India's Trade Deficit and Fiscal Position to Be Further Impacted by Prolonged Energy Disruptions, Moody's Warns

India's Trade Deficit and Fiscal Account Under Threat from Prolonged Energy Disruption

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. The situation is particularly concerning due to India's status as the world's third-largest crude importer.

Brent Crude prices have surged 31% since the U.S.-Israeli war on Iran began on February 28, 2026. Each development in the war has led to fluctuations in crude prices, with prospects of peace fueling a recovery in stock markets globally. The impact of these higher crude prices on India is expected to be significant, as they tend to increase the country's import bill, inflation, and impact corporate margins.

Foreign investors have been offloading Indian shares at an alarming rate, with a total of $18.6 billion worth of shares sold so far in 2026. March alone saw a record $12.7 billion worth of net outflows. This trend is likely to continue if the disruption in energy supply persists.

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Moody's Ratings has warned that the lingering risks associated with the war and the time required to restart and reposition production operations in the Middle East and logistical assets will result in structurally higher risk premia and key commodity prices for some time.

The rating agency currently has a Baa3 rating on India with a "stable" outlook. However, it has trimmed its growth forecast for India's real gross domestic product 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.

The impact of higher crude oil on companies will be uneven, with oil marketing companies (OMCs) and fuel-dependent sectors such as cement and chemicals likely bearing the brunt of the price shock. While cost hikes associated with inland transportation have been contained for now through fuel subsidies borne by state-owned OMCs, this has shifted cost pressures onto their balance sheets in a manner that is unsustainable.

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Note: The impact on profit margins is estimated and may vary depending on the specific company and sector.