For years, India’s economic story has largely been one of expansion. More people travelling abroad, more households buying gold, more consumption, more mobility, more visible signs of middle-class confidence.
This week, the language coming from the government began to sound different.
Prime Minister Narendra Modi urged citizens to reduce fuel consumption, work from home where possible, and avoid non-essential spending pressures as the conflict in West Asia continued to disrupt global energy markets.
The message acknowledges that a geopolitical conflict is exerting pressure on India’s economy.
Stock and forex markets reacted quickly. But the larger adjustment may have been psychological. Investors suddenly found themselves confronting a question India has largely avoided in recent years – what happens when a growing economy must begin thinking more carefully about conserving dollars rather than expanding consumption?
India imports close to 90% of its crude oil and half of its natural gas. As energy prices climbed and the rupee weakened, concerns around inflation, foreign exchange reserves and the current account deficit began building steadily.
India has dealt with expensive oil before. What makes this episode feel different is the tone of the response. Governments usually try to absorb external shocks quietly – through fuel pricing, currency management or fiscal adjustments. This time, policymakers also turned to public behavioural signalling: use less fuel, postpone discretionary consumption, travel more carefully.
That messaging shift matters because it suggests policymakers may believe the disruption could persist longer than initially expected. That explains why the market reaction felt sharper than the speech itself may have warranted. Consumer-linked sectors, jewellery stocks and travel-related companies all came under pressure as investors began reassessing how prolonged energy costs might affect spending and external balances.
The pressure had already been building beneath the surface. Foreign exchange reserves have fallen nearly $38 billion since the start of the conflict and foreign portfolio investors have pulled more than $22 billion out of Indian equities. The rupee has weakened to nearly 96 against the dollar even as oil prices remain elevated.
Each of those pressures matters individually. And, together, they create a more uncomfortable macroeconomic picture.
External shocks move unevenly through an economy. Higher fuel prices feed into transportation and logistics costs. A weaker rupee raises the price of imports. Pressure on fertiliser and energy supply can affect food inflation. State-run oil companies absorbing losses cannot do so indefinitely.
The debate around gold revealed a similar tension. From a balance-of-payments perspective, reducing gold imports during periods of external stress makes economic sense.
But in India, gold is not merely consumption. For many households, it also functions as savings, security and informal financial insurance. That makes behavioural appeals around gold more complicated than they may initially appear.
The government’s decision to double import duties on gold and silver and cap the limit of duty-free imports by exporters reinforced the sense that policymakers are increasingly focused on managing external leakages. Higher duties may support the rupee at the margin, but they also carry the risk of reviving smuggling incentives.
The episode exposes a deeper reality: strong domestic growth does not eliminate dependence on global energy routes, capital flows and commodity prices. For investors, that creates a more complicated environment than the relatively straightforward growth narrative that dominated much of the past few years.
The question now is less about whether India can withstand a temporary oil shock. It probably can. The more difficult question is whether the global environment itself is becoming structurally less forgiving – more fragmented geopolitically, more volatile financially and less stable in energy and trade flows.
If that turns out to be the case, economies heavily dependent on imported energy may have to operate with narrower margins for error.
Price Without Panic
Talking about energy prices, overall inflation is rising again across major economies.
For much of the past year, markets had started to believe the inflation shock was fading. Prices were cooling, central banks were turning less aggressive, and investors were beginning to shift their attention back toward growth.
This week’s inflation data complicated that story.
India’s wholesale price inflation jumped to 8.3% in April, the fastest pace in three-and-a-half years, government data showed this week. Wholesale fuel and power prices soared 24.71% year-on-year in April, versus 1.05% in March.
In the US, the producer price index—akin to the wholesale price index in India—jumped to a three-and-a-half-year high of 6% in April from a year earlier. In Japan, the corporate goods price index rose to a three-year high of 4.9% in April.
Consumer prices firmed up, too. India’s retail inflation rose to 3.48% in April, still below the Reserve Bank of India’s medium-term target of 4%. In the US, annual inflation climbed to 3.8%, the highest in three years.
In both cases, energy costs linked to the Iran conflict played a major role. In India, inflation still appears relatively contained. In the US, it is beginning to look broader and harder to isolate.
The larger concern emerging now is not simply that oil prices have risen. It is whether governments and central banks can continue shielding households from those costs if the conflict drags on.
On Friday, the Indian government finally raised retail prices of petrol and diesel by Rs 3 per liter. This will further raise inflation in coming months. And this increases the prospects of interest rate hikes.
RBI Governor Sanjay Malhotra acknowledged this more directly than markets perhaps expected. Speaking in Switzerland, he said monetary policy could “look through” temporary supply shocks, but warned the central bank may need to respond if inflation pressures become more persistent.
India’s inflation challenge currently looks like a case of delayed transmission. That transmission mechanism is what investors are now watching most closely.
The US situation appears more immediate. Unlike India, higher fuel prices have already flowed into American household expenses. Airfares jumped alongside higher jet fuel costs. Food prices rose amid transport and fertiliser pressures. Household goods prices climbed as companies began to pass through the tariffs introduced by Donald Trump.
