Mumbai (Maharashtra) [India], May 19 (ANI): Amid the fallout from the West Asia escalation crisis, which triggers substantial capital outflows and strains the country’s external balance sheet, India’s macroeconomic landscape is facing external headwinds.
But a massive anticipated dividend payout from the Reserve Bank of India (RBI) and robust historical foreign exchange buffers are poised to act as crucial shock absorbers, opine economists.
The economists are of the view that India’s baseline GDP growth is projected to moderate slightly to around 6.7 per cent for the current financial year (FY27).
Concurrently, the country’s Current Account Deficit (CAD) is anticipated to widen significantly to 2.1 per cent of GDP, up from an estimated around 1 per cent in FY26, driven primarily by sticky global crude oil prices and trade route disruptions.
Speaking to ANI, Rajani Sinha, Chief Economist at CareEdge Ratings, observed, “The West Asia crisis is going to impact the Indian economy through various channels. Not just growth and inflation, but it’s also going to adversely impact government finances and, very worryingly, also India’s balance of payments situation,” Sinha stated.
On the specific macro projections, she added, “In fact, on the growth front, we feel that growth could moderate to around 6.7 per cent or so… Not only are we expecting the current account deficit to widen, we are expecting it to widen to around 2.1 per cent of GDP in FY27 from around 1 per cent that we had in FY26.”
Sinha explained that India’s forex reserves have contracted by USD 27-28 billion since the conflict began, heavily driven by weak capital flows. Foreign Institutional Investors (FIIs) pulled out a cumulative USD 20 billion in March and April alone, while net Foreign Direct Investment (FDI) plunged to just USD 6.8 billion over 11 months of the last fiscal year.
To defend the rupee, the central bank has actively deployed its “war chest.”
Weighing in on this defensive strategy, Radhika Rao, Senior Economist & Executive Director at DBS Bank, emphasised that the drawdown is a timely utilisation of built-up defenses.
“Much like elsewhere in the region, the central bank has drawn on its reserves to cushion the currency’s weakness, resulting in a moderation of reserve levels,” Rao observed.
“The substantial reserve accumulation in recent years was intended precisely to strengthen buffers for periods of volatility such as the current environment, meaning the reserves are now being used for their intended ‘rainy day’ purpose,” she added.
While external accounts look stretched, India’s domestic balance sheet is expected to receive a blockbuster lifeline with the upcoming RBI dividend transfer estimated between Rs 2.8 trillion and Rs 3 trillion. This windfall will prove vital in managing the structural domestic costs of the conflict–estimated at 0.5 per cent of GDP–originating from escalating fertilizer and fuel subsidies alongside a Rs 1.1 trillion revenue loss from retail fuel excise cuts.
“In a scenario where tax revenue collections could come under pressure if industrial growth slows down, the large dividend transfer from the RBI will act as a major saviour for the fiscal deficit,” Sinha noted. (ANI)
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