West Asia War: The US–Israel war with Iran is currently the single most important monitorable for markets, and a major external shock for India because it directly threatens energy supply chains and pricing, especially if disruption in the Strait of Hormuz persists. Roughly one-fifth of global oil shipments and a significant share of India's energy imports (both crude and LNG) pass through the Strait of Hormuz, and sustained disruptions would impact domestic activity, widen the current account deficit, increase pressure on INR, and affect inflation. While India can lean on inventories and diversification in the near term, macro sensitivity remains high if the conflict prolongs and energy supply do not normalise.

New GDP series: The much-anticipated new GDP series was broadly in line with market estimates and continues to show healthy real growth but weaker nominal growth, with 3Q GDP growth seen strong at 7.8% y/y. Annual FY26 growth is now estimated at 7.6%, versus 7.4% in the earlier series. GVA growth was also similar at 7.8%. The breakdown of growth suggests strong performance in manufacturing (13.3%), 'Trade, hotels, transport' (11.0%) and financial and other services (11.2%). While annual real GDP growth was upgraded to 7.6%, nominal GDP remained weak at 8.6% (8.0% in the old series). However, overall nominal GDP for FY26 is estimated 3.3% lower at INR 345 trillion (tn) versus INR 357 tn in the old series. We think the new series does not materially change RBI's reaction function and we do not expect any rate action in the near term; however, RBI is likely to continue focusing on monetary transmission of earlier easing.

Balance of payments: India's Sep–Dec 2025 BoP data showed a large BoP deficit of US$ 24.4 bn due to both the current and capital accounts being in deficit. While both the current and capital accounts were in deficit, we would highlight that a Current Account Deficit (CAD) of 1.3% of GDP is comfortable and close to the median of the last 10 years, whereas the capital account balance of (-) 1.0% of GDP is low (10-year median is a capital account surplus of 2.2% of GDP) and is the real cause for concern. A country at India's stage of development is typically expected to run a current account deficit funded by capital inflows; weakness in capital inflows has been the key drag on the overall BoP.

Trade deals and US SC ruling: It was an active month on the trade front with India's trade deal announcements with both the EU and the US. The trade deal with the EU aims to establish an India–EU free trade area, and it will likely come into force in about six months after approvals and legal vetting. The EU is India's second-largest export destination after the US and the second-largest import destination after China, and the trade deal envisages deep tariff cuts—with the EU eliminating/reducing tariffs on ~99.5% of tariff lines for imports from India, and India eliminating/reducing tariffs on ~92.1% of its tariff lines—alongside negotiated exemptions for sensitive sectors. The bigger development from the market's perspective was the announcement of a trade deal with the US, which has now been upended by the US Supreme Court ruling on the President's power to impose tariffs, and then the West Asia war, with the US now allowing India to import Russian crude for about a month. Looking through near-term volatility, we view the trade deals positively and believe that once the war ends, pressure on INR is expected to ease.

New Consumer Price Index (CPI) series: Another major development keenly watched by markets was the launch of the new CPI inflation series, with the base revised to 2024 from 2011 in the earlier series. This assumes importance since RBI's inflation-targeting framework mandates it to keep CPI inflation (as defined by the latest series) at 4%. Base revisions can potentially have a substantial impact on CPI since India is a fast-growing economy and consumption patterns have been evolving rapidly—for example, the weight of food items in India's CPI basket has come down from nearly 50% in the 2011 series to 37% in the latest series. However, inflation as per the new series came close to the previous series at 2.7% (RBI inflation target is 4%), which means monetary policy can remain growth-supportive.

Monetary policy and market view: RBI Feb Monetary Policy Committee meeting was status quo with repo at 5.25% in a unanimous move while keeping the stance as 'neutral'. RBI through its communication and actions appear committed to be pre-emptive and proactive in liquidity management. There was announcement of Open Market Operations(OMOs) of INR 1tn in March and appreciable secondary market purchase of Indian Government Bonds in NDS-OM (Negotiated Dealing System - Order Matching) as well, despite surplus liquidity in the banking system. This is very important in our view since the tight liquidity had contributed to less monetary transmission. Moreover, RBI has also been conducting switch operations to reduce gross borrowing supply in FY27, which we now expect to be closer to INR 16tn, significantly lower than budget announcement of INR 17.2tn. Governor has also made a statement that rates are likely to stay at current levels or may go lower. Moreover, we expect RBI to adjust the borrowing calendar, which may be announced in March-end, to reduce duration supply lower. We expect RBI to continue to take steps to ensure adequate transmission of earlier rate cuts and nudge term spread lower in IGB curve, as well as reduce SDL/bonds spread. However, the war in West Asia is a key risk, which we are closely monitoring, and has potential to increase long end yields given its implication not only for crude oil price but also global supply chain.

Source: RBI, CEIC, Bloomberg, MOSPI

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