The challenge, however, is far from trivial. The conflict has amplified risks across multiple fronts, including energy imports, supply chains, exports and inflation. This raises the prospect of slower growth and a widening external imbalance. The Reserve Bank of India (RBI), in its April bulletin, has warned that higher input costs and supply disruptions could constrain the availability of key inputs and impair growth, even as inflation risks tilt upward due to volatile commodity prices.
Also read: RBI: India’s central bank sounds alarm with five risks as Iran war threatens domestic stability
This places India in a delicate position: exposed to global shocks but better prepared than in previous crises. In the April review report, The Finance Ministry notes that while global growth is expected to slow and inflation risks are rising, India’s growth momentum remains relatively robust, supported by domestic drivers. The RBI echoes this assessment, stating that the fundamentals of the Indian economy are on a stronger footing, providing greater resilience to withstand shocks now than in the past.
The story of India’s response to the war shock, therefore, is not one of insulation, but of absorption, adaptation and slight repositioning.
A multi-channel shock
The economic impact of the conflict is being transmitted through several interconnected channels.
Dipti Deshpande, principal economist at Crisil, describes four key pathways: export exposure to the Middle East, dependence on crude oil and natural gas, production disruptions in energy-intensive sectors, and broader trade risks as shipping costs rise.
These risks are already visible. The Finance Ministry flags energy price spikes, supply chain disruptions and pressure on input costs as immediate concerns in times of such geopolitical tensions. The RBI similarly notes that disruptions in shipping routes and rising freight and insurance costs could hit exports and constrain production.
India’s exposure to the region adds to the vulnerability. The Middle East accounts for about 13% of India’s exports and nearly 38% of remittance inflows, and any prolonged disruption could widen the current account deficit and put pressure on the rupee, according to Deshpande.
Industry is already feeling the strain. The Confederation of Indian Industry (CII) has flagged shipment delays, rising logistics costs and shortages of key inputs across sectors dependent on cross-border supply chains.
Also read: Taking a stock: Amid oil volatility, India and others keep reserves steady
Energy shock and inflation pressures
At the centre of the crisis lies the energy shock.
The Finance Ministry review highlights that rising crude oil prices, ranging around $110 per barrel in recent weeks, pose a direct risk to inflation and the import bill. The RBI adds that volatility in global energy prices has introduced significant uncertainty into the inflation outlook, with upside risks becoming more pronounced.
So far, the impact on consumers has been cushioned. The government has absorbed part of the fuel price shock through tax adjustments and pricing controls, helping keep headline inflation relatively contained in the near term.
“But this buffer may not hold indefinitely. Persistently high crude prices will eventually have to be passed on,” Deshpande told ET Online, warning of broader inflation pressures from rising input costs.”
The RBI, in its April bulletin, projected inflation at around 4.6% for 2026-27, but warned that energy prices and weather-related risks could push it higher.
Trade disruption and external risks
The external sector presents a mixed picture.
On one hand, India has built structural strength. The Finance Ministry notes that exports have reached record levels, with services exports acting as a key buffer.
On the other hand, near-term pressures are mounting.
In March, India’s exports dropped 7.44% to $38.92 billion in March, marking the steepest fall in the past five months, while the imports declined 6.5% to $59.59 billion from the year before.
The central bank report pointed to a widening trade deficit, which widened from $283.5 billion in FY25 to $333.2 billion in FY26 driven by rising imports and weakening exports, alongside global trade slowdown due to geopolitical tensions.
Shipping disruptions in critical routes such as the Strait of Hormuz, through which a significant share of global oil trade passes, could further raise freight costs and delay shipments, adding to inflationary pressures and supply bottlenecks.
Also read: Crude oil, remittances & exports: RBI spells out where the Iran war bites India
Markets under stress, but stable
Financial markets have not been immune to the turbulence either.
Foreign portfolio investors have pulled out significant capital in recent months, reflecting global risk aversion. In the first four months of 2026, the overseas investors have already pulled out Rs 1.8 lakh crore, surpassing the total pullout for the previous year, according to an ET report. Yet, domestic investors have stepped in as a stabilising force.
