Tentative progress in US-Iran negotiations has improved market sentiment and pushed Brent crude oil prices below US$100/bbl, though significant uncertainty remains around the durability and implementation of any potential agreement.
The Middle East conflict and associated disruptions continue to weigh on the Indian economy. Manufacturing activity has softened amid rising input costs and supply disruptions, while the services sector remains relatively resilient. Agricultural prospects are mixed, with adequate reservoir levels partly offsetting risks from heatwaves, fertiliser supply disruptions, and a potentially weaker monsoon. Private consumption remains resilient despite early signs of moderation, though higher fuel prices and rising inflation are likely to weigh on purchasing power.
Policy is gradually shifting from cushioning the energy shock toward calibrated pass-through of costs, with inflation pressures expected to build as pipeline cost pressures feed through. Given the possibility of a near-term US-Iran peace agreement, we retain for now our FY27 forecasts of 6.7% real GDP growth and 4.7% CPI inflation, although downside risks to growth and upside risks to inflation have increased. The RBI is expected to keep the policy repo rate unchanged at its June meeting, while policymakers are expected to focus on exchange rate stability and measures to attract foreign capital inflows.
