Oil, El Niño and capital flight: Can India retain its fast-growth tag?

When International Monetary Fund (IMF) managing director Kristalina Georgieva termed India a ‘bright spot’ across the global economy, she was not overstating. Over the past three years, India’s economic growth has averaged 7.3%, an expansion rate double that of the wider world. This momentum held firm despite elevated commodity prices triggered by geopolitical conflicts and disruptive trade tariffs.

That momentum has carried into this year. In the first quarter of 2026-27, India’s GDP expanded by 7.8%. The World Bank, IMF, and the Reserve Bank of India have all lifted their growth projections to 7% or higher. On 11 November, Moody’s Ratings raised its 2026-27 growth forecast for India’s economy to 7% from 6.5%, citing resilient consumption, improving investment dynamics and the economy’s ability to withstand the global energy shock.

India continues to outpace major peers like the US and China, anchoring global economic momentum.

“The financial, including the banking sector clean-up, and the physical infrastructure built in the second decade, is clearly helping,” India’s chief economic adviser V. Anantha Nageswaran told Mint. “Add to it the substantial tax reliefs in 2025—both direct and indirect. All of these appear to have built the Indian economy’s resilience to tackle multiple shocks.”

And in recent days, India’s economic outlook appears to have brightened further. US President Donald Trump faced a major setback in the midterm polls, where voter anger over the Iran conflict and rising inflation forced him to dial down his bellicose rhetoric. In Israel, his key wartime ally, Benjamin Netanyahu, has been reduced to a caretaker role after losing his parliamentary majority in deadlocked elections. Meanwhile, peace negotiations have begun between Russia and Ukraine—Russian and Ukrainian negotiators agreed to a major prisoner exchange, Reuters reported on 11 November.

Consequently, benchmark Brent crude prices have retreated toward the $90-per-barrel mark from over $100. Foreign portfolio investors have also resumed buying across Indian assets. In the first nine days of November, overseas funds poured ₹53,739 crore into the domestic market, according to data from the National Securities Depository Ltd.

“The good news is that the external environment has become favourable in recent days but other risks remain,” said D.K. Joshi, chief economist at Crisil, a ratings agency.

A fresh macroeconomic shock could test India’s resilience like never before—the country’s buffer against such shocks has diminished considerably. New Delhi’s counter-cyclical policy response to any crisis would be constrained by tight fiscal and monetary conditions.

What could upset India’s party? Read on.

Oil’s well, but …

Trump first struck Iran in February this year, prompting Tehran to shut the Strait of Hormuz—the choke point through which a fifth of global crude flows. Markets braced for catastrophe, with analysts projecting crude would rocket from $72 levels to between $150 and $200 a barrel.

Eight months on, oil has rallied sharply but has held below the $120 mark.

Analysts credit several shock absorbers. First, markets were awash with crude when the conflict erupted, cushioned by robust global stockpiles. Second, major consumers including the US, the European Union, China, and Japan drew down heavily on their strategic petroleum reserves. Third, Gulf producers bypassed Hormuz by rerouting volumes through alternative pipelines.

Meanwhile, non-OPEC output stepped in: US shale output surged, and Venezuelan barrels re-entered the market following the ouster of strongman Nicolás Maduro by the US. Structural demand shifts also cushioned the blow, led by rapid electric vehicle adoption in China.

Those buffers are now wearing thin.

“The world has used up the crude oil surplus. If war flares up in West Asia again, oil prices could sharply jump,” warned Joshi.

While war clouds appear to be lifting, risks persist. Tehran could mobilize Houthi proxies against Saudi energy infrastructure or choke off the Bab-el-Mandeb Strait, closing the alternative corridors Gulf exporters rely on.

On 12 November, media outlets quoted Houthi military spokesperson Yahya Saree claiming that the group had targeted oil infrastructure and military assets in Saudi Arabia, including a pumping station on the East-West Pipeline and the Yanbu oil facility on the Red Sea. On 15 November, Al Jazeera reported that Saudi-led coalition forces fighting the Houthis had intercepted two missiles and two drones targeting Riyadh.

Trump can complicate matters. A Democrat-held Congress threatens to paralyze his domestic agenda, starve key initiatives of funding, and launch sweeping probes. A lame-duck presidency could push Trump toward desperate measures.

