Global markets breathed a sigh of relief as the US-Iran war appeared close to resolution, with both sides signing an interim deal last month to cease attacks and resolve all pending issues over the next two months. Consequently, oil flows through the Strait of Hormuz have started normalizing, cooling crude prices to their pre-February 28 levels. While it is too early to comment on the durability of the peace, given the broader strategic interests of the US, Israel, and Iran, the geopolitical shadow of the conflict is likely to leave a lasting imprint on energy exports from the Gulf region.
The Indian economy, meanwhile, has witnessed a significant shift in its energy supply mix, with Russia now accounting for more than half of India’s crude oil imports and the US emerging as the leading supplier of natural gas. The normalization of marine traffic through the Strait of Hormuz is likely to moderate non-Gulf energy flows. However, India is unlikely to revert to its pre-February 28th dependence on West Asia for its energy needs. Instead, recent developments are likely to accelerate India’s transition towards renewable energy, which already accounts for more than half of the country’s installed power generation capacity. There remains, however, a need to strengthen energy storage and evacuation infrastructure to assure industries of a reliable and consistent power supply.
The recent moderation in crude oil prices nevertheless bodes well for India’s macroeconomic outlook, especially for the rupee, which has come under pressure amid weakening financial account inflows in recent quarters. Regulatory measures to support the rupee, including the swap facility for FCNR deposits mobilized by banks and external commercial borrowings (ECBs) raised by public sector undertakings, are expected to augment foreign exchange reserves by around USD 50 billion, enhancing India’s economic resilience. Foreign portfolio investors have also shown renewed interest in Indian assets, particularly as Indian valuations now appear less stretched than those of several other emerging markets in Asia.
Inflation risks are also seen subsiding despite El Niño’s effects on rainfall. In line with forecasts from the India Meteorological Department, the southwest monsoon was significantly weaker, with rainfall at just 60% of the long-period average in June 2026, making it the third-driest June in a century. Encouragingly, monsoon coverage has improved during the first week of July. As the non-farm segment now contributes more than half of the value added in the agriculture sector, India’s dependence on rainfall for overall economic growth has steadily declined over the years. Nevertheless, the monsoon remains critical for the livelihoods of a large farming population and for sustaining rural demand.
The Monetary Policy Committee (MPC), in its June bi-monthly review, signalled a data-dependent approach to interest rates and indicated its willingness to look through temporary supply-side shocks. With the geopolitical situation in West Asia stabilizing, the outlook for international crude prices has become more favorable for India. Consequently, monetary policy could maintain the status quo for a longer period than previously envisaged to support economic growth.
Bank credit growth remained robust even as deposit growth lagged during the first quarter of FY2026-27. Although the credit-deposit ratio remains elevated, banks are likely to benefit from lower funding costs through resources mobilised overseas under the RBI’s FCNR swap facility. Moreover, with bond yields easing during the last week of June 2026, banks are expected to report strong earnings, supported by mark-to-market gains on their treasury portfolios. The RBI’s stress tests have found Indian banks to be resilient, with most maintaining capital levels comfortably above the regulatory minimum. Under severe stress scenarios, however, pockets of vulnerability could emerge among non-banking financial companies and the general insurance segment of the financial sector.
The bond market has also seen yields soften following the easing of fiscal and geopolitical risks following the signing of the US-Iran MoU. The benchmark 10-year Government of India security yields now hover around 6.75%, compared with above 7% just a few weeks earlier. This has signaled the revival of corporate bond issuances after activity nearly froze during April and May amid concerns over rising borrowing costs. With FCNR and ECB swap facilities expected to inject abundant liquidity into the financial system, the softening in yields is likely to persist through the second and third quarters of FY2026-27.
In sum, the economic outlook today is in better shape than it was during the height of the US-Iran conflict. The resolution of the war has paved the way for the restoration of macroeconomic stability across emerging markets, including India. It would, however, be erroneous to view this period of calm as permanent. It would be prudent for India to maintain a diversified energy sourcing strategy while accelerating its transition towards renewable energy to strengthen the energy security of one of the world’s fastest-growing major economies.