All this complicates the positions of the US Federal Reserve and the RBI considerably. Only a few months ago, markets were expecting interest-rate cuts. Now, investors are debating whether rates may need to stay elevated or even rise.
Central banks can slow demand through higher interest rates. But they cannot produce more oil, reopen disrupted shipping routes or stabilise conflict zones. That leaves policymakers balancing two uncomfortable risks simultaneously: tightening too early and weakening growth, or waiting too long and allowing inflation expectations to drift upward.
Bond yields in the US have risen as traders reassess how long rates may remain elevated. In India, economists mostly expect the RBI to stay on hold for now while monitoring fuel-price pass-through and monsoon conditions.
But even there, the tone has shifted noticeably from confidence toward vigilance.
For much of the post-pandemic period, markets treated inflation largely as a problem central banks would eventually solve through tighter policy. What recent months are revealing instead is how vulnerable inflation remains to forces outside central bank control – wars, shipping disruptions, commodity shortages and energy shocks.
Prices are rising again. But more importantly, uncertainty about future prices is rising, too. And markets tend to react to uncertainty long before they react to certainty.
Moving Around the Market
Switching from the economy to markets, latest mutual fund data released this week suggests investors are becoming more selective, but not necessarily more cautious.
For months, one of the strongest signals in Indian markets has not come from stock prices themselves, but from the persistence of retail money flowing into mutual funds almost regardless of volatility. April’s data suggests that confidence is still intact. But the way that money is moving is beginning to change.
Equity mutual fund inflows moderated to Rs 38,440 crore in April from Rs 40,450 crore in March, according to AMFI data. On the surface, that looks like mild cooling. But the broader picture is more nuanced.
Equity inflows were still 58% higher than a year ago. SIP contributions remained above Rs 31,000 crore. Retail investors have clearly not abandoned the market. What appears to be changing instead is investor behaviour inside the market.
Small-cap and mid-cap funds continued attracting heavy inflows even as broader uncertainty rose because of the US-Iran conflict, oil-price volatility and global inflation concerns. Small-cap funds alone received nearly Rs 6,900 crore in April – more than large-cap funds and sectoral strategies combined.
It says something about how retail investors are interpreting risk.
Despite rising global uncertainty, investors are still willing to move further down the risk curve in search of returns. The appetite for smaller companies has remained resilient even after regulators and fund houses spent much of the past year warning about stretched valuations in parts of the market.
Meanwhile, debt mutual funds received Rs 2.47 lakh crore of inflows in April after nearly Rs 3 lakh crore of outflows in March, when companies usually withdraw money for year-end tax payments.
Much of the money in April flowed into liquid, overnight and money-market funds – categories generally associated with short-term cash management rather than long-duration conviction. Gilt funds and long-duration bond funds continued seeing outflows—suggesting that investors believe the interest-rate easing cycle is all but over and rates may even rise.
Hybrid schemes, too, saw a sharp turnaround in April, swinging from outflows to more than Rs 20,000 crore of inflows. But here too, arbitrage funds dominated flows, with investors seeking relatively stable returns during volatile conditions.
Gold ETFs continued attracting money, with inflows rising above Rs 3,000 crore during the month. Inflows into overseas funds nearly trebled. That combination is revealing. Investors are still participating aggressively in Indian equities, but they are also adding gold, global exposure and short-duration debt to diversify.
Even after months of geopolitical volatility and recurring growth concerns, money continues entering equity markets. The structure of those flows may be evolving, but the broader participation trend remains intact.
Open Skies, Closed Routes
Moving on to corporate news, Tata Group-owned Air India’s global ambitions are running into rough weather.
The airline that Tata Group acquired from the government four years ago recorded a record loss for 2025-26. Singapore Airlines, which owns a 25% stake in Air India, said this week the Indian carrier’s annual loss was 3.56 billion Singapore dollars, or $2.80 billion at current exchange rates.
Air India has been struggling ever since the crash of the London-bound flight AI-171 in June last year that killed 260 people. Disruption from the Iran war and Pakistan’s ban on Indian carriers from its airspace compounded its woes.
No wonder, then, that India’s second-largest carrier (after IndiGo) has sharply reduced international flights in recent months, particularly to the US and Europe. Scheduled international flights from India fell 17.5% year-on-year during March-May. Flights to the US plunged 77% over the same period, according to data from aviation analytics firm Cirium.
For years, India’s aviation story has largely been about growth. More passengers, more international routes, more Indians flying directly to Europe and North America. Air India was supposed to sit at the centre of that shift. But the Iran conflict, which pushed fuel prices higher, and continuing Pakistan airspace restrictions, which forced Indian carriers to take longer routes to Europe and North America, are disrupting that plan.
Importantly, demand has not weakened—Indians are still travelling abroad in large numbers and airfares remain elevated. What is changing is which airlines are capturing that demand. That distinction matters because Air India invested aggressively in aircraft orders and fleet upgrades after its takeover by the Tata Group to grow its international business, which contributes more than 60% of group revenue.
