Intro: Few times in recent years has India faced so many economic uncertainties at once. Volatile crude oil prices, geopolitical tensions, inflation risks, an uncertain monsoon and moderating growth are creating a complex policy challenge for FY27. While India continues to outperform most major economies, the coming months could test every pillar of macroeconomic stability. What should policymakers prioritise first, and where do the biggest risks truly lie? On Socio-economic Voices this week, Yuvika Singhal - Economist QuantEco Research speaks to Mahima Sharma of Indiastat, in an exclusive conversation. Read on…
MS: If crude remains elevated for the next six months, how should India protect first: growth, inflation or fiscal stability? Please share steps towards all three.
YS: For a net crude importer like India, a sustained 6-month period of elevated oil prices would inevitably strain all three macroeconomic pillars of growth, inflation and fiscal stability. Having said that, of the three macroeconomic variables, India should prioritise inflation first, followed by growth and fiscal consolidation. The RBI operates under a flexible inflation-targeting framework, with a statutory mandate to maintain CPI inflation within the 2–6% band. Thus, price stability should become the first line of macroeconomic defence.
A calibrated pass-through to inflation can be achieved by sharing an incremental crude oil price burden between consumers, government and the private sectors (i.e., OMCs) equally. Remember, inflation acts as a regressive tax on the economy. Higher fuel inflation worsens household’s disposable incomes as well as producers’ margins, to weigh on both demand and supply side dynamics of growth.
Growth protection should come through supportive public capex, which is seen to have a higher growth multiplier vis-à-vis revex. At the same time, fiscal policy must remain anchored in medium-term consolidation, even in case of deviations warranted by exceptional situations, such as prolonged and elevated phase of crude oil price. Only a calibrated policy mix would best preserve macroeconomic stability while building the economy's resilience to a prolonged oil price shock.
MS: The RBI has cut FY27 growth expectations while raising inflation concerns. Are we entering India's first serious stagflation risk phase since the pandemic? If yes/If no—what cautions would you share?
YS: RBI’s adjustment of growth and inflation projections are a reflection of two shocks that are likely to impact the Indian economy in FY27 – one, the after effects of the Middle East energy disruption and two, El Nino phenomenon that is likely to result in a sizable monsoon deficiency.
RBI’s FY27 GDP growth forecast at 6.6% - still places India as one of fastest growing key economies in the world. So clearly, India is not facing stagflation risk, but an adverse growth-inflation impulse.
Nevertheless, we do remain cautious of downside risks to growth and upside risks to inflation this year. While the MoU signed between US-Iran offers comfort and has already led to Brent crude prices reverting to pre-war levels of less than USD 70 pb, the situation is still unresolved. Any flare-up in crude prices could impact the growth-inflation dynamics adversely.
Second, while a strong El Nino is unfolding globally and a monsoon deficiency is largely factored in, a lot would depend on the timing as well as regional distribution of rainfall. Any adverse surprises on these fronts, could yet again add to food-led upside in CPI inflation and downside risks to FY27 growth outlook.
Finally, the persistence of inflation warrants close attention. Food inflation tends to be more persistent than other components of CPI and has a disproportionate influence on household inflation expectations. Looking ahead, the implementation of the Eighth Pay Commission in FY28 could further strengthen demand and keep underlying inflation somewhat sticky over the next 12–18 months.
MS: The RBI is holding rates despite rising inflation forecasts. Is this confidence in India's resilience or a gamble on crude and weather normalising?
YS: Neither the downside in growth, nor the anticipated upside in CPI inflation has yet manifested in numbers. Further, the MoU between US-Iran tilts the growth-inflation dynamics somewhat favourably in India’s case. So, I see RBI holding rates steady as a “wait and watch” strategy.
In the current context, RBI is balancing two-sided risks. Tightening policy prematurely, based on anticipated rather than realised inflation, could unnecessarily weaken domestic demand at a time when growth is already moderating. Conversely, delaying action indefinitely would risk inflation expectations becoming unanchored if supply-side shocks prove persistent.
We do see the scope of 25-50 bps of incremental rate hikes in FY27, likely to be backloaded, perhaps in Dec-26 and Feb-27. By Dec-26, the central bank will have absolute clarity over the monsoon season, persistence of food inflation, as well as the second order impact of the energy shock that has already entered the economy.
MS: How much of India's inflation problem today is actually imported through oil and how much is still a domestic food-supply issue? What steps need to be taken for each to be resolved?
YS: India's inflation challenge in FY27 is likely to be a combination of both, though the relative importance varies by time horizon.
The impact of energy disruption owing to the Middle East crisis is likely to have its impact predominantly in Q1 FY27, with second order impact spilling into Q2.
On the other hand, price pressures for domestic food supply are likely to begin taking shape from Q2 onwards (sentimental based on sowing patterns) and more strongly in Q3 FY27 as actual estimates of Kharif production become known.
To address imported crude inflation, the Government of India has been fairly agile by diversifying energy imports, increasing natural gas production, strengthening strategic reserves and lowering of excise duties on both petrol and diesel.
On the other hand, resolving food inflation requires deeper reforms – such as:
expansion of area under irrigation (especially in the case of pulses and oilseeds)
MS: If the monsoon disappoints, would you rather see the government intervene through food management or the RBI respond through monetary policy? Why?
YS: In case of monsoon deficiency, Government’s intervention through food management should come as the first line of defence. A weak monsoon is fundamentally a supply-side shock and the most effective response is to alleviate supply constraints rather than suppress demand. Government action could be in the form of Open Market Sales, especially in the case of Rice – as the Government has sizable buffers of the foodgrain with Food Corporation of India, along with the possibility to reduce import duties on key commodities, facilitate imports, curb hoarding and improve food distribution mechanisms.