“Domestic capital now sustains market valuations,” Tejas Khoday, co-founder and CEO of FYERS told ET Online, pointing to strong retail participation through systematic investment plans (SIPs). “Without this cushion… stocks would have collapsed under FII selling pressure.”
The RBI’s data reinforces the broader picture of stability. Despite capital outflows, India’s foreign exchange reserves remain robust at $697.1 billion as of April 3, covering about 11 months of imports, while liquidity conditions in the banking system remain comfortable.
Source: RBI Monthly Bulletin – April
Resilience pillars: Why India is holding up
1. Domestic demand as the primary buffer
The most important stabiliser is domestic consumption.
“Over 60% of India’s GDP comes from domestic consumption. So, this provides a natural protection against international affairs from a high level perspective,” said Khoday. As per the central bank, private consumption and investment remain key drivers of economic momentum.
High-frequency indicators cited by the Finance Ministry, ranging from vehicle sales to GST collections, suggest that demand remains resilient, even if growth is moderating.
2. Strong financial system and balance sheets
Unlike previous crises, India is not entering this shock with a balance sheet problem.
The RBI bulletin highlighted that banks and non-banking financial companies maintain strong capital adequacy, improved asset quality and robust liquidity buffers.
Corporate leverage is also relatively low, giving firms room to absorb cost pressures and invest when conditions stabilise.
3. Policy agility and state response
The government’s response has been swift and multi-pronged. Its key relief measures include measures include fuel price cushioning, export support through schemes such as the Rs 497 crore RELIEF (Resilience & Logistics Intervention for Export Facilitation) package, diversification of crude sourcing and steps to stabilise currency and supply chains.
“The response… has been quick, calibrated and continuous,” CII Director General Chandrajit Banerjee said, highlighting coordinated action between government and industry.
The RBI, for its part, has maintained a flexible monetary stance while ensuring adequate liquidity to support growth.
4. External buffers and macro stability
India’s macro roots provide an additional layer of protection.
Foreign exchange reserves remain strong, remittance inflows are steady, and services exports continue to generate surplus.
Services exports continue to provide a cushion, with India’s total services exports reaching around $418 billion, according to the Finance Ministry’s April economic review.
“Remittances from the Middle East account for about 38% of India’s total inflows and could slow in the short term, notes Deshpande.
While risks to the current account are rising, these buffers reduce the likelihood of a balance-of-payments crisis.
ET OnlineThe way out of the war wreckage
If resilience defines India’s present, then structural transformation will determine its future. “The current crisis underscores the need to accelerate long-term structural reforms, including energy transition, supply chain diversification and productivity-enhancing measures, said Deshpande.
Reducing dependence on imported crude is critical, alongside scaling up renewable energy, expanding nuclear capacity and building strategic reserves, said the economist, outlining the key pathways for India to navigate the current shock.
She further suggested that:
- Securing alternative trade routes and diversifying sourcing can reduce vulnerability to geopolitical chokepoints.
- Strengthening fertiliser production and promoting alternatives such as green ammonia can improve food and input security.
- Easing business constraints, improving logistics and investing in skills will be key to sustaining growth in a volatile global environment.
The Finance Ministry review itself points to these structural priorities: energy security, supply chain resilience and regulatory simplification, as essential to navigating future shocks.
A stress test for resilience
The West Asia conflict is not just another external shock, it is a stress test of India’s economic architecture. The economy remains exposed to oil, trade and financial volatility. Growth could slow, inflation could rise, and external balances could come under pressure if the conflict drags on.
But the underlying story is one of relative strength. As both the Finance Ministry and RBI underline, India’s improved fundamentals, such as strong demand, healthier balance sheets and policy flexibility, offer a buffer.
“The profile of India’s domestic strengths today is very different and much improved compared to past external shock periods, implying a stronger shock-absorptive capacity,” said Deshpande, even as she cautioned that risks are mounting as the conflict deepens.
The outcome will depend on how effectively these buffers are deployed and whether the crisis is used as an opportunity to accelerate structural change.
To durably raise growth, the economist said, “India must continue focusing on efficiency gains and reforms that improve investor sentiment and build resilience in a volatile global environment.