“Trump’s diminished lame-duck status, and frustration that he is no longer the centre of attention, could aggravate old tensions and spark new explosions,” Simon Tisdall, a foreign affairs commentator, wrote in The Guardian. The US president could “defy chastened Republicans such as the vice-president, J.D. Vance, and resume and expand the war”.

Last week, Trump asked Vance to stop working on Iran peace efforts.

That leaves pricey oil squarely on the table.

Return of the hawks

Runaway oil prices could spell trouble for India despite the recent correction.

Costlier crude stokes inflation—which climbed to 6.1% in October, well above the Reserve Bank of India’s 4% target—keeping the central bank on a tightening path. At its October meeting, the monetary policy committee had already lifted the repo rate by 25 basis points to 5.50% and pivoted its stance from ‘accommodative’ to ‘calibrated tightening’. Rate cuts are off the table for now; subsequent moves will involve either another hike or a pause.

The central bank has signalled that the longevity and quantum of this hiking cycle will track incoming growth-inflation prints, particularly core pressures.

The Reserve Bank is hardly an outlier, to be sure. Across September and October, 16 global central banks raised benchmark lending rates. Their synchronized signalling confirms the global economy is settling into a ‘higher-for-longer’ rate regime. Elevated borrowing costs threaten to dampen consumer sentiment and drag on private consumption—the primary engine of India’s economic growth.

Super El Niño

The economic engine also faces an environmental threat—an unfolding El Niño—marked by warming sea surface temperatures in the equatorial Pacific.

It has already left the southwest monsoon trailing normal levels by 13%. Ranking among the driest spells in decades, the rainfall deficit has pushed several states to declare drought. While kharif sowing gaps have narrowed, the ultimate toll on crop yields remains uncertain.

“Higher food inflation is a given,” said Madan Sabnavis, chief economist at Bank of Baroda.

A shortfall in farm output will compound rural distress. Data from the Consumer Price Index (CPI) for Agricultural Labourers reveals that real year-on-year wages contracted through July and August across both farm and non-farm rural jobs. Impending water shortages will also test the livestock and dairy sectors.

“Rural consumption could be impacted and higher food prices could hurt discretionary spending in urban centres as well. This will slow the economic growth in the second half,” said Joshi.

To ease rural strain, the Centre will face mounting pressure to expand safety nets under flagship programmes like the Viksit Bharat–Guarantee for Rozgar and Ajeevika Mission. The scheme, which came into force on 1 July 2026, replacing the MGNREGA (Mahatma Gandhi National Rural Employment Guarantee Act) framework, requires states to foot 40% of the bill. The finances of most states are tight—they may not find the resources to spend on it.

Also, the pivotal question: does New Delhi possess the fiscal leeway to ramp up welfare spending without derailing its consolidation glide path?

AI meltdown?

While the rural strain could test New Delhi’s fiscal math, another risk is brewing thousands of miles away—in Silicon Valley’s unprecedented spending spree on artificial intelligence (AI). Goldman Sachs pegs global AI-related capital expenditure in 2026 alone at $1 trillion.

India, however, has little direct skin in the game. It has no domestic champions fabricating advanced silicon or high-bandwidth memory chips—like Nvidia and Micron in the US, or SK Hynix and Samsung in South Korea. Nor has it built frontier foundational models to rival OpenAI’s GPT suite, Anthropic’s Claude, or Google’s Gemini. Its exposure remains largely confined to hosting data center infrastructure.

Yet the ripples of this AI boom are buffeting India on multiple fronts. With no pure-play AI heavyweights listed on Dalal Street, foreign portfolio investors keen on thematic trade have pulled capital out of Indian equities, redirecting allocations toward the US, South Korea, and Europe.

This flight of capital extends beyond public equities. Mammoth debt issuance by tech giants to bankroll AI infrastructure has lifted US Treasury yields. After scaling 5.3%, the benchmark 10-year yield is hovering near 4.9%, drawing yield-hungry fixed-income investors back to risk-free sovereign paper.

At the same time, generative AI adoption is starting to bite Indian software exporters, hurting their billings. That drag showed up in September, when India’s services exports logged an uncharacteristic monthly contraction.

In recent weeks, unease has gathered pace that the AI trade may be unravelling—the boom could turn into a spectacular bust. Tech giants face mounting scrutiny over sky-high valuations and delayed returns.

