<h2><strong>Political & Policy Issues to Watch</strong></h2>.<h4><em><strong>Managing the peace…</strong></em></h4><p>With a fragile Iran-US ceasefire taking hold, India will look to repair some of the damage the conflict has done to the country, diplomatically as well as in terms of domestic politics. The poor optics around PM Modi’s visit to Israel just days before the conflict broke out; the sinking of an Iranian frigate off Sri Lanka’s coast; and India’s initial silence over the death of Iran’s Supreme Leader will all weigh on Indo-Persian relations, while giving opposition parties an issue to rally around. Added to this, Pakistan’s key role in brokering a makeshift deal has overshadowed India’s aim of playing a mediating/leadership role in the region. The PMO and Foreign Ministry did effectively work the telephone lines, thereby keeping India’s position relatively safe on both sides of the Strait of Hormuz. However, a domestic LPG crisis resulting from the choking-off of gas supplies may impact Assembly elections across 5 states this month. </p>.<h4><em><strong>…and strengthening ties with the neighbourhood</strong></em></h4><p>Closer home, efforts to mend fences with India’s immediate neighbours are underway. A multi-day visit by the new Bangladeshi Foreign Minister is likely to recalibrate ties that have been severely strained in the last 2-odd years, following ex-PM Hasina’s resignation and flight to India. A similar process of recalibration is underway between India and Nepal under its new leadership. </p>.<p><em><strong>Landmark electoral changes ahead?</strong></em></p><p>Parliament’s budget session drew to a close a few days early, having passed only a handful of bills. These included amendments to the FCRA, IBC, Corporate Laws and AP Reorganisation Acts; a bill to decriminalise offenses and rationalise penalties under 80 separate laws; and tweaks to the Industrial Relations Code. However, the legislature will soon reconvene for a special three-day sitting to fast-track implementation of the Women’s Reservation Act passed 3 years ago. This may prove especially significant if, as rumoured, the government attempts to dovetail women’s reservations into a long-delayed delimitation exercise. </p>.<h2><strong>Outlook for the Market</strong></h2>.<h4><em><strong>Signs of domestic economic strain</strong></em></h4><p>With limited data filtering through, the Iran war already seems to have left a mark on the Indian economy. The March PMI reading for the Manufacturing sector fell sharply, from 56.9 to 53.9, its lowest level in 4 years. New orders slowed markedly and input costs spiked. Shortages of natural gas and other critical inputs have begun to hit various industries, though it remains to be seen whether – and how quickly – the ceasefire helps normalise supplies. The Services PMI also declined, though relatively mildly, from 58.1 in February to 57.5. Meanwhile, FPI investments turned sharply negative in March (-$13.6 bn) after a short-lived recovery (+$4.2 bn) the previous month; the forward view remains cloudy. Other lead indicators point to steady growth through March, but the April picture may look quite different. GST receipts (+2% YoY) crossed the Rs 2 tr mark for the first time since last year’s rate cuts and e-Way bill issuances through February (+19%) continued to grow robustly. Exports fell by 0.8% in February (the latest month for which data is available) but imports (a marker of domestic demand) grew by 24%, causing the trade balance to continue widening.</p>.<h4><em><strong>Just how much will growth decline?</strong></em></h4><p>So far, banks and rating agencies have lowered their FY27 GDP forecasts for India by anywhere from 30 bps to over 100 bps, from ~7% before the conflict, to 5.9-6.8% now. IMA still expects the final numbers to fall in the 6.3-6.8% range. Projections for CPI inflation have been marked up from ~4.1-4.2% to 4.5-5%, and those for the current account deficit (CAD) from under 1.5% of GDP to 1.5-2%. The consensus is that the Repo rate, rather than being lowered further, may at best be held at the current 5.25% level, or at worst, taken up to 5.5-5.75% in the second half of the year.</p> <p>Even assuming that the ceasefire holds, IMA expects oil prices to remain elevated for the next 3-4 months. This will filter through into domestic inflation, impacting demand and margins across industries. It will also almost certainly cause the CAD to widen, and unless FPI flows turn strongly positive, the rupee will continue to face downward pressures, which the RBI may find hard to contain. Agriculture may also run into an input wall later this year, as naphtha supplies from the Middle East dry up. Combined with early warnings of a potential ‘Super El Niño’ over the South Pacific this year and, consequently, expectations of a below-normal monsoon, farm-sector growth could suffer, pulling down rural incomes and spending in the latter half of the year.</p>
