India can absorb energy shock but fiscal strains possible
India can withstand a sharp energy shock due to its strong domestic fundamentals, potential government support, and significant improvement in corporate and banking sector health over the past few years, a report said on Tuesday.
The report from S&P Global Ratings said robust corporate balance sheets and banks’ strong capital and profitability would cushion the economy against higher energy prices.
"India's robust external position gives it buffers to absorb some shocks from a higher import bill, “it said, adding sovereign, corporate and bank ratings are not expected to face immediate downgrades due to the West Asian conflict.
Under a stress scenario in which oil averages $130 per barrel in 2026, the ratings agency found that growth could slow by up to 80 basis points from its base case, temporarily worsening the government's fiscal position.
Corporate sector EBITDA could ease by 15 per cent-25 per cent with leverage increasing by about 0.5x-1x EBITDA in fiscal 2027; banking system asset quality would also likely worsen, with weak loans rising to 3.5 per cent, it noted.
Neel Gopalakrishnan, an analyst at S&P Global Ratings said that credit quality should recover sharply in fiscal 2028, given elevated but comparatively lower energy prices.
The agency forecasted “generally strong performances for India's corporations and banks for fiscal 2026,” adding that the key monitorable remains any changes to capital expenditure plan in the industrial sector.
“Long-term growth plans should remain unchanged. However, the impact of the war on cash flows in the next 12-18 months and demand expectations could lead to temporary slowdowns in capacity expansion,” it said.
The Reserve Bank of India has imposed a $100 million cap on net open positions for the banks to curb the volatility and stem the pressure on the rupee. However, the cap will dent the foreign exchange income for the banks.
“We expect the banks to reflect strong credit growth and profitability in fiscal 2026. Government measures to mitigate high energy prices may lead to a higher fiscal deficit than India targets this year. However, they will not derail India's political commitment to fiscal consolidation over the next few years,” the report said.
