The madness of the 2020s just does not end. Each crisis looks worse than the previous one. The Trumpian bullying on trade has morphed into physical abuse of global infrastructure, putting both energy and food security for billions at risk. In a fully unpredictable world, where self-interest comes first, India needs to put on its energy and food security oxygen mask with long-term solutions, not band-aids. And we, as citizens, must prepare for a hard year ahead on inflation, markets and overall chaos. The journey from February to March 2026 shows how fast a good story can turn precarious. What looked like a launchpad year for a higher Indian growth trajectory is now quite the reverse. The Goldilocks moment of low inflation, above 7% growth, a comfortable stack of foreign reserves, a declining fiscal deficit, and a low current account deficit is under threat as the world reels from the West Asian fuel supply disruption.
The vitals of the Indian economy are already showing stress. The rupee is falling, bond yields are up, stock markets have lost almost 10% over the past month. As fear and uncertainty get amplified on social media, I will attempt to answer very simply some of the questions that the non-finance people are asking.
Why is the rupee falling? Because India needs more dollars to buy each unit of fuel it imports from abroad. Oil prices have risen sharply over a month and can go even higher. As we pay more dollars, the price in terms of the amount in rupees needed to buy a single dollar rises. This has also cascaded, given the downward trajectory of the rupee over the past year due to foreign institutional investors selling the Indian market and taking their dollars back to where the Artificial Intelligence (AI) boom is giving better returns.
The rupee story can quickly get worse if the West Asia crisis prolongs — who expected the Russia-Ukraine war to last all these years? — and the fat pipeline of Gulf NRI foreign exchange inflows takes a hit. Why should you worry even if you are not an importer or aren’t sending kids abroad to study? Rising oil prices and falling rupee usually translate into higher levels of inflation. Rising prices cut consumption and also translate into higher interest rates, both of which then cause the already-skittish private sector to step back from investment. This can become a bad downward cycle.
What do bond yields have to with the war and how far will stock markets fall? Both stock and bond markets are forward-looking and price in bad news before it manifests on the ground. The 10-year G-Sec yield breached 7% last week, a rise of more than 40-basis year on year (in bond markets that is a steep rise). In plain English, this means that the price of the 10-year government-issued bond fell. Bond prices and yields move in opposite direction. So, when you read yields are going up, remember that bond prices are falling. Sharply falling bond prices are a red flag. In this case, it is the expectation of potentially higher interest rates, not economic weakness, that is driving bond prices down. Inflation is expected to rise due to the higher fuel bill and also due to higher-than-expected government borrowing ahead. The government cut the special excise duty on petrol sharply, which is likely to hit its revenues by close to ₹1.5 trillion. This shortfall can either be filled by higher-than-expected exports or by borrowing. The bond market thinks it will be more borrowing, which will raise interest rates.
This is going to derail the growth trajectory envisaged earlier in the year. The cost to growth is expected to be in the range of around one percentage point. India’s GDP growth, which was pegged at well over 7% for the new financial year, is now expected to be lower. Stock markets, which were already spooked, are now digesting the new reality, and I would expect far more pain ahead than what we have seen in the markets so far if the war does not end.
Is there more bad news? Yes. If the story on energy security were not bad enough, there is a looming fertiliser scare that might play out. Indian agriculture is dependent on both imported fertiliser and imported feedstock that goes into fertiliser factories. Current fertiliser stocks, the government says, are adequate, but if the war continues, this could easily become a food security issue.
Are there any silver linings? The clean macro story, oil and forex reserves with which India entered the war-period is a big positive. If our vitals were already weak, the current crisis would have caused a worse problem. The strong macro position has given the needed elbow room for a policy rethink and has allowed the government to absorb the fuel cost rise by cutting excise duties on petroleum products. While this may not last, at least the hit on consumers of petrol, diesel, and piped cooking gas has not been immediate.
What can the government do? While the band-aid of absorbing the fuel price hike and the Reserve Bank of India’s moves to manage currency, interest rates, and balance of payments will continue, the crisis ideally should trigger reforms that build both energy and food security. India has one of the largest reserves of coal in the world and the technologies that are able to use them to our advantage must be deployed. In addition, the path cleared for energy from small nuclear plants must be used to build for the future.
The fertiliser story is one of misused subsidies. Instead of funding high-cost fertiliser production, a cash transfer to the farmer might be the road ahead. Though politically sensitive, subsidising those who actually need it rather than the current entangled web of entitlements and high costs — which have actually harmed both agriculture and soil over time — might be the way forward.
What should we be doing? Start by recognising that a tough year lies ahead. There is a war raging, and we will get singed. The long-term growth story of India remains strong; we need to get through the present time by not making hasty money decisions. Do not try to time the markets; we do not know how long they could fall. Your only friend is a split between safer debt products and risky equity. And remember, equity needs at least seven to 10 years to show results. So, stay patient in these times of fear and uncertainty.
Monika Halan is the bestselling author of the Let’s Talk series of books on money. The views expressed are personal
