Oil prices above $100 expose a vulnerability in Indian economy

The plunge in the exchange rate of the rupee has come as a rude shock to policy makers and businessmen. The plunge comes at a time when India's economic fundamentals are better than before. 

Despite seemingly sound fundamentals, FIIs are exiting India. Why? For most of 2025, it was because India came to attract Trump tariffs of over 50 per cent including punitive tariffs of 25 per cent for buying oil from Russia. FIIs saw the US administration posture towards India as a negative. That problem was resolved in February 2026. Then in March came the Iran war which pushed oil prices to well over $100 a barrel.

Oil prices of over $100 can push India's current account deficit (CAD) to over 2 per cent. That's a level that policy makers are okay but not foreign investors. India's CAD averaged 0.8 per cent in the last five years. They stayed low, thanks to oil prices staying well below $100 for the most part. 

I argue in my BS article that oil prices rising above $100 expose a vulnerability in the Indian economy.

Iran shock highlights India’s external vulnerability

Managing external risks may require reining in growth ambitions

Going by the revised gross domestic product (GDP) series, the Indian economy grew by 7.2 per cent, 7.1 per cent, and 7.6 per cent in FY 24, FY 25, and FY 26, respectively. This is a truly impressive growth record in an environment marked by the Ukraine conflict, high interest rates in Western economies, and Trump tariffs. have posed serious challenges. 

Even a tariff rate of over 50 per cent on much of India’s exports to the United States could not stop the Indian economy in its stride. With the inflation rate at an extremely benign 3 per cent, it appeared that India was finally set on a 7 per cent growth trajectory even in a difficult global environment. The conflict in Iran, now paused for two weeks, threatens to  undermine these expectations.  

The truly unsettling element in the scenario has been the fall in the exchange rate of the rupee. The fall predates the Iran conflict. The conflict has merely accentuated an underlying trend. The nominal effective exchange rate of the rupee has fallen by 8.5  per and the real effective exchange rate by 8.1per cent in the period from February 2025 to February 2026 (trade-weighted 40 currency basket). The latter is well beyond the Reserve Bank of India’s comfort zone of 5 per cent. 

 A growth rate of over 7 per cent, an inflation rate below 3 per cent and a current account deficit of 0.8 per cent scarcely justify a fall of this order. The fall has to do entirely with capital flows. There was a net foreign portfolio investment (FPI) outflow of ~1.52 trillion in FY26. These are the highest FII outflows ever in any given year. They exceed the outflows of ~1.22 trillion in the Covid-impacted year of 2021-22.  

In 2021-22, the growth outlook was nowhere as positive as it is today. The inflation rate was running at 5.5 per cent. The banking system was under considerable stress. The flight of FII funds was entirely understandable. Why would FIIs want to exit an economy growing at over 7 per cent, with inflation at 3 per cent and banking system indicators that are highly favourable?

The outflows are perceived to have happened on account of the punitive tariffs imposed on India by the Trump administration. FIIs were said to perceive the US administration’s stance towards India as a big negative for the economy. It was a risk factor that argued against staying exposed to India.

The tariff issue was resolved with the Indo-US interim trade agreement in February 2026. In the same month came the judgment of the US Supreme Court striking down the Trump administration’s tariff regime. For the present, India, like everybody else, is subject to tariffs of 10 per cent on its exports to the US.  It cannot be that the tariff factor is material to the exchange rate of the rupee any more. 

The material factor is the war in Iran. It has changed the outlook far more drastically than the Trump tariffs had done. The impact on growth and inflation are still manageable. Several agencies now project India’s growth at 6.5-7 per cent or even 6 per cent, down from 7 per cent earlier.   Inflation is projected at 4.5 to 5 per cent, which is within the RBI’s inflation band. Neither projection is scary.

It is the current account position that is seriously impacted by higher oil prices. Analysts see the current account deficit (CAD) going up to 1.8 per cent of GDP if oil prices remain at $85 per barrel throughout the year. That is what the RBI has assumed for FY 27 in its April Monetary Policy Report. If oil prices are above $100, the CAD could be higher than 2 per cent.  

That does change the perspective drastically for foreign investors. India’s policy makers have always believed that a CAD of up to 2.5 per cent is manageable. What investors will focus on, however, is a significant worsening in relation to the past five years. When FIIs see CAD increasing steeply from an average of 0.8 per cent of GDP in the past five years to around 2 per cent, expectations of a depreciation in the rupee are inevitable. As FIIs head for the exit to protect their returns, these expectations will prove self-fulfilling. 

