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Just as the embers of geopolitical tension were calming, the world was once again set on fire as Iran was struck. The Supreme Leader of Iran was killed and in response Iran targetted several high-value assets in the Gulf. With Iran’s control over a key trade route – the Strait of Hormuz, supply chains have been impacted. Further, the air warfare ensures that human movement is impeded, with millions of Indians being present in the region. There is no clarity as to the objectives of the war, and with no end in sight, the world is preparing for a drawn out conflict. Indeed, the end may be determined by who can take the most inflationary pain (in a mid-term election year in the US) rather than who has the strongest military.

 

The Gulf produces ~1/3rd of the world’s crude and the Strait of Hormuz is the second biggest choke point for the fuel in the world. This meant that Brent crude prices which were below USD 70/bbl just a month back touched almost USD 120/bbl briefly, and TTF gas prices are up 90%+ m/m. Overtures are being made to Russia with American permission but discounts erstwhile available have evaporated in the supply shock. In this context, it must be noted that the declining trajectory of inflation worldwide was majorly supported by benign fuel prices in the past year and these developments pose a significant risk to the same. Policymakers must act in time to ensure that the impact of energy inflation does not spillover to other commodities in FY27

 

Before the war drums were beaten, the world was welcomed with a brief respite as the US SCOTUS declared Mr. Trump’s tariffs illegal with another US court even ordering refunds. The US Government quickly imposed milder tariffs for 150 days as it rethinks its strategy. With extreme volatility on multiple fronts, nations are stuck between a rock and hard place. The INR experienced high volatility sinking to all-time lows multiple times. Cross-border flows remain flippant with large FPI equity outflows in early Mar’26 reversing inflows seen in Feb’26. The only reassurance seems to be a manageable current account deficit and hale forex reserves, which give some wiggle room for monetary policy

 

With chances of inflation rising now stark, the rate trajectory of most global Central Banks is moving away from a downward curve, creating upward pressure on yields. Indeed, the markets now expect one fewer cut by Jan’27 policy in the US than was forecast a month before. At the same time, higher crude prices have stoked fears that the RBI’s policy may need to change course – though whether inflation or currency concerns will dominate its thinking remains an open question. For now, the RBI is trying to manage all fronts by compensating for the INR dried up in forex markets with domestic bond buying. Policy appears to be entering a difficult phase where it adheres to the Anna Karenina principle rather than the Goldilocks narrative

 

Amidst global bedlam, domestic activity is resilient with the new GDP series printing auspicious figures for FY26. A more accurate view on manufacturing has bolstered its role retrospectively even as the new methodology reaffirms convictions held on private consumption as a powerhouse. As far as investments are concerned, however, the economy continues to be reliant on the Union. States seem less keen on capex in the absence of the GST Cess, as suggested by the fact that just half of the outlay for fiscal has been spent in 10MFY26. Private players are on an eternal weight for uncertainty to end. This could emerge as a sore point, with the downwardly revised absolute nominal GDP for FY26 stifling room for deficit financing. The newly launched NMP 2.0 stands as beacon of hope in these challenging times, and could make the difference in achieving growth aims

 

 

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