The ongoing East crisis has entered its third month, with geopolitical uncertainty remaining elevated amidst a fragile ceasefire. The blockade of the Strait of Hormuz has halted maritime traffic through one of the world's most critical energy chokepoints, with daily ship arrivals at the Strait plummeting from over 100 to fewer than 10. Brent crude, which averaged around USD 68 per barrel in FY26, has surged well above USD 100 per barrel in Q1 FY27 so far, and the near-term trajectory remains critically dependent on the outcome of a high-stakes game of strategic brinkmanship among the US, Iran, and Israel. This remains the single largest source of uncertainty for India's macro outlook. The macro impact of the energy shock is being felt across multiple channels simultaneously. On the supply side, constrained availability of petrochemicals and energy-intensive inputs, combined with a sharp escalation in shipping and logistics costs, is feeding directly into manufacturing input prices — with S&P Global PMI data flagging the highest input cost pressures since early 2010. On the demand side, elevated energy prices are beginning to erode consumer purchasing power, though the lagged tailwinds from earlier monetary easing, lower inflation, and GST rationalization have provided an interim buffer. High-frequency indicators remain broadly resilient, with GST collections touching a record high, and automobile registrations continuing to be robust. However, broader activity indicators — including international air passenger traffic and industrial fuel consumption — signal a waning of economic momentum. Amidst these moving parts, we retain FY27 GDP growth forecast of 6.6%. Adding to the complexity is a second major risk: the likely onset of El Niño conditions. The combination of possibly lower agricultural yields, constrained fertilizer availability, and elevated agri input costs pose a downside risk to food production and rural incomes.

On inflation, our FY27 CPI projection of 4.5% does not yet fully account for monsoon-related risks. While petrol and diesel prices have been held constant so far — cushioning the direct CPI impact — the indirect transmission through LPG, logistics, dining out, etc. is already underway. A partial pass-through of fuel prices to consumers is increasingly unavoidable. WPI inflation, meanwhile, has already surpassed CPI for the first time in over three years, rising to 3.9% in Mar-26, and is projected at 6.0% for FY27 as a whole.

On the external front, the BoP position remains concerning amidst rising pressure on the current account and unpredictable capital flows. We expect BoP to record its third consecutive deficit in FY27. The INR has depreciated by over 4% since the onset of the crisis and is tracking an annualised depreciation of ~10% in Q1 FY27. The policymakers are likely to take targeted steps at curbing the trade deficit and/or encouraging capital flows. We continue to project USDINR at 96.5 by March 2027, with risks tied to the Middle East crisis.

In the bond market, supply pressures remain unrelenting — FY27 net G-sec borrowing is set at a record INR 11.7 tn, with total general government security supply projected to exceed INR 21 tn. The state-level unconditional cash transfers have emerged as a key point of fiscal stress, and could potentially worsen in the next few years. We now expect the 10-year benchmark yield to drift towards 7.25% by Mar-27. While the repo rate is expected to remain unchanged at 5.25% through FY27, the risk of a rate hike is gradually emerging if the upside inflation scenario materializes.