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West Asia crisis with resilient activity indicators and still-supportive demand. Further, the inflation environment too has remained benign.

February CPI and WPI inflation was 3.2% and 2.1% respectively.However, persistent supply shocks are skewing the inflation distribution sharply higher, despite the government and oil marketing companies cushioning the impact for now. We expect the pass-through to consumers to begin in a month or two.

Furthermore, inflation risks are increasing amid a weakening rupee, rising probability of sub-par monsoons, and risks of fertilizer shortage. On the positive side, heavy buffer food stocks should help cap some of the monsoon-led risks to food inflation.While we do see risk of GDP growth falling towards 6.5% (from 7% pre-crisis period) and average inflation rising to 4.7% (from 4.1% earlier) with further upside risk in FY2027, we remain more wary on the increasing vulnerability to the external balance.

Even before the recent crisis, the current account deficit (CAD) was being weighed down by higher goods trade deficit with services exports and remittances offering significant offsets.In the current scenario, the import bill is expected to surge significantly not just from oil imports, but also gas, fertilizer and other inputs. Exports too will be impacted, especially to West Asia, worsening the CAD—we expect CAD/GDP at 2.2% compared to ~1% estimated prior to the crisis.

Compounding this impact is the unrelenting capital outflows—foreign portfolio investors outflows in March surged to $15.5 billion following a brief inflow of $3.5 billion in February. If such risk-off sentiments continue, the balance of payments, or BoP, deficit is estimated to widen towards $75 billion, in the absence of