It is clear that improvements in the fundamentals of the Indian economy in recent years have concealed an important vulnerability:  The impact of oil prices above $100 a barrel on the current account deficit. This vulnerability was not noticed because world prices have stayed below $ 100 for most of the past five years, except for about four months in 2022 after the Ukraine conflict erupted. They have stayed below $80 over the past two years.  

The conviction in the markets has been that oil prices will stay in the mid-60s under President Donald Trump. The rise in oil prices to well over $100 a barrel  over the past month has upset all calculations.  No surprise that, until the announcement of the ceasefire in Iran, the downward pressure on the rupee seemed relentless.   

There is not much the government can do about the prices of oil and related products. It can at best focus on ensuring supply and cushioning the price impact on consumers. So far, it has done a good job on both counts. 

As for the exchange rate, intervention by the RBI can only manage the fall in the rupee, it cannot prevent it. If the ceasefire does not last and oil prices stay elevated for a long period, the RBI may  have little choice but to increase the policy rate. The cumulative reduction in the RBI’s policy rate of 125 basis points since February 2025 is now beginning to look somewhat imprudent. With the economy growing at around  7 per cent, it may have been wiser  to have exercised restraint , given the enormous uncertainties in the international environment ever since President Trump assumed office in January 2025. 

 There is an important lesson here for policymakers. If we are to effectively manage risks in the economy, if stability is not to be compromised, it is necessary to rein in aspirations for GDP growth. In a troubled global environment, a growth rate of close to 7 per cent is not something to be sniffed at. Macroeconomic policies that seek to accelerate the growth rate at the current level of savings and investment expose the economy to avoidable risk.

Dhurandhar makes news in The Economist; FT zooms in on Bollywood films

The Economist has taken note of Dhurandhar. It sees the move is propaganda for PM Modi. It explains what has driven the movie's success:

Two emotions have driven the films’ record-smashing success. One is sheer exhilaration at the stylised ultraviolence set to a sweat-soaked soundtrack. The other is a sense of catharsis. A country that cannot pull off an assassination in Canada—Canada!—without getting rumbled is in “Dhurandhar” capable of retribution that makes Mossad look like LARPing teenagers. The trailer for “The Revenge” starts with a Pakistani terrorist telling the Indian spymaster that “Hindus are a very cowardly people”. The film spends four hours proving him wrong.

But ultimately the movie is a hit because it reflects a world that many Indians think is real:

The loudest cheers came when the screen lit up with news footage of Mr Modi, the bravest Hindu of all. But to dismiss “Dhurandhar” as propaganda is to miss something important. It did not become a monster hit by trying to convince viewers of an alternate reality. Its genius is to reflect the world many Indians, browbeaten by years of shrill pro-Modi messaging on TV news and social media, already believe to be real

The FT focuses on Bollywood. It portrays an industry that is struggling, with a movie such as Dhurandhar offering hope of a way out. 

One executive says the industry is “on a ventilator”. Cinema attendance last year fell 6 per cent from 2024 levels to 832mn, the lowest in a decade barring the pandemic years, according to Ormax Media, a consulting firm tracking India’s entertainment sector. While box office receipts have recently edged back, helped by rising ticket prices and a smash-hit thriller that heaps praise on Prime Minister Narendra Modi, insiders and analysts say Bollywood is a shadow of its former self.

 ....One top producer who has worked with many of Bollywood’s top actors says the combination of cultural drift and waning star power is a deadly one. “If you’re bankrupt on creativity, then the only thing you’re banking on is stars,” he says. “Nobody’s coming to the movie theatre to watch a star any more.” This, he adds, is a major reason why several international studios abandoned their attempts to enter the Indian industry.

There are some hopeful signs of late:

 As last year drew to a close, a violent spy thriller named Dhurandhar (Stalwart) started gaining traction at the box office, offering the industry some hope. Built around some real incidents, the film features a swashbuckling Indian spy in Pakistan and heaps glory on India’s current national security adviser and Modi. By January, despite a run time of well over three hours, it had become one of India’s largest-grossing movies ever, earning over $140mn. 

.......Despite a fall in the number of cinemagoers year on year, Indian films made $1.45bn from ticket sales in 2025, up from $1.32bn in 2024, Ormax Media said in a report in January, “underscoring the continued dependence of the box office on rising average ticket prices in recent years”.  India’s total moviegoing audience, meaning the number of people who go to the cinema — often for repeat visits — rather than total ticket sales, has been stuck at about 150mn to 160mn for nearly a decade, according to Ormax.  But streaming platforms appear to have lost some of their initial charm when it comes to watching films. That has fed into the prices they and TV channels are willing to pay to buy rights for films, which was down 10 per cent in 2024, according to a report by EY. “Streaming has reached a point where audiences are no longer enamoured by it like they were when it came, because initially there was a sense that this is so different and so new,” Ormax’s Kapoor says.

