Former Reserve Bank of India (RBI) Governor Duvvuri Subbarao says that while the RBI has adequate reserves to address excessive volatility, there is a strong case for minimal intervention in the forex market. “A 5% depreciation in the rupee could add roughly 40 basis points (bps) to inflation and shave off 25 bps from growth. With uncertainty around both input costs and demand, firms are likely to defer investment decisions, even if they do not cancel them outright,” he told The Indian Express in an interview. “Going forward, RBI is likely to remain on hold over the next few policy cycles,” he says.What’s the impact of West Asia conflict on various sectors, investment and margins?The shock is largely cost-driven and uneven across sectors. Input-intensive industries — fertilisers, textiles, chemicals and MSMEs — are facing margin compression due to higher freight and raw material costs.This comes at a time when private capex was beginning to gain traction. With uncertainty around both input costs and demand, firms are likely to defer investment decisions, even if they do not cancel them outright. Stronger corporates may be able to absorb the shock and even consolidate market share, but smaller firms are more exposed to working-capital stress. Overall, the investment cycle remains intact, but momentum could soften in the near term due to profitability pressures.Given the current uncertainties, what policy options does the government have?The government has already reduced excise duties on petrol and diesel to cushion the impact on consumers. Going forward, it faces a difficult trade-off. One option is to continue absorbing higher oil prices, thereby protecting consumers. However, this would worsen the fiscal position, tighten financial conditions, and eventually weigh on consumption and investment thereby hurting growth.The alternative is to allow prices to pass through to consumers. This would raise inflation but impose a relatively smaller drag on growth. Neither option is benign. However, from a balance-of-payments perspective, there is a stronger case for allowing greater pass-through. Higher prices would dampen demand and help contain pressures on the current account deficit. Some price pass-through may actually be the more sustainable option.Story continues below this adDo you foresee interest rate action by the RBI to tackle an expected rise in inflation?At its April meeting, the Monetary Policy Committee kept the repo rate unchanged at 5.25% and maintained a neutral stance. The policy signals suggest that the RBI is balancing growth risks against emerging inflation pressures. India entered this episode with relatively strong macro fundamentals — robust growth, moderate inflation, a manageable external account, and healthy bank and corporate balance sheets. This provides some policy space. Going forward, the RBI is likely to remain on hold over the next few policy cycles. The case for rate cuts is limited due to upside risks to inflation from oil prices and potential weather-related food shocks.At the same time, the case for rate hikes is also weak, as inflation remains within the target band. Additionally, premature easing could widen interest rate differentials with the US and add pressure on the rupee.Overall, policy is likely to remain data-dependent with a cautious bias towards checking inflation. The bar for both rate cuts and hikes is high: expect an extended pause.Story continues below this adWill external sector, rupee stay under pressure as capital outflows continue, and markets remain battered?The rupee briefly crossed 95 to the dollar before recovering, aided in part by RBI measures to curb arbitrage opportunities in the offshore NDF market.Beyond oil prices, several other factors are exerting pressure on the currency — tightened fiscal conditions, RBI’s liquidity operations, and relatively low domestic interest rates.Importantly, the rupee had been weakening even before the Iran conflict, driven by capital outflows. Going forward, additional pressure may come from a widening current account deficit due to higher crude prices, lower remittances and weaker exports. The current account deficit, which was around 1% of GDP in FY26, could plausibly widen to around 2% this year.Story continues below this adWhile the RBI has adequate reserves to address excessive volatility, there is a strong case for minimalist intervention.Allowing a gradual real depreciation would improve export competitiveness and apportion the burden of adjustment across sectors, giving greater flexibility to both fiscal and monetary policy. A gradual, managed depreciation is preferable to burning reserves to defend a level. There has been some discussion around issuing NRI bonds to bolster reserves. This appears premature. Such a move could send adverse signals about external stability. Besides, it may not be effective given low interest differentials, unless offered at a significant cost.What’s your overall assessment on the economy and growth outlook?The impact of the Iran conflict on India will transmit through slower growth, higher inflation and a weaker rupee.Story continues below this adIndia imports about 80-85% of its crude requirement, making it highly vulnerable to oil shocks. RBI estimates suggest that every 10% increase in oil prices could raise inflation by about 50 basis points and reduce growth by 25 bps. Similarly, a 5% depreciation in the rupee could add roughly 40 bps to inflation and shave off 25 bps from growth. This is essentially a supply shock that simultaneously affects growth and inflation. As higher oil prices percolate through supply chains, stress will spread across a wide range of sectors. On baseline assumptions of crude at $85 per barrel and an exchange rate of ₹94 per dollar, RBI projects GDP growth for this fiscal year at 6.9%. Outcomes could worsen if the conflict is prolonged or intensifies. Importantly, if disruptions force business closures, restarting activity could entail disproportionate costs, amplifying the growth impact.With the conflict in West Asia continuing, what do you think is the outlook for energy prices and crude oil?Crude oil is likely to remain elevated and volatile, even with a temporary ceasefire. The geopolitical risk premium — particularly around the Strait of Hormuz — is unlikely to dissipate quickly. For India, this is a critical vulnerability. Sustained high crude prices would widen the current account deficit and feed directly into inflation.Even without an actual supply disruption, uncertainty alone can keep prices elevated. The more realistic scenario is one of moderately high and volatile oil prices, rather than a return to earlier benign levels.Story continues below this adWhat are the risks to the banking system as several sectors are facing headwinds?The banking system is in a stronger position than in previous cycles, with improved asset quality and capital buffers. The risks now are more sector-specific than systemic.Stress could emerge in MSMEs due to cost pressures, while rising yields may lead to mark-to-market losses on bond portfolios. If growth slows, asset quality risks could re-emerge at the margin. The appropriate response is continued vigilance through stress testing, close supervision and ensuring adequate liquidity, rather than broad-based intervention.What macroeconomic strategies and policy measures are necessary for India to effectively manage external shocks while sustaining investor confidence and long-term economic stability?Story continues below this adManaging shocks of this nature requires strong macro buffers — stable growth, contained inflation and adequate foreign exchange reserves. India’s current position reflects some of this preparedness. Going forward, reducing dependence on imported energy, diversifying supply chains and maintaining policy flexibility will be critical.A coordinated fiscal and monetary response, along with clear communication, will be essential to anchor expectations and sustain investor confidence.