In its monthly economic review, the ministry said the disruption of shipping and energy flows through the Strait of Hormuz remains the most critical variable shaping India’s external sector and inflation outlook, as geopolitical tensions continue to affect global oil markets.

The report noted that recent increases in fuel prices, combined with rising upstream production costs, are likely to gradually feed into retail inflation through higher transportation, energy and food expenses.
Officials warned that a significant rainfall shortfall during the monsoon season could further intensify inflationary pressures by affecting agricultural output and food supplies. Such a scenario could also weaken rural consumption and weigh on broader economic growth.

“The near-term outlook for the Indian economy is one of cautious resilience,” the ministry said, while emphasizing the need for continued policy vigilance amid multiple external and domestic risks.
The report highlighted a combination of elevated global energy prices, depreciation of the Indian rupee, rising input costs and the possibility of below-normal rainfall as factors that could complicate inflation management in the months ahead.

India remains heavily dependent on imported crude oil, making it particularly vulnerable to supply disruptions and price volatility stemming from geopolitical developments in the Middle East. Any prolonged disruption to maritime traffic through the Strait of Hormuz could increase import costs and widen inflationary pressures across sectors.

Despite these concerns, inflation has remained relatively contained. India’s annual retail inflation rate rose marginally to 3.48% in April, remaining below the target level monitored by the Reserve Bank of India.
The assessment comes as policymakers seek to balance economic growth with price stability amid an uncertain global environment marked by geopolitical tensions, energy market volatility and weather-related risks to agricultural production.

The Finance Ministry publishes its economic review on a monthly basis to assess macroeconomic trends and emerging risks facing the Indian economy.

The Nifty 50 gained 1.56% to close at 22,679.40, while the BSE Sensex advanced 1.65% to 73,134.32, marking a strong start to the new fiscal year after steep losses in March.Fourteen of the 16 major sectors ended higher, with broader markets outperforming.

The Nifty Smallcap 100 rose 3.3% and the Nifty Midcap 100 climbed 2.2%, reflecting renewed risk appetite among investors.Global equities also surged, with Asian markets posting their biggest one-day gain since November 2022 and Europe’s STOXX Europe 600 rising 2.1%, as easing geopolitical concerns buoyed sentiment.

Oil prices retreated, with Brent crude falling to around $103 per barrel after remarks by Donald Trump indicated a potential exit from the Iran conflict. Investors are now awaiting further updates in a scheduled address on Thursday.

“The markets are at levels where opportunities may emerge across sectors, though risks remain,” said Prateek Agrawal.

Indian equities had declined sharply in March, with both the Nifty 50 and Sensex falling more than 11% each, their steepest monthly losses in six years, as foreign investors pulled out a record $12.7 billion amid heightened geopolitical uncertainty.

Analysts said a resolution to the Middle East conflict could support the rupee and revive foreign portfolio inflows, reversing the trend seen in March after earlier buying in February.

Gains on Wednesday came despite higher domestic fuel prices, with retailers raising rates for jet fuel and commercial liquefied petroleum gas.

Shares of companies in sectors such as fertilisers, restaurants, tourism and rice exports led the advance as optimism over easing global risks outweighed cost concerns.

“Exporters are avoiding dealing with Iran since payments are getting delayed for months,” said a Mumbai-based dealer with a global trading house.

Iran’s rupee reserves in India’s UCO and IDBI Bank, the two lenders authorised to facilitate rupee trade, have depleted significantly and exporters are not sure whether they would be paid on time for new shipments, the dealer said.

Under U.S. sanctions, Tehran is unable to use U.S. dollars to transact oil sales.

Iran previously had a deal to sell oil to India in exchange for rupees, which it used to import critical goods, including agricultural commodities, but New Delhi stopped buying Tehran’s oil in May 2019 after a U.S. sanctions waiver expired.

Tehran continued using its rupees to buy goods from India, but after 22 months of no crude sales, Iran’s rupee reserves have fallen, said the sources, who asked not to be named, citing business privacy.

Iran’s reserves have reduced significantly and “will be over soon probably because trade has stopped,” said a senior official with IDBI Bank.

The Islamic Republic was buying mainly basmati rice, tea, sugar, soymeal and medicines from India.

“Rice exporters are concerned about the current payment mechanism,” said Vijay Setia, a rice exporter and former president of the All India Rice Exporters’ Association (AIREA).

“There was too much of delay in payments from last year’s shipments. Exporters received payments six months after shipments,” Setia said.

In the first quarter of 2020 Iran imported nearly 700,000 tonnes of basmati rice from India, but in the same period this year shipments would be “very negligible,” Setia said.

Last year, Iran was the biggest buyer of India’s basmati rice and sugar. Iran fulfils more than one-third of its sugar and rice demand through imports, traders estimate.

Iran’s trade ministry and Central Bank of Iran declined to comment on the matter.

Payments hit by Sanctions

“We are in talks with Indian government and Indian traders to resolve these payment issues and I believe it will be resolved soon,” said a senior Iranian official, who asked not to be named due to the sensitivity of the matter.

“The delay in payments are due to U.S. sanctions on Iran’s financial system that has made such payments very difficult,” he said.

As rupee reserves have depleted and dollar trade is not allowed, sugar exporters are exploring options to conduct trade in euros, Rahil Shaikh, managing director of MEIR Commodities India, said.

Sugar exporters are focusing on other destinations like Indonesia and Sri Lanka, as Iran is unlikely to buy significant quantities this year, said Shaikh.

India’s overall exports to Tehran fell 42% in 2020 from a year ago to $2.2 billion, the lowest in over a decade, said an official with India’s Ministry of Commerce and Industry.

The fall is continuing in 2021 and in January this year exports more than halved from a year ago to $100.20 million, the official said.

India’s ministry of commerce and industry did not immediately respond to a request for comment.

Trading houses and exporters were hoping new U.S. President Joe Biden could reverse sanctions imposed by his predecessor Donald Trump on the oil-rich country.

“Exports would rebound even if Biden administration provides a few concessions to Iran like allowing oil trade in rupees,” said a Mumbai-based dealer with a global trading firm.

According to a report, over 12 million passengers in 2018 travelled via Dubai airports to and from India, since Indians are potential customers to Dubai airports, they decided to transact in Indian Rupees at all point of sales in Terminal 1, 2, 3 of Dubai International, as well as Al Maktoum International airports.

However, the customers will be returned UAE dirhams as change for Indian rupees. While for Euros, pounds and US dollars, the same currencies will be returned.

Ramesh Cidambi, COO of Dubai Duty Free said, “The sales to passengers travelling to India is also a significant portion of Dubai Duty Free’s business and it contributes to nearly 11% of our total business.”.

“Our view is that the facility to make payment in Indian Rupee is another convenient option for our Indian passengers,” he added.

All major denominations starting from 100s, 200s, 500s, 2000s are accepted. This makes Indian rupee the 16th International currency to be accepted at Dubai airport stores.