<h2><strong>Political & Policy Issues to Watch</strong></h2>.<h4><em><strong>Managing the peace…</strong></em></h4><p>With a fragile Iran-US ceasefire taking hold, India will look to repair some of the damage the conflict has done to the country, diplomatically as well as in terms of domestic politics. The poor optics around PM Modi’s visit to Israel just days before the conflict broke out; the sinking of an Iranian frigate off Sri Lanka’s coast; and India’s initial silence over the death of Iran’s Supreme Leader will all weigh on Indo-Persian relations, while giving opposition parties an issue to rally around. Added to this, Pakistan’s key role in brokering a makeshift deal has overshadowed India’s aim of playing a mediating/leadership role in the region. The PMO and Foreign Ministry did effectively work the telephone lines, thereby keeping India’s position relatively safe on both sides of the Strait of Hormuz. However, a domestic LPG crisis resulting from the choking-off of gas supplies may impact Assembly elections across 5 states this month. </p>.<h4><em><strong>…and strengthening ties with the neighbourhood</strong></em></h4><p>Closer home, efforts to mend fences with India’s immediate neighbours are underway. A multi-day visit by the new Bangladeshi Foreign Minister is likely to recalibrate ties that have been severely strained in the last 2-odd years, following ex-PM Hasina’s resignation and flight to India. A similar process of recalibration is underway between India and Nepal under its new leadership. </p>.<p><em><strong>Landmark electoral changes ahead?</strong></em></p><p>Parliament’s budget session drew to a close a few days early, having passed only a handful of bills. These included amendments to the FCRA, IBC, Corporate Laws and AP Reorganisation Acts; a bill to decriminalise offenses and rationalise penalties under 80 separate laws; and tweaks to the Industrial Relations Code. However, the legislature will soon reconvene for a special three-day sitting to fast-track implementation of the Women’s Reservation Act passed 3 years ago. This may prove especially significant if, as rumoured, the government attempts to dovetail women’s reservations into a long-delayed delimitation exercise. </p>.<h2><strong>Outlook for the Market</strong></h2>.<h4><em><strong>Signs of domestic economic strain</strong></em></h4><p>With limited data filtering through, the Iran war already seems to have left a mark on the Indian economy. The March PMI reading for the Manufacturing sector fell sharply, from 56.9 to 53.9, its lowest level in 4 years. New orders slowed markedly and input costs spiked. Shortages of natural gas and other critical inputs have begun to hit various industries, though it remains to be seen whether – and how quickly – the ceasefire helps normalise supplies. The Services PMI also declined, though relatively mildly, from 58.1 in February to 57.5. Meanwhile, FPI investments turned sharply negative in March (-$13.6 bn) after a short-lived recovery (+$4.2 bn) the previous month; the forward view remains cloudy. Other lead indicators point to steady growth through March, but the April picture may look quite different. GST receipts (+2% YoY) crossed the Rs 2 tr mark for the first time since last year’s rate cuts and e-Way bill issuances through February (+19%) continued to grow robustly. Exports fell by 0.8% in February (the latest month for which data is available) but imports (a marker of domestic demand) grew by 24%, causing the trade balance to continue widening.</p>.<h4><em><strong>Just how much will growth decline?</strong></em></h4><p>So far, banks and rating agencies have lowered their FY27 GDP forecasts for India by anywhere from 30 bps to over 100 bps, from ~7% before the conflict, to 5.9-6.8% now. IMA still expects the final numbers to fall in the 6.3-6.8% range. Projections for CPI inflation have been marked up from ~4.1-4.2% to 4.5-5%, and those for the current account deficit (CAD) from under 1.5% of GDP to 1.5-2%. The consensus is that the Repo rate, rather than being lowered further, may at best be held at the current 5.25% level, or at worst, taken up to 5.5-5.75% in the second half of the year.</p> <p>Even assuming that the ceasefire holds, IMA expects oil prices to remain elevated for the next 3-4 months. This will filter through into domestic inflation, impacting demand and margins across industries. It will also almost certainly cause the CAD to widen, and unless FPI flows turn strongly positive, the rupee will continue to face downward pressures, which the RBI may find hard to contain. Agriculture may also run into an input wall later this year, as naphtha supplies from the Middle East dry up. Combined with early warnings of a potential ‘Super El Niño’ over the South Pacific this year and, consequently, expectations of a below-normal monsoon, farm-sector growth could suffer, pulling down rural incomes and spending in the latter half of the year.</p>
