Hormuz Disruption Identified as Major Risk to India's External Sector and Inflation Outlook: Finance Ministry

India's External Sector and Inflation Outlook Remain Cautious Amid Global Uncertainty

The Finance Ministry's Monthly Economic Review for May 2026 has highlighted the duration of the disruption in the Strait of Hormuz as the "single most consequential variable" for India's external sector and inflation outlook. According to the review, prolonged energy supply disruptions could amplify price pressures and impact the growth trajectory.

The review, released by the Department of Economic Affairs (DEA), notes that India's near-term economic outlook remains one of "cautious resilience," supported by stable domestic fundamentals, strong services exports, resilient labour markets, and comfortable foreign exchange reserves. However, the global environment has become significantly more challenging following the West Asia conflict.

The review warns that the duration of the Strait of Hormuz disruption remains the single most consequential variable for India's external and price outlook. If normalization occurs soon, the conditions for a broader-based recovery, supported by strong services exports and sustained investment commitments, are in place. However, the review also flags inflation risks, citing the gap between retail and wholesale inflation as a signal that cost pressures are building up in the economy.

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The current divergence between retail inflation and wholesale prices indicates that upstream cost pressures are building, and the pass-through to consumers, while limited so far, may not be far behind. Recent increases in petrol and diesel prices could trigger both direct and indirect inflationary effects, while any further escalation in energy prices may erode the current inflation cushion faster than expected.

Energy Import Dependence: A Key Vulnerability

India's dependence on energy imports from the Gulf region is a significant vulnerability. Crude oil and petroleum products accounted for 53.9% of India's total merchandise imports from the West Gulf Cooperation Council (GCC) region in FY26. The Strait of Hormuz has been closed amid the West Asia conflict, but India has so far been able to meet its crude oil requirements through diversified sourcing arrangements.

To reduce vulnerability to global energy shocks, India has recently signed agreements with Abu Dhabi National Oil Company (ADNOC) covering strategic crude oil storage and long-term LPG supply arrangements. The DEA notes that policy will need to remain "agile across monetary, fiscal, and structural dimensions" to navigate the combined challenges arising from external geopolitical risks and domestic climatic uncertainties while safeguarding medium-term growth.

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Note: The projected values for FY26 are not available in the review.