India weathers West Asia turmoil, growth outlook brightens as oil prices cool after US-Iran ceasefire: SBI Capital Markets

India's economy appears to have weathered the disruptions caused by the recent West Asia conflict, with high-frequency indicators pointing to resilient economic activity even as easing geopolitical tensions and lower crude oil prices improve the global growth outlook, according to a report by SBI Capital Markets. 

The report said the cessation of hostilities between the US and Iran has primarily reduced risks to global trade and energy markets. Free access through the Strait of Hormuz has largely been restored, with vessel movements returning to levels seen before the conflict, although cargo throughput is recovering gradually. Despite the ceasefire, global markets remain cautious, with war-risk premiums staying elevated amid occasional skirmishes. 

According to SBI Capital Markets, if peace holds through the second half of calendar year 2026, global growth projections could improve, with the US economy expected to remain resilient. 

Crude eases, inflation concerns moderate 

The report noted that Brent crude has corrected sharply to around $70 per barrel, returning to levels prevailing before the conflict. While renewed global demand, inventory rebuilding and infrastructure repairs are expected to provide a floor to prices, the resumption of sanction-free Iranian oil exports is likely to support global supply. 

The decline in crude prices has eased inflationary concerns for central banks worldwide. Inflation readings for June are expected to reflect the benefits of the mid-month ceasefire, with price pressures normalising further by July as second-round effects remain contained. Lower oil prices have also reduced currency pressures on emerging market economies, diminishing the need for aggressive monetary tightening. 

Economy remains resilient 

SBI Capital Markets said India's domestic economy remained largely insulated from global disruptions during the first quarter of FY27. High-frequency indicators, including the Purchasing Managers' Index (PMI), automobile sales, fuel consumption (excluding LPG), credit growth, Unified Payments Interface (UPI) transaction values and electricity demand, suggest economic activity remained robust. 

While sectors such as airlines, ceramics, and fertilisers faced temporary disruptions due to supply constraints, the report expects these industries to recover as supply chains normalise, supporting growth momentum in the second quarter. 

However, it flagged the weak monsoon as the key domestic risk to the economy. As of July 2, all-India rainfall remained 33.5% below normal, with large parts of central and eastern India experiencing deficient rainfall. The delayed monsoon has slowed the sowing of paddy, oilseeds and pulses, raising concerns that weaker rural demand could emerge as a headwind in the second half of the fiscal year. 

Fiscal pressures mount 

The report said the Union government's fiscal position has come under pressure as it cut excise duties on petroleum products to cushion consumers and oil marketing companies from elevated crude prices during the conflict. 

Higher subsidy expenditure also weighed on government finances as limited natural gas supplies increased the cost of urea imports. Consequently, the fiscal deficit reached 9.6% of the full-year Budget Estimate in the first two months of FY27, compared with just 0.8% during the corresponding period last year. 

According to the report, restoring excise duty collections may take time as oil marketing companies recover their losses. In the interim, corporate tax collections, import-related GST revenues and proceeds from disinvestment and asset monetisation will remain critical for maintaining fiscal stability. 

Rupee and bond markets recover 

The ceasefire, combined with coordinated policy measures by the government and the Reserve Bank of India (RBI), helped stabilise India's external sector, SBI Capital Markets said. 

The rupee has appreciated from its record low, while benchmark 10-year government bond yields have risen modestly but remain close to pre-conflict levels. Corporate bond markets also showed signs of recovery in June after a sharp slowdown earlier in the fiscal year, aided by improved competitiveness and narrowing credit spreads. 

Consumption and manufacturing stay strong 

Fuel consumption rebounded in June after two subdued months, with petrol and diesel demand improving as restrictions linked to the conflict eased. LPG consumption, however, remained weak due to supply disruptions. 

Manufacturing activity continued to expand, with India's PMI remaining among the strongest globally. Revised Index of Industrial Production (IIP) methodology has also strengthened industrial output data, aligning more closely with buoyant PMI and gross value added (GVA) trends. Vehicle sales also remained healthy during the month. 

The aviation sector saw a temporary decline in passenger traffic as elevated aviation turbine fuel (ATF) prices led to cancellations of some flight routes, although the report expects normalisation in the coming months.  

GST collections improve, tax outlook remains positive 

Gross GST collections recorded their strongest growth since September 2025 in June, led by robust import-related tax revenues, while domestic GST collections increased at a moderate pace. Net GST collections grew at a slower rate because of higher tax refunds during the month. 

Despite the improvement in GST collections, overall net tax revenues declined during the first two months of FY27 owing to lower excise duty collections and GST rationalisation measures. 

On direct taxes, the report noted that the Central Board of Direct Taxes (CBDT) has set a target of ₹26.97 lakh crore for FY27. The strategy includes improving tax recovery, identifying wrongful exemption claims and encouraging taxpayers to update returns where taxes have been underpaid. Net direct tax collections stood at ₹5.21 lakh crore as of June 15, up 15% year-on-year. 

Govt spending gathers pace 

Revenue expenditure increased sharply during the first two months of FY27, driven by higher fertiliser subsidies and a 23% year-on-year increase in interest payments. Capital expenditure also gathered momentum, with spending by the Railways and Defence ministries rising 34% and 28%, respectively, while expenditure on road infrastructure remained comparatively weaker.