IRGC navy chief was an expert in aysmmetrical warfare

 The IRGC naval chief, Ali Reza Tangsiri, who was reportedly killed in an Israeli strike was an expert in asymmetrical naval warfare.

The Guardian pays an unusual obit :

According to the US Treasury, which sanctioned him in 2019 and in 2023, Tangsiri oversaw the IRGC Navy’s testing of cruise missiles and sat on the board of a company that developed armed drones. Both weapons could now be used to maintain the current blockade of the strait.

A third weapon strongly supported by Tangsiri was fast boats – light, manoeuvrable craft that can threaten civilian shipping but also, he hoped, evade the defence systems of modern warships.

Last week, Tangsiri dared the US to launch a ground assault on Kharg Island, Iran’s principal hub for oil exports, pointing out the effect such a move would have on oil prices. On Monday, said in a media post that Iran had “prepared the graves of child-killing aggressors”.

Iran seems to have nurtured a crop of extremely talented military leaders. The talent pool is so wide that the killing of those at the helm is little cause for concern- they seem to get replaced by younger, even more highly motivated leaders. 

That should be a real worry for the US and Israel. 

Trump tariffs are here to stay- Navarro

The US administration has been going out of its way to emphasise that the Supreme Court judgement striking down tariffs imposed by President Trump changes nothing. Tariffs will stay- and the trade deals done so far, including the one with India (done but not signed), will remain.

If anybody has doubts on this score, the article in FT by Peter Navarro should dispel these.  Navarro notes that the SC only struck down tariffs imposed under the International Economic Emergency Powers Act (IEPPA). It doesn't question the President's powers to impose tariffs using a variety of other laws.

The court did not declare tariffs unconstitutional. It did not strike down section 232 of the Trade Expansion Act. It did not invalidate section 301 of the Trade Act. It did not question the use of sections 122, 201 or 338. It did not revive the “nondelegation” doctrine. And only three justices relied on the “major-questions” doctrine, meaning the court created no sweeping precedent limiting presidential trade authority.  

In fact, even as the court struck down the IEEPA tariffs, it acknowledged that the president retains broad and powerful authority under numerous other statutes to impose tariffs.

......  Moreover, by narrowing the legal dispute in this case to the IEEPA alone, the court clarified the legal landscape. The authority under those other statutes is not in doubt. It is written clearly into law. That clarity will significantly strengthen the president’s tariff hand. 

The message is clear. President Trump will not back off from the tariff regime. Trump himself has clarified that the SC verdict will not change outcomes. He said at a press conference:

The India deal is on. All the deals are on, we're just going to do it a different way. 

And on Truth Social, President Trump posted:

Any Country that wants to 'play games' with the ridiculous supreme court decision, especially those that have 'Ripped Off' the U.S.A. for years, and even decades, will be met with a much higher Tariff, and worse, than that which they just recently agreed to. Buyer beware."

Indo-US trade deal: India's problem is not the current account but the capital account

Much of the analysis of the Indo-US trade deal centres on what India has gained or lost in terms of trade. But the point about the deal is not that it improves our export prospects while opening up selectively to American goods. 

It is that the deal improves the prospects for capital inflows, FDI and FII. These inflows have been distinctly unsatisfactory consequent to the US's imposing additional tariff of 50 per cent on Indian exports (barring a few specified items).

Foreign investors do not view favourably any emerging market towards which the US administration is ill disposed. That would have meant a downward pressure on the rupee indefinitely. Any further fall in the rupee had the potential to destabilise the Indian growth story. The rupee exchange rate rising to around Rs 90 from Rs 92 or so before the deal was announced is an indicator of how the attitude of the US towards India matters.

More in my BS article, Indo- US trade deal is not just about trade

Indo-US trade deal is not just about trade

The deal shifts the US posture towards India from hostile to neutral, and that matters for growth

T T Ram Mohan

The India-US trade deal, for which a framework for an interim agreement has been agreed, will not lack critics. The Congress party has called it a surrender. A farmers’ organisation has called for protests. Many will pore over the fine print once the details are finalised and argue that the deal is more favourable to the United States.

We need to be clear about a couple of things.

First, any nation negotiating a trade deal with the Trump administration must expect the deal to be tipped in favour of the US. President Donald Trump has made it clear that his priority is to reset America’s economic equations with the rest of the world. He is determined to use the economic and military might of the US to do so.  

