India is stepping into the financial year 2026–27 with relatively stable economic fundamentals, but the Finance Ministry has cautioned that the ongoing conflict in West Asia could create lasting consequences for both the domestic and global economy.
In its Monthly Economic Review for February, the ministry noted that the confrontation involving the United States, Israel and Iran has heightened uncertainty across global financial markets. With the tensions entering nearly a week, the report said volatility in markets may persist for some time.
According to the ministry, the broader implications of the conflict for India may be deeper than currently visible. The report stated that the outcome of the conflict remains uncertain and its long-term consequences could unfold gradually.
One of the key risks flagged in the review relates to the Strait of Hormuz, a strategic maritime route near Iran through which a significant portion of global crude oil shipments pass. Any disruption to this corridor could push up oil prices due to rising geopolitical risks.
The ministry explained that if the strait becomes vulnerable to interruptions, the geopolitical risk premium in global oil prices could return. On the other hand, if the confrontation eventually leads to a credible shift in the regional power balance, markets may slowly absorb the shock and regain stability. However, it warned that if claims of victory emerge before underlying strategic tensions are resolved, any temporary calm in financial markets could quickly fade.
Officials also drew parallels with the 1991 Gulf War, suggesting that the global economy may move away from an era of relatively cheap energy and instead enter a more volatile phase resembling an ‘inter-war’ period for global trade.
Despite these external risks, the Finance Ministry emphasised that India’s current economic position is stronger than during earlier periods of instability in the Gulf region. The report noted that the country is entering the next financial year with a solid macroeconomic foundation that could help cushion potential shocks from energy markets and global uncertainties.
It highlighted that economic growth remains steady, inflation levels are moderate, credit expansion continues at a healthy pace, and the fiscal deficit is under control. External sector stability has also been maintained, according to the review.
The ministry also announced the introduction of a revised GDP series with the base year updated to 2022–23. Under the new Consumer Price Index series for 2024, inflation in January 2026 stood at 2.75 per cent, reflecting easing food prices while remaining within a comfortable range.
The updated GDP data suggests that the economy has remained resilient after the pandemic, recording growth above 7 per cent for three consecutive years, even though the revised calculations show a slightly smaller but stable economic base.
The report also referred to the impact of ‘Operation Epic Fury,’ stating that the elimination of key leadership in Iran has created a power vacuum, complicating prospects for immediate stability in regional trade routes that are important for India.
At the same time, the ministry pointed out that India is better equipped to deal with global volatility thanks to its strong foreign exchange reserves. The country currently holds reserves exceeding $720 billion, which are sufficient to cover nearly eleven months of imports and provide the Reserve Bank of India with adequate resources to support the rupee if required.
Overall, the review concluded that India’s macroeconomic environment continues to be defined by steady growth, controlled inflation and ongoing structural reforms, even as geopolitical risks remain elevated.
