Moneycontrol Pro Panorama | When war comes for Goldilocks

A sub-7% GDP growth and retail inflation above 4% isn’t a Goldilocks economy anymore.

Dear Reader,

A month ago (or even two weeks), the investment narrative towards India was that of a Goldilocks economy with just the right amount of inflation and growth mix to inspire a stake in it. It wasn’t for lack of returns foreign investors shunned Indian equities in past months but more because of American exceptionalism taking hold. We looked good but relatively others looked better.

West Asia has changed all that today. The war between US-Israel and Iran has engulfed the Middle East, and maritime adventurism has affected nations not even remotely a party to the conflagration. Thoughtful long-term strategies are getting upended, and R Srinivasan explains India’s maritime risks from this war in his piece here. But the focus is rightly on the short-term pain that awaits us.

A 167 kilometres long chokepoint between Iran and Oman holds hostage a fifth of global oil shipments and this chokepoint is now heavily restricted, even closed for business as ships avoid the Strait of Hormuz. The wide implications for global trade are not lost on investors but nations such as India are among the most vulnerable here. We depend on the Strait of Hormuz for safe and quick passage of 50 percent of our crude oil imports and 85 percent of petroleum and natural gas. Bypassing the Strait would mean a surge in shipping costs that feeds into domestic inflation. As such, the war has lit a fire under crude oil futures, Brent crude is now at $80 per barrel. Oil prices holding at current levels or climbing from here will inflate our import bill and services exports growth will have to counter it, in absence of which the current account deficit will widen as our Chart of the Day points out.

The assumption on oil is critical to domestic inflation and growth calculations that the monetary policy makes. The Reserve Bank of India has assumed $70 per barrel as the average crude oil price during October-March of the current fiscal year to project retail inflation of 2.1 percent and GDP growth of 7.4% for FY26. The GDP and inflation projections for Q1 and Q2 of FY27 will also have to be relooked given the sharp change in underlying assumptions.

A sub-7% GDP growth and retail inflation above 4% isn’t a Goldilocks economy anymore. No wonder equity investors have already cleansed their portfolios for these risks as much as they can. That said, there is some confidence that policymakers would blunt the impact which shows in the benchmark indices recouping some of the recent losses.

But markets don't just make general bets, they go a step further and assess how each sector and each company is poised to either lose or win when war arrives. Ananya Roy, in her piece here, explains why the war has divided the markets into winners and losers. For perspective, within the oil & gas sector, downstream firms have suffered a blow while upstream companies such as ONGC have thrived. Airlines have been battered as turbine fuel price surge and airspace restrictions have been a double whammy for them.

Even as discerning investors choose sectors and companies based on who is exposed how much to West Asia’s war, there exists a gap between spreadsheets and the physical market. It is this gap that is critical to bridge and how long the war lasts will be one of the biggest determinants here.

Indeed, we wrote that OPEC+ output increases do not mean anything unless shipments can pass through the Strait. In the same way, paper money would mean zilch unless physical quantities of the commodity find their way to where they are meant to reach. India’s crude and gas reserves will be tested by the war’s timeline. If physical shortages are triggered, the behaviour of markets would vary widely. Then spreadsheets with careful models hardly matter. Goldilocks may not surrender to the war, but she would definitely fall into the gap between spreadsheets and reality.

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