For the entire post-War period until recently, the US was happy to let the advantage lie with many of its trade partners. It believed that it was economically strong enough to do so. Sharing prosperity with partners, the US believed, would make for world peace and it would also keep the world safe from communism. 

Not any more. Mr Trump rode to power in 2016 by insisting that the time had come to reorder trade relationships to the benefit of the US.  He didn’t quite manage to do so, partly because his initiatives were scuttled by Washington establishment status quoists in his Cabinet. In his second term, Mr Trump is determined not to make that mistake.  He has filled his administration with loyalists who will faithfully execute his orders. 

Last July, Mr Trump reiterated his perception of where matters stand. He said in a post, “The United States of America has been ripped off on TRADE (and MILITARY!), by friend and foe, alike, for DECADES. It has come at a cost of TRILLIONS OF DOLLARS, and it is just not sustainable any longer - And never was!” In any trade deal, therefore, it will be Advantage US.

Second, we must be clear that the overall relationship with the US is contingent on arriving at a trade deal that America approves. Not doing a trade deal means courting US hostility across the board. In negotiating a trade deal with the US, every nation faces a choice: Does it want the US to be a friend or a foe? 

Mr Trump’s trade deal with the European Union is an excellent illustration of the two points made above. For the EU, the issue was not just access to the vast American market. It was also American support to Europe in the Ukraine conflict, including the supply of critical weaponry and intelligence and America’s involvement in the North Atlantic Treaty Organization (Nato) itself. Faced with the prospect of jeopardising its defence relationship with the US, the EU settled for terms that were widely seen as humiliating.

The EU now faces a baseline 15 per cent tariff on its exports to the US. In addition, steel, aluminium and copper exports from the EU will face a 50 per cent tariff. Car exports would be subject to a quota.  The EU has also agreed to buy an additional $750 billion in US energy products over the next three years and make investments worth $600 billion in the US by 2029. The EU, for its part, will eliminate tariffs on imports of all US industrial goods and provide preferential access to a wide range of US seafood and agricultural products.  A more abject surrender is hard to visualise. Mr Trump has likewise signed deals with the UK, Japan and South Korea — all close allies of the US —that are conspicuously one-sided.  

The lesson for India is that the Indo-US trade deal is not just about access to the US market. India has weathered Mr Trump’s 50 per cent tariff on Indian exports much better than expected. India’s total exports are up 4.4 per cent year on year despite Trump’s tariffs. Nor have exports to the US suffered — they are up 9.8 per cent in April-December 2025.

The problem for India is that capital flows are flagging. This is happening at a time when India’s current account deficit of 1.3 per cent of gross domestic product (GDP) compares favourably with that of a range of countries, including Canada, the United Kingdom and Australia, as the latest Economic Survey notes. India had no difficulty financing current account deficits of a much higher magnitude in the post-reform era. Today, we are hard-pressed for capital inflows, and the rupee is under pressure despite a highly favourable set of economic indicators. That is not something to be treated lightly.

Gross foreign direct investment (FDI) fell marginally by 2 per cent in calendar year 2024. This may be in line with the general decline in FDI flows in recent years but it does not help us at all. At the same time, outward FDI from India as well as repatriation of profits by foreign firms in India have increased sharply. As a result, net FDI in April-November 2025 was a mere $5.6 billion. The bigger problem at the moment is with foreign portfolio inflows (FPI). It was (-)$3.9 billion in April-December 2026.  

There could be many reasons why FPI inflows have turned negative. You can be pretty sure, however, that the orientation of the US administration towards India is an important factor. When India is subject to a punitive tariff regime by the US, fund managers are unlikely to view India as a good place to invest in. The Treasury department houses individuals, including the Treasury Secretary, with strong links to Wall Street. They are known to work the phone lines with fund managers on a range of matters. 

Absent a trade deal, therefore,  we must reckon with rough weather in respect of capital flows, however good our macroeconomic indicators. (Using the future tense, as in the original version, because the deal is not finalised yet- TTR . And who knows, services exports to the US will not be subject  to punitive action as well? Also at risk are  defence collaboration, technology transfers and the entire strategic partnership that has been built over the past two decades. Thus, India’s strong economic performance in the present year is  no assurance that it can be sustained in the absence of an Indo-US trade deal. 

The point about the Indo-US trade deal is not that it involves compromises, such as cutting back on oil imports from Russia or scaling up imports of goods from the US to $100 billion annually for the next five years. It is also not just about getting a tariff rate of 18 per cent, one that is lower than that of many of our competitors. The substantive point is that it moves the US posture towards India from hostile to neutral. That is good news for the Indian economy.

 

Marco Rubio at Munich: the West versus the rest?