On the other hand, monetary policy is relatively less effective in addressing supply-driven inflation. Having said that, the role of RBI is to ensure that price pressures don't become entrenched, via resetting inflationary expectations higher. As such, monetary policy should remain the second line of defence.
MS: A weak monsoon now threatens both rural incomes and food prices. In your view, why has India become too dependent on rainfall despite decades of reforms?
YS: In my opinion, the Indian economy’s dependence on rainfall has waned over the decades owing to a variety of factors - a gradual shift from agrarian to a services-led economy, expansion of area under irrigation, sizable stocks of foodgrains, improvement in reservoir levels among others.
That said, India's dependence has not disappeared. Agriculture still supports a large share of livelihoods, nearly half of the country's gross cropped area remains rainfed and several crops - notably pulses, oilseeds and coarse cereals - continue to have relatively low irrigation coverage. Small and fragmented landholdings further limit farmers' ability to invest in irrigation, mechanisation and climate adaptation, leaving rural incomes vulnerable to rainfall shocks.
But do remember, the year 2026 is an exception - as what we are likely to witness is a rare Super El Nino phenomenon – coinciding exactly with India’s 4-month monsoon period.
MS: What is the bigger FY27 risk for India: a weak monsoon or a prolonged Middle East conflict? And why, keeping the next two-three years in mind.
YS: For FY27 alone, a weak monsoon may have a larger immediate impact on inflation. However, over a 2-3 year time horizon, a prolonged Middle East conflict may be a greater macroeconomic risk.
A weak monsoon primarily adversely affects food inflation, rural incomes and agricultural output. But the impact is temporary. It is like an annual reset. Food prices tend to be cyclical and do tend to mean revert just as quickly as they rose/fell.
In comparison, the impact of a prolonged Middle East conflict is far more pervasive. It affects oil prices, shipping costs, trade routes, external balances, inflation, fiscal accounts and business confidence simultaneously. It can also trigger sustained geopolitical fragmentation, resulting in structurally higher logistics and energy costs.
MS: If oil crosses $100-$110 per barrel, what is the first economic indicator you would monitor daily to assess India's vulnerability and why?
YS: The single most important indicator would be the Indian rupee's exchange rate.
Oil shocks become significantly more damaging when accompanied by currency depreciation. India imports a large majority of its energy requirements in dollars, therefore a situation of crude price acceleration, exposes India to currency risks. In addition, a weaker rupee amplifies the imported cost of higher crude prices.
MS: If the Strait of Hormuz faces prolonged disruption, what must be India's Plan B beyond strategic petroleum reserves?
YS: While strategic reserves buy time, they do not solve prolonged disruptions. Also, strategic reserves for India are fairly limited at present, so will need a coordinated policy thought and deliberate action plan to be scaled up meaningfully.
India's Plan B should rest on four pillars.
MS: If you were presenting one policy recommendation today, what single reform would most improve India's growth-inflation balance over the next three years?
YS: The one reform priority for me would be to sustain India's infrastructure investment cycle while creating conditions for private capital expenditure to take the lead. Since the pandemic, public capex has been the principal engine of investment and in turn growth. While this has strengthened India's physical infrastructure and crowded in activity in several sectors, a broad-based revival in private capex has remained elusive.
The next phase should therefore focus on leveraging public investment to unlock private capital. This calls for continued investment in logistics, transport, energy, urban infrastructure and irrigation, while accelerating asset monetisation, strategic disinvestment and greater private participation through well-structured public-private partnerships.
From a macroeconomic perspective, high-quality infrastructure raises the economy's productive capacity while creating incomes, jobs and stimulating demand. Creating a virtuous cycle where public investment crowds in private investment is the single most important reform to strengthen India's growth-inflation balance over the medium term.
About Yuvika Singhal
Yuvika Singhal is an economist with over 15 years of experience in Indian economic research, specialising in macroeconomics, public policy and empirical analysis. Before joining QuantEco Research, she spent nearly a decade at YES Bank and also worked at ICICI Bank, partnering closely with Treasury teams serving multinational companies, leading Indian corporates, government bodies and ministries. At QuantEco Research, she regularly shares insights on India's economic and financial market outlook with clients and contributes expert commentary on economic developments in the media. Her expertise spans econometric modelling, macroeconomic research, forecasting and credit risk assessment.
Yuvika holds undergraduate and postgraduate degrees in Economics from Shri Ram College of Commerce and the Delhi School of Economics, respectively. She also completed the Goldman Sachs 10K Women Entrepreneurship Program at IIM Lucknow.
About the Interviewer
Mahima Sharma is an Independent Senior Journalist based in Delhi NCR with a career spanning TV, Print, and Online Journalism since 2005. She has played key roles at several media houses including roles at CNN-News18, ANI, Voice of India, and Hindustan Times.
Founder & Editor of The Think Pot, she is also a recipient of the REX Karmaveer Chakra (Gold & Silver) by iCONGO in association with the United Nations. Since March 2022, she has served as an Entrepreneurship Education Mentor at Women Will, a Google-backed program in collaboration with SHEROES. Mahima can be reached at media@indiastat.com
Disclaimer : The facts & statistics, the work profile details of the protagonist and the opinions appearing in the answers do not reflect the views of Indiastat or the Journalist. Indiastat or the Journalist do not hold any responsibility or liability for the same.
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