The geopolitical order is increasingly looking fractured and unhinged amidst repeated instances of conflicts and wars involving key countries in the world. The year 2026 began with further escalation of geopolitical risk with Israel, US, and Iran once again caught in a war that not just threatens peace in the Middle East region but also poses a serious risk to global economic stability. Global energy supply chain could become a causality in the absence of a political resolution, which in turn will disrupt energy prices and expose macroeconomic and financial vulnerabilities.

Iran’s control of the Strait of Hormuz, a key maritime chokepoint (that witnesses ~20% of global energy shipments), has sent crude oil prices to their highest level in 21 months. Durability of this price shock is bound to create adverse spillovers. We believe the result from standard simulations to be extremely muted till oil price averages under USD 80 pb in FY27 (vs. FYTD average of USD 68 pb) as the economy’s energy intensity has evolved, while fiscal policy could be in a position to partially accommodate the shock. However, movement of crude oil price moves towards USD 90 pb levels on a sustained basis could create asymmetric impacts, with the BoP reflecting the primary fallout, followed by inflation, growth, and fiscal policy. Under this scenario, we project India’s GDP growth and CPI inflation at 6.5% and 4.5% respectively, accompanied by a BoP deficit of USD 30 bn. This adverse macro combination could result in INR weakening towards 97, while the 10Y sovereign yield could touch the 7% mark. Providing economic forecasts in such a fluid state is going to be fraught with challenges. Nevertheless, under business as usual conditions (assuming our assumption of crude oil price of USD 70 pb on average in FY27 along with a normal monsoon outturn), we project India’s GDP growth, CPI inflation, and BoP at 6.6-6.8%, 4.0% and USD +5 bn in FY27, with unchanged monetary policy rate, 10Y sovereign yield at 6.90%, and USDINR at 93.0 levels by Mar-27. Needless to say, these forecasts could be subjected to some of the statistical scenarios as mentioned above if risk sentiment shows a prolonged deterioration.