There are decades when nothing happens, and then there are weeks when decades happen. A quote attributed to Lenin captures the first few weeks of 2026.
Indeed, with the dawn of the year 2026, the world woke up to news of the capture of Venezuelan president, Nicholas Maduro, by the USA forces. If that were not enough, beginning March 2026, along with Israel, the USA government chose to intervene militarily in Iran, killing the President, Ayatollah Khomeini, in aerial bombing, triggering an intense war that has engulfed the entire Gulf area. Iran’s retaliation against the USA security bases in the region has meant there is war raging across twelve nations, and luring many more to join the sparring sides.
With the ‘Strait of Hormuz’ coming under fire, crude petroleum and natural gas supplies have come to a halt, threatening energy prices across the Globe. It is estimated that a-fifth of global energy trade passes through the Strait, and prolonged disruptions could spill over into macroeconomic imbalances, especially for net energy-importing nations like India. While Iran accounts for a meagre share (0.15% of merchandise trade) of India’s direct trade (Indian Exports to Iran: USD 1.24 billion; Imports from Iran: USD 0.44 billion), half of India’s energy imports transit through the Strait of Hormuz.
Reflecting this disruption, international crude prices have surged past USD 85 per barrel. An increase of 10 dollars per barrel could raise India’s oil import bill by USD 14 billion annually. Rupee weakening could further compound the balance of payments woes, especially given that flows in the financial account are already thin.
At home, India made progress in trade diversification with the signing of the India-EU free trade agreement (FTA) in early January and the conclusion of an interim trade deal with the USA, which eased tariff restrictions on Indian goods to the USA, beginning in February 2026. Meanwhile, the Supreme Court of the USA, striking down the Trump Tariffs as executive overreach, is creating ambiguity about India-USA trade resolutions underway.
Earlier, the Union Budget 2026 adhered to a fiscally prudent path —having Capex-heavy spending and modest fiscal consolidation to keep the economy on a debt-reduction trajectory. The capex allocations, including infrastructure, have been retained at 3.1% of GDP, which, together with Grants-in-Aid to states, makes the effective revenue deficit fall to 0.3% of GDP, affirming the quality of budget-making. Further, the 16th Finance Commission’s retention of tax devolution shares at 41% for States is prudent, given the shift in expenditure priorities between the Union and the States.
The Reserve Bank of India, in turn, has maintained the policy rates unchanged in the February 2026 bimonthly review. Further, with inflation seen as benign, it is likely to keep rates low for an extended period ahead.
There is a twist in the tale, however, with the release of new macroeconomic data, including the consumer price index (CPI) (Base 2023-24) and gross domestic product (GDP) (Base 2022-23). While the price gauge paints a comforting narrative on price dynamics in India, especially with headline and core both printing lower in 2025 than in the last series (Base 2011-12). The CPI rejig has meant lower weight for volatile items like food and precious metals.
On the other hand, while new series GDP estimates have shown activity at real level much robust than envisaged earlier (7.6% growth for FY2025-26 following 7.1% for FY2024-25), at nominal level size of economy is smaller (Rs 345 trillion GDP estimated for FY2025-26 as per Second Advance Estimates taking 2022-23 as a base year as against Rs 357 trillion estimated as per First Advance Estimates on 2011-12 base year). The shrinking nominal GDP has meant that fiscal consolidation targets for FY2026-27 could warrant a reduction in expenditure estimates going forward.
Bond markets have sensed unease in fiscal dynamics, especially with States rivalling the Union Government in the gross supply of securities. The yield on the benchmark 10-year security, therefore, remains sticky around 6.6%, making the term premium elevated to 130 basis points.
Banks have also opportunistically priced loans higher as corporates have fewer resources to raise money more cheaply, underscoring the dissonance between money and credit markets. The credit-deposit (CD) ratio has inched up to 82%, implying intense competition for funds in the last quarter of the financial year 2025-26.
Having undertaken open market purchases of securities worth Rs 3.5 trillion and forex swaps of USD 15.1 billion in the December 2025 and January 2026 period, the RBI still cannot rest easy, given a high CD ratio and the rupee under pressure. India’s robust macro-economic health parameters will be tested in a conflicted global economy.
