian Rupee a key outcome as well.

MEANWHILE, OIL PRICES CLOSER TO US$100/BBL COULD IMPLY INDIA’S CURRENT ACCOUNT DEFICIT WIDENS TO 3% OF GDP FROM OUR BASE CASE OF 1.5% OF GDP

RBI recognizes downside risks to growth

 With benign CPI inflation prospects and a robust growth outlook, the Monetary Policy Committee (MPC) has opted to continue with the present repo rate of 5.25% while also continuing with a neutral stance.

 The growth for 1Qtr and 2Qtr of 2026-27 has been revised upwards to 6.9% and 7% and CPI inflation for these quarters is projected at 4% and 4.2% respectively. This is an optimal combination for the Indian economy at the present juncture as the growth rate in Half of 2026-27 is expected to be close to the potential growth of 7% as estimated by the Economic Survey of 2025-26. 

The CPI inflation is projected to average 4.1% for this period, just marginally above the MPC’s inflation target of 4%. 

The RBI recognizes downside risks to growth emanating from the continuing geopolitical tensions and volatility in global financial markets as also in international commodity prices. If any of these risks lead to an adverse impact on growth, the RBI may consider revising the repo rate downwards in its next monetary policy review. 

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