How a crash would hit India remains a subject of debate. Optimists contend that once the initial turbulence clears, global funds will rotate back into Indian equities in greater numbers, drawn to their domestic, non-AI cyclical growth story. A bubble popping would also curb hyperscaler capex and debt issuance, cooling US Treasury yields and stemming debt outflows from emerging markets.

Meanwhile, finance minister Nirmala Sitharaman recently signalled that the Indian government will review foreign portfolio investors’ grievances over the capital gains tax regime, amid escalating calls for a reduction in long-term capital gains (LTCG) tax on equities. Investors currently pay LTCG tax at 12.5% on eligible gains exceeding ₹1.25 lakh in a financial year. Applicable cess and surcharge are levied separately.

Skeptics take a different view. They argue that investors bruised by an AI rout would retreat into safe-haven dollar assets rather than redeploy into an emerging market saddled with a depreciating currency. A weaker rupee erodes dollar-denominated returns, blunting India’s appeal just when external buffers are tested.

The rupee factor

That currency vulnerability sits at the heart of India’s external challenge.

High crude prices alongside relentless capital flight across debt and equity have exerted pressure on the Indian currency. The rupee plunged to a historic low of ₹96.96 against the greenback in May before the central bank stepped in. Crucial among its interventions was a $143 billion FCNR(B) deposit mobilization drive, which arrested the immediate slide.

FCNR(B) deposit mobilization is similar to a cash-collection drive—a country asks its wealthy citizens living abroad to temporarily park their money in local banks instead of foreign ones. For doing so, the Reserve Bank offered depositors protection against depreciation risk and made the income tax free in India.

While the rupee currently trades around the ₹94 mark, it has still shed nearly 6% over the trailing 12 months—a persistent drag that amplifies imported inflation.

Defending the currency has pushed the central bank toward unpopular market measures. Over recent weeks, heavy dollar sales have rapidly eroded India’s external buffers, drawing foreign exchange reserves down from $786 billion in early September to $717 billion by late October. The regulator has also tightened oversight across spot and derivatives desks, driving hedging costs sharply higher for market participants.

A growing chorus of economists says the Reserve Bank should step back and let the rupee find its natural level, warning that its active defence is proving counterproductive. They point to the central bank’s $240 billion short position in the forward market as of September—essentially future commitments to supply dollars. Fulfilling those contracts later will force the central bank to buy dollars, creating a drag on the rupee’s recovery even when market conditions improve.

Continued intervention, they warn, amounts to tactical sentiment management that will quickly prove unsustainable if crude flares again or global outflows accelerate. They also worry that the Indian government’s wider macroeconomic toolkit is facing constraints.

Foreign inflows lift Indian stocks' dollar returns above rupee gains as currency rebounds

New Delhi’s limitations

During the first half of 2026-27, India’s fiscal deficit widened to ₹7.1 trillion from ₹5.7 trillion a year earlier, driven by higher expenditure.

According to Aditi Nayar, chief economist at ICRA, a ratings agency, meeting the full-year deficit target of 4.3% of GDP will demand sharp expenditure cuts in the second half. That leaves little room for counter-cyclical stimulus—even with divestment receipts poised to overshoot targets for the first time in years.

The government, for instance, raised funds through minority-stake transactions and share sales across major public sector undertakings, including IDBI Bank, Life Insurance Corporation (LIC) and Coal India Ltd. As per government data, ₹62,124 crore was raised in the first six months of the fiscal year, and if the IDBI Bank stake sale is factored in, the overall receipts could exceed this year’s target of ₹80,000 crore.

Monetary policy faces an even tighter bind. “Ideally, monetary policy can help stimulate growth by reducing interest rates, but that will be possible now only if the inflation comes down,” said C. Rangarajan, former governor of the Reserve Bank.

Global dynamics further tie the central bank’s hands. As monetary authorities worldwide lift borrowing costs, the Reserve Bank must defend rate differentials to prevent another wave of capital flight. “Monetary policy today cannot ignore what is happening outside the country. Our interest rates are integrated with the global rates,” Rangarajan added.

New Delhi, for its part, remains confident it can handle any future shock.

“We are comfortable yet watchful. A lot of things are up in the air. We have diversified our supplies to manage disruptions and are widening our export base through free trade agreements to de-risk our exports,” said chief economic adviser Nageswaran. “There are downside risks but we are confident they can be managed.”