To fill this gap, foreign airlines such as Lufthansa, Swiss, Cathay Pacific and KLM are moving quickly. Foreign airlines’ share of India-origin international traffic has risen to 58.4% from 51% a year ago.
Swiss increased India flights nearly 40% during March-May, helped by strong demand on the Delhi-Zurich route. Cathay Pacific expanded India-Hong Kong services as more passengers opted to connect through East Asia instead of the Gulf. KLM also reported stronger demand from Indian travellers amid the Middle East disruptions.
Some are expanding schedules. Others are intensifying marketing campaigns. Lufthansa even lit up Mumbai’s Sea Link bridge with branding earlier this year – a reminder of how strategically important India has become for global airlines.
For Air India, the challenge now is not simply managing a geopolitical shock. It is preventing a temporary operational disruption from reshaping long-term passenger behaviour. That risk becomes larger the longer the disruption lasts.
Airlines tend to retain customers once travel habits stabilise around particular routes, hubs and loyalty programmes. If Indian passengers increasingly get used to connecting through Hong Kong, Zurich or Amsterdam instead of flying Air India directly, some of those shifts may outlast the conflict itself.
Market wrap
India’s stock markets slipped this week as concerns deepened about an acceleration in inflation due to high energy prices and after Prime Minister Narendra Modi asked people to halt gold purchases and cut oil consumption. The rupee’s drop to a new record low past 96 to the dollar and continued selling by foreign portfolio investors made matters worse. The Sensex dropped 2.7% this week while the Nifty 50 fell 2.2%.
In the broader market, the Nifty Small-Cap 250 index lost 4.1% and the 150-stock mid-cap index skid 2.2%.
As many as 13 of the 16 major sectors logged weekly losses, with metals and pharma among the exceptions. The IT index declined 5.7% over the week on heightened worries over revenue risks for IT companies after ChatGPT owner OpenAI launched a new AI venture with a $4 billion investment.
Adani Enterprises was the top gainer, jumping 8.4% this week after teaming up with Uber for the ride-hailing company’s first India data centre and following reports that the US was set to drop civil and criminal fraud charges against founder Gautam Adani.
ONGC surged 7.2% after the government cut royalties on crude oil and gas production. Cipla climbed over 6% despite a sharp drop in its fourth-quarter profit. Its peers Dr Reddy’s Labs and Sun Pharma also ended higher. Tata Consumer, Max Healthcare, Bharti Airtel, Hindalco and Adani Ports were among the other winners.
Titan was the top loser this week and fell 7.5% after missing profit forecasts and as jewellery stocks slid following PM Modi’s call to avoid gold purchases.
Heavyweight Reliance Industries and its NBFC unit, Jio Financial, fell over 6.5% each. Other NBFCs–Shriram Finance, Bajaj Finance, Bajaj Finserv–also ended lower, as did all banks barring Kotak Mahindra Bank.
Tech Mahindra, TCS, HCL Tech and Infosys slumped over 5% each while Wipro lost over 4%. Auto stocks, led by Mahindra & Mahindra’s 6% drop, skid on concerns the Middle East conflict and high oil prices will hurt sales in coming months.
Earnings Snapshot
- Bharti Airtel Q4 net profit drops 34% to Rs 7,325 crore
- JSW Steel consolidated profit before exceptional items and tax jumps 153% to Rs 4,489 crore
- Cipla consolidated net profit plunges 54.6% on-year to Rs 555 crore, misses forecasts
- Diageo unit United Spirits’ Q4 profit rises 27% to Rs 571 crore
- Gold-loan financier Muthoot Finance’s Q4 profit doubles to Rs 3,086 crore
- Apollo Tyres consolidated profit soars to Rs 631 crore from Rs 185 crore on deferred tax gain
- Hindustan Aeronautics Q4 profit rises 5.5% to Rs 4,196 crore
- State-run Oil India’s Q4 profit rises 12.4% to Rs 1,790 crore
- Hindustan Petroleum Q4 profit surges 46.1% to Rs 4,902 crore
- Tata Power profit drops 4.5% to Rs 996 crore
Other Headlines
- US SEC settles civil lawsuit against billionaire Gautam Adani subject to court approval
- Govt of India bans sugar exports until September 2026 to cool local prices
- Govt caps duty-free gold imports for jewellery exporters at 100 kg to curb demand
- Govt considers reducing taxes on bond investments by foreigners, reports Bloomberg
- Govt asks US to extend Russian oil waiver as Iran war drags on, reports Bloomberg
- Cabinet approves Rs 37,500 crore scheme to boost coal gasification projects
- SEBI plans to ease borrowing norms for mutual funds, quicken approval for alternative investment funds
- Adani Ports says to invest $1.36 billion for expansion in Europe
- Bank of America settles allegation of insider trading rule violation with SEBI
- Anthropic, Gates Foundation launch $200 million partnership for AI in health, education
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