External uncertainties increased materially with the escalation of the Iran conflict, and led to a sharp jump in crude prices. Additionally, supply chain bottlenecks cropped up with the closure of Strait of Hormuz, accounting for ~20-25% of global seaborne oil and over 33% of global LNG traffic, making it essential for global energy markets.
US Manufacturing PMIs inched up to 52.3 in March 2026 vs 51.6 in February, and has remained in expansionary mode for 8 consecutive months. In contrast, the services PMI softened to below the 50-mark threshold and came in at 49.8 in March vs 51.7 in Feb. US headline and core CPI came in at 2.4% and 2.5%, broadly in line with expectations. Going forward, inflation could inch up on account of the increase in gasoline prices. US labour markets rebounded in March, with non-farm payrolls coming in at 178k (vs 133k decline in February), and a 3-month average of 68k. US unemployment also declined and came in at 4.3% vs 4.4% in the previous month.
On domestic front, February CPI surged to 3.26% (vs 2.75% for the previous month), mainly driven by uptick in food inflation. Food & beverages inflation came in higher at 3.4% from 2.1% in the previous month. Food had been in deflationary zone towards the end of CY25, and has normalized now in the new series. Meanwhile, core inflation remained flattish at 3.45% (vs 3.41% in the previous month), supported by health & transport inflation remaining subdued. Personal care inflation has been at elevated levels and came in at 19.7% yoy, largely due to sharp price increases in gold & silver. Precious metals form part of the personal care basket and have a weightage of 0.94% in the overall CPI index (lower than the 1.2% weight in the old index) – which has kept personal care inflation elevated. Going forward, inflation may inch up higher driven by higher energy prices, depending upon the extent of retail price increase in energy products. Additionally, supply chain bottlenecks due to the recent conflict can also spillover to inflation.
Manufacturing PMI fell to 53.9 in March from 56.9 in February, above the expansion threshold of 50 but at its lowest level since end-2021. The decline was driven by fall in new orders and higher input prices, while employment and export orders remained steady. Services PMI also eased to a 14-month low of 57.5 in March from 58.1 in February, but remained well above the 50 mark. New business growth softened to a 14-month low even as new export orders rose to a three year high. The index of eight core industries rose by 2.3% in February 2026. Five of the eight core industries reported a rise in production, while three reported a fall. Cumulative output of eight core industries during April - Feb 2026 rose by 2.9% on a YoY basis, as compared to 4.4% YoY growth during the corresponding period last year.
India’s merchandise trade deficit narrowed to USD 27.1bn in February 2026 vs USD 34.7bn in January 2026 driven by lower gold imports, although inched up on a yoy basis (USD 14.4bn in February 2025). Gold imports moderated to USD 9.1bn in February vs USD 14.1bn in January. Overall exports growth was subdued and recorded a de-growth of 0.8% YoY, driven by a 40% de-growth in oil exports while non-oil exports remained steady at 6.4% YoY. Exports to the US remained broadly unchanged, despite lower effective US tariffs on Indian exports, while exports to Saudi Arabia and UAE fell sharply. Imports grew by