West Asia Conflict May Exacerbate Remittance Shortfalls, Impact Rupee Value and Fiscal Balance: SBI Funds Report

India's External Sector Under Threat of Renewed Pressure

A recent report by SBI Funds Management warns that the ongoing conflict in West Asia could disrupt economic flows linked to the Gulf region, putting India's external sector, currency stability, and fiscal finances under renewed pressure.

The report, titled "2026 Middle East Conflict and Its Implications", notes that geopolitical tensions could transmit risks through multiple channels, including remittances, trade balances, and government subsidies. A key concern highlighted is the potential slowdown in inward remittances from Gulf countries, which account for approximately 38% of total inward remittances, with 50% coming from the UAE alone.

The report estimates that sustained high crude prices could significantly widen India's current account deficit (CAD). Every US$10/bbl rise in crude price is estimated to widen the annual CAD by US$15 billion. Under a high oil price scenario, the CAD could expand sharply, widening by US$70 billion if crude prices remain near USD 100 per barrel for an extended period.

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The report also warns of pressure on currency markets if capital inflows remain unstable. If FII inflows fail to recover, the Indian rupee could weaken further, leading to a 4-5% depreciation in 2026. The rupee, currently trading at ₹93 per US dollar, could move toward ₹96 per US dollar over the next two quarters.

On the fiscal side, the report notes that rising input costs, particularly in fertilisers, could increase government subsidy outgo. Global fertiliser prices have surged, with urea now almost 50% higher since December 2025. As a result, subsidy requirements could rise significantly, by Rs. 300 billion or more, if elevated prices persist.

The report also flags broader concerns around India's balance of payments position, noting that weak capital inflows could exacerbate external vulnerabilities. Despite a structural improvement in India's current-account dynamics, the country's balance-of-payments position has weakened materially due to near-zero net FDI inflows, leading to a deterioration in India's basic balance.