India's Economy Is Holding Up : But Is the Worst Still Coming?

When Uday Kotak stood up at the CII Annual Business Summit this week and said "we have not seen the impact in the last two months of the West Asia war in terms of energy price transmission — it's coming, and it's coming big," the room had good reason to take note. The founder of Kotak Mahindra Bank is not given to exaggeration. His warning, framed as what he called "strategic paranoia," was aimed squarely at policymakers, businesses and citizens.

The message was not very hard to interpret: the cushion is running out.

India's headline GDP growth story remains intact for now. Morgan Stanley's India Economics Mid-Year Outlook forecasts real GDP growth of 6.7% for FY2027 and 7.0% for FY2028, versus an estimated 7.6% in FY2026. That is still among the strongest growth numbers in the world. But the battle has quietly shifted from sustaining growth to protecting the macro scaffolding that makes it possible.

First Pain--Rupee

The most immediate visible stress is the currency. The Indian rupee fell to around 95.73 per dollar on May 14, touching fresh record lows as concerns over the fragility of the US-Iran ceasefire continued to weigh on global markets. Over the past year, the rupee-dollar exchange rate has been down over 11%, meaning the rupee has shed significant purchasing power against the dollar.

The RBI has intervened, but its room to manoeuvre is narrowing fast. According to Ambit Capital's analysis published, while India's headline foreign exchange reserves stand at around $690bn, once gold holdings of $113bn and net short positions of $103bn are stripped out, the effective reserve figure falls to approximately $471bn, putting import cover at just 5.8 months — the lowest since early 2014.

The rupee's weakness is not happening in a vacuum. It is a direct consequence of the oil shock building since the Iran-US-Israel conflict escalated in early 2026. India imports nearly 090% of its crude oil requirements, and with Brent averaging close to $100 per barrel in recent weeks, the import bill is swelling fast.

Ambit Capital estimates that oil imports will rise 41% year-on-year in FY2027, with the current account deficit (CAD) widening to roughly 2.9% of GDP, compared to 0.7% in FY2026. Making matters worse, net foreign investment — which averaged roughly $3.7bn per month between FY2015 and FY2024 — has turned negative since FY2025, averaging an outflow of $0.5bn a month. When the capital account deteriorates at the same time as the trade account, the currency has very few friends.

Upstream Warning

The wholesale price data released today tells the producer-side story. India's WPI-based inflation surged to 8.3% in April 2026, up from 3.88% in March, the highest reading 3.5 years. The fuel and power segment saw inflation skyrocket to 24.71%, with crude petroleum and natural gas inflation rising to 67.18% and petrol and high-speed diesel inflation at 32.4% and 25.19%, respectively. Of the 22 manufacturing groups tracked under WPI, 21 reported price increases in April. Basic metals, textiles, chemicals — the cost pressure is broad-based, not a one-sector story.

Equirus Securities notes that commodity spillovers are widening further, with price pressures now visible across dyes, organic solvents, sulphuric acid, carbon black, glass products, stainless steel, electronic components, and cables — well beyond the usual energy suspects.

A telling signal sits in the credit data. Non-food credit accelerated to 15.5% in Q4 FY26, with a sharp uptick in working capital borrowings across chemicals, metals, aviation, gems, shipping, and glass, according to Equirus. Firms in these sectors are not borrowing to expand — they are borrowing to stay afloat against elevated input costs. That is a meaningful distinction. PMI surveys tell a similar story from a different angle. Manufacturing input costs rose at their fastest pace since August 2022 in April, and Equirus points out that while manufacturing firms have begun passing those costs through to output prices, services firms are still absorbing them. That gap will close over coming quarters, which means the retail inflation story is not yet fully written.

This is the pipeline through which Kotak's "big shock" will eventually reach ordinary consumers. Retail CPI inflation has thus far remained relatively contained at 3.48% in April, partly because the government has held back on passing higher fuel costs to households. But that restraint is becoming fiscally costly. Oil marketing companies are reportedly sitting on under-recoveries of ₹18–25 per litre. Ambit Capital's scenario analysis suggests that even a modest ₹6.5 per litre hike could push FY2027 headline CPI to 4.5%, while a full cost pass-through could add close to 100 basis points. The government has said fuel price hikes are not planned. The under-recoveries suggest that the position is getting harder to hold.

Old Playbook, New Scale

Facing pressure on multiple fronts, the government has been reaching for familiar levers. Gold import duty was raised sharply from 6% to 15% in May, targeting an import bill that reached $72bn in FY2026, or 9.3% of total imports — the highest proportionate share since FY2013.

Prime Minister Modi has publicly appealed for work-from-home adoption, reduced international travel, and lower gold and edible oil consumption. Ambit Capital frames the gold duty hike explicitly as "the first step in a broader external stabilisation playbook," with further measures such as tighter Liberalised Remittance Scheme outflows and instruments to attract offshore dollar liabilities likely to follow. India navigated something similar during the 2013 taper tantrum, using a combination of LRS restrictions, the RBI swap window for oil marketing companies, and gold duty adjustments. The tools are the same; the scale of the current challenge is meaningfully larger.

Morgan Stanley expects the RBI to stay on pause through FY2027, relying on non-rate tools to manage external pressures, including tighter outward direct investment norms and steps to boost NRI deposits and foreign exchange inflows. A shallow hiking cycle is pencilled in only for FY2028, contingent on inflation staying above 5% and growth holding up.

Watch the Skies

Kotak's warning this week is less a forecast of catastrophe and more an instruction to shed complacency. India's growth fundamentals are sound, its corporate balance sheets are resilient, and domestic demand remains a genuine buffer. But the challenge for the next twelve months is not about growth numbers. It is about whether the rupee, the reserves, and the inflation trajectory can be held together while the oil shock works its way through an economy that has, so far, only felt the edges of it. And there is a second front opening quietly alongside the first.

Equirus Economics flags an impending El Niño episode as a compounding risk for the second half of FY2027. Historically, El Niño is associated with roughly 80 basis points rise in rural unemployment and double-digit contraction in construction and real estate employment. If the kharif season is disrupted at the same time as the commodity squeeze tightens, the auto sector — one of the key pillars of FY2026's manufacturing growth — faces a rural income shock from two directions simultaneously. The West Asia crisis was the known enemy. El Niño is the one that few are watching closely enough.