India faces economic pressure from Iran conflict and oil prices

The conflict in Iran poses significant economic risks to India, primarily through rising oil prices. Ran Li, a Senior Economist at the World Bank, noted that higher energy costs are already impacting the Wholesale Price Index (WPI), which affects industrial producers more immediately than consumers. This inflationary pressure is expected to eventually pass through to consumer spending as businesses transfer higher input costs.

In addition to geopolitical tensions, the World Bank identified a rainfall deficit linked to El Nino as a major factor that could pressure India’s growth outlook. The agriculture sector has already seen a downward forecast revision due to a rainfall deficit of approximately 12 to 15 per cent compared to historical averages.

Concurrently, the Reserve Bank of India (RBI) is expected to maintain its repo rate at 5.25 per cent. However, MUFG analysts suggest this pause may be temporary, forecasting potential rate hikes in December and February. The central bank faces mounting inflation risks driven by oil prices, liquidity, and a pressured rupee resulting from higher US yields.