Energy disruption to widen India deficit

Moody's flags inflation risks, fiscal pressures may strain policy flexibility and investor confidence

BENGALURU:

A prolonged disruption in energy supply can widen India's trade deficit and strain the fiscal account of the world's fastest-growing major economy, according to rating agency Moody's.

Brent Crude prices have shot up 31% since the US-Israeli war on Iran began on February 28 and have been see-sawing with each development, while prospects of peace fuelled a recovery in stock markets globally.

India is the world's third-largest crude importer, and higher prices tend to increase its import bill, inflation, and impact corporate margins. As a result, foreign investors offloaded Indian shares worth $18.6 billion so far in 2026, March logged a record $12.7 billion worth of net outflows.

"Given lingering risks and because some production operations in the Middle East and logistical assets will take time to restart and reposition, risk premia and key commodity prices will likely remain structurally higher for some time," Moody's Ratings said in a report on Monday.

The rating agency currently has "Baa3" rating on India with a "stable" outlook. It had trimmed its growth forecast for India's real gross domestic product (GDP) to 6% for fiscal 2027 from 6.8% earlier, factoring in the impact of the Iran war.

"A prolonged disruption would pose more material challenges, potentially entrenching inflation, straining fiscal and monetary policy flexibility and testing external investor confidence," Moody's said.

The impact of higher crude oil on companies will be uneven, the report noted, with oil marketing companies (OMCs) and fuel-dependent sectors such as cement and chemicals likely bearing the brunt of the price shock.

"Cost hikes associated with inland transportation have been contained for now through fuel subsidies borne by state-owned OMCs, but this has shifted cost pressures onto their balance sheets in a manner we view as unsustainable," Moody's added.