West Asia Conflict Threatens India's Remittances, Rupee and Fiscal Health

The report titled "2026 Middle East Conflict and Its Implications" highlighted that apart from higher crude prices, India's external sector and fiscal balances could come under strain through multiple channels.

One key risk is a slowdown in remittances from the Gulf region, which accounts for a large share of funds sent home by overseas Indians.

"Remittance inflows are also likely to be affected, as about 38% of total inward remittances originate from the Middle East--half of which come from the UAE alone," the report said.

The report also flagged the possibility of a wider current account deficit if crude prices remain elevated.

"Every US$10/bbl rise in crude price widens the annual CAD by US$15 billion," it noted.

Under one scenario where crude remains close to USD 100 per barrel for an extended period, the deficit could widen sharply.

"Current account deficit widening by US$70bn," the report estimated under a high-price scenario.

Pressure on the external sector could also spill over to the currency market. The report said the rupee may weaken further if foreign investment flows remain volatile.

"If FII inflows fail to revive, the rupee will remain vulnerable to global shocks. We now expect a 4-5% depreciation in 2026 (vs. an earlier expectation of 2-3%). The rupee, currently trading at ₹93 per US dollar, could move toward ₹96 per US dollar over the next two quarters," it said.

At the same time, the conflict could put additional pressure on the government's finances through rising subsidy requirements, especially in the fertiliser sector.

"Global fertiliser prices have risen sharply, with urea now almost 50% higher since December 2025," the report said, adding that the subsidy requirement could rise significantly if costs remain elevated.

It added that the government's fertiliser subsidy bill could increase substantially beyond the budgeted amount.

"Rising gas costs and fertiliser inflation could push the subsidy requirement upward by Rs. 300 billion or more," the report noted.

Another concern highlighted in the report is the strain on India's balance of payments if capital inflows remain weak.

"Despite a structural improvement in India's current-account dynamics and a CAD that has remained below 2% of GDP since FY15 (except FY19 at 2.1%), India's balance-of-payments position has weakened materially due to near-zero net FDI inflows," the report said, adding that this has led to a deterioration in India's basic balance.

Overall, the report emphasised that the impact of the West Asia conflict on India may extend beyond energy prices, affecting remittances, fiscal balances and overall financial markets.

- ANI