US Secretary of State Marco Rubio's impassioned speech at the Munich security conference a few days ago lays out very clearly what the US thinks is wrong with the world and how it thinks it should be set right.

Rubio highlighted the three principal mistakes the West made in the post- War era.

First mistake: free trade

.....we embraced a dogmatic vision of free and unfettered trade, even as some nations protected their economies and subsidized their companies to systematically undercut ours – shuttering our plants, resulting in large parts of our societies being deindustrialized, shipping millions of working and middle-class jobs overseas, and handing control of our critical supply chains to both adversaries and rivals. 

Second mistake: climate change thesis

To appease a climate cult, we have imposed energy policies on ourselves that are impoverishing our people, even as our competitors exploit oil and coal and natural gas and anything else – not just to power their economies, but to use as leverage against our own. 

Third mistake: opening the doors to immigration:

And in a pursuit of a world without borders, we opened our doors to an unprecedented wave of mass migration that threatens the cohesion of our societies, the continuity of our culture, and the future of our people. 

How to set the world right? Europe must follow America's lead in asserting the primacy of Western civilisation over the rest of the world. The centuries of colonialism before the WW2 were the era of Western greatness and it's time for the West to put aside the post-WW2 order in order to reclaim that dominance:

For five centuries, before the end of the Second World War, the West had been expanding – its missionaries, its pilgrims, its soldiers, its explorers pouring out from its shores to cross oceans, settle new continents, build vast empires extending out across the globe. 

But in 1945, for the first time since the age of Columbus, it was contracting.  Europe was in ruins.  Half of it lived behind an Iron Curtain and the rest looked like it would soon follow.  The great Western empires had entered into terminal decline, accelerated by godless communist revolutions and by anti-colonial uprisings that would transform the world and drape the red hammer and sickle across vast swaths of the map in the years to come. 

Against that backdrop, then, as now, many came to believe that the West’s age of dominance had come to an end and that our future was destined to be a faint and feeble echo of our past.  But together, our predecessors recognized that decline was a choice, and it was a choice they refused to make.  This is what we did together once before, and this is what President Trump and the United States want to do again now, together with you. 

The troubling question for Europe is what the new colonial enterprise means for them. In the old days of colonialism, Europe called the shots. The partnership that Rubio now advocates is one in  which the US will hold the upper hand. As we have seen, all trade agreements the US has signed so far are tipped in favour of the US. And the US  expects Europe to defer to the US in matters that the US thinks are vital to itself, such as Greenland.

Many Europeans may well think that this order, unlike the earlier colonial era, is one in which they are at the receiving end of colonialism! 

Indo-US trade deal: some preliminary thoughts

It's a trade deal, not an agreement. The broad contours have been agreed between PM Modi and President Trump. Now the details have to be filled in.

Trump made a number of claims in his post on Truth Social:

• India will stop buying Russian oil
• American exports to India will be subject to zero tariffs and there will be no non-tariff barriers
• India will buy $500 bn of American goods

None of the above appears likely.

India will scale down purchases of Russian oil but will not scrap oil purchases altogether- the relationship with Russia is too deep and too valuable for India to attempt such a radical step.

Zero tariffs on all American exports are also a pipe-dream. Some exports, particularly agricultural exports, will face tariffs. No government will survive if it allows agricultural products to come in freely.

India imports about $40 bn worth of goods and $83 bn of goods plus services, so $500 bn appears way out- unless spread out over several years. Even if India steps up oil and defence purchases, $500 bn appears distant.

The tariff of 18 per cent is slightly lower than that for competitors such as Vietnam but that in itself is not going to confer great advantage. All trade is linked to FDI- and unless US FDI rises considerably, we are not going to see any great increase in Indian exports.

But for India the deal is not really about pushing exports. Overall exports have not suffered in FY 26- despite US tariffs, exports are 4.4 per cent up over the previous year. Indian exports to the US in the aggregate have not suffered either, thanks to electronic and pharma exports that are not subject to tariffs. Gems and jewellery, apparel have taken some hit, though, but these sectors have not suffered as much as feared, partly because of support from the government to cushion the impact of Trump tariffs.

For India, the deal is about capital flows, FDI and FII and the impact on the rupee. The rupee has bounced back from Rs 92.04 to around Rs 90.28 after the deal was announced. The deal certainly brings stability to the rupee. 

The deal is also about the overall strategic relationship with the US, including defence supplies and an understanding on containing China in the Indo-Pacific. We do not wish to be an ally of the US but nor do we wish to be seen as a foe. Commentators have noted that trust will take a long, long time to restore but the trade deal is a good start.