A breach in the 4% inflation target of the Reserve Bank of India (RBI) in the April-June quarter of the financial year 2026-27, a higher current account deficit, lower GDP growth estimates, and a pause in policy rates by the central bank — these are some of the key case scenarios that most economists are building for the Indian economy amid the ongoing West Asia war.The growing view is that even if the conflict ends in a day, energy supply disruptions, overshooting of demand post the conflict and storage issues are likely to keep oil prices high over the coming quarters.In their base case scenarios, most economists see elevated oil prices as a key factor for the immediate increase in inflation in the coming 1-2 quarters, with an anticipated increase in pump prices at the retail end after the upcoming state elections.The continued dependency on energy import is a key macro weakness for the Indian economy, India Ratings and Research, a Fitch Group company, said in its monthly macro view released Tuesday, adding that its base case scenario is an increase in the retail selling price of petrol and diesel by one-third of the increase in global crude prices between May 2026 and December 2026.“A $10/bbl increase in crude oil prices could widen the current account deficit by $16.7 billion, increase currency weakness, and push inflation. Average inflation in the base case scenario is now expected to be 4.1% compared to the earlier forecast of 3.7%, and the currency may weaken 4.5%-5.0% yoy in FY27”, Devendra Kumar Pant, Chief Economist, India Ratings, said.Also in Explained | As the US talks of seizing Kharg, 3 problems and an ominous precedentIf crude oil prices remain elevated, there is a risk that pump prices will eventually have to be increased, though it will most likely happen after the state elections, scheduled for April, with the final results on May 4, Nomura’s economists Sonal Varma and Aurodeep Nandi said in a note on March 28. Though the fiscal policy is doing “much of the heavy-lifting” right now to shield the economy from a direct inflation pass-through from higher global oil prices, easing pressure on monetary policy to act, they said that other inflationary pressures are seeping through that will require the RBI to be on its guard.Under the new baseline scenario outlined by the HDFC Bank’s Treasury Research Desk, if there is a resolution in the conflict over the next 10-15 days, oil price is expected to average at $80-85 per barrel from the earlier forecast of $65 per barrel. “GDP growth is estimated between 6.5-7% from our earlier forecast of 7.2% for FY27 and inflation is estimated at 4.5-5% (from earlier forecast of 4.2%) under this scenario. CAD/GDP is estimated at 2% vs earlier forecast of 1%. We do not anticipate the RBI to hike rates under this scenario and expect it to remain on hold through 2026 while focussing on liquidity,” a note authored by HDFC Bank’s economists Sakshi Gupta, Deepthi Mathew, Avni Goyal and Divya Srinivasan stated.Story continues below this adBoth wholesale and retail inflation rates are currently lower than the rates seen at start of 2022, but every $10 per barrel increase in crude oil prices, assuming incomplete passthrough and government intervention, will result in a direct inflation impact of 45-50 basis points and indirect impact of 50-55 basis points through transport costs and input cost push, HDFC Bank said. Every $10/barrel increase in crude oil prices could also result in a GDP growth impact of 25-30 basis points, with the GDP growth seen to be 6.5-7.0% in FY27, it said.While India Ratings expects annual inflation in FY27 to remain within the RBI’s target of 4% ± 2%; it sees inflation breaching the base 4% target on a quarterly basis. “The impact on the Indian economy and inflation would depend on a) how long the conflict lasts, b) the time taken in restoring supplies, and c) the time and extent of passthrough of higher prices to consumers,” it said.Other case scenarios, second-order effectsWhile most economists are sticking to their revised base case scenarios for now, a lingering disruption in energy supplies amid a prolonged war is seen resulting in other second-round effects of supply shortages, increased freight costs, and a slowdown in economic activities.Also in Explained | Israel’s death penalty for Palestinians: How new terrorism law highlights major shift in approachDetailing the adverse scenario of higher oil prices of at/above $100 per barrel, an extended conflict spilling over to Q2 FY27 and a situation of supply shortage, the HDFC Bank’s economists said there could be non-linear downside risks to growth forecasts. “The RBI could look at supporting growth under this scenario while greater fiscal intervention would be needed to manage the pass-through to inflation,” the Bank’s note stated. Additional impact could be seen from the trade route as West Asia accounts for 22% of India’s imports and 15% of exports apart from the additional risk on remittances as 38% of remittance flows to India from the Gulf, it said.Story continues below this adIf the conflict lasts for an extended period, the adverse implications could widen across sectors, amid an uptick in input costs and the consequent impact on profitability of India Inc, Moody’s affiliate ICRA Ratings said. “India’s GDP growth is expected to moderate to 6.5% in FY27 from the projected 7.5% in FY26, owing to the adverse impact of elevated energy prices and concerns around energy availability, even as developments around tariffs, lower GST rates, policy rate cuts, subdued food inflation, and upbeat farm sector trends augur well for consumption,” it said.While an extended pause is expected on the policy rates by the Monetary Policy Committee through the fiscal, despite the softening in the GDP growth, ICRA said it expects the RBI to intervene on the liquidity front during FY27. “Assuming an average crude oil price of $85/bbl, India’s CAD is expected to widen sharply to around 1.7% of GDP in FY27 (from around 1.0% in FY26 provisional). The USD/INR pair is likely to witness high volatility and trade with a downward bias in the near term, amid continued sour global sentiment and sell-off by FPIs from Indian equities,” ICRA said.There are fiscal risks from the recent excise duty cuts which could cost the central government about Rs 1.6-1.8 lakh crore (around 0.5% of GDP along with the risks of higher-than-budgeted fertiliser, fuel and food subsidy outlays in FY27, Nomura said. While maintaining the 4.3% fiscal deficit target for FY27, it said the government could cut revenue expenditure and capex, and tap into the recently-introduced Rs 1 lakh crore (0.3% of GDP) Economic Stabilization Fund to deal with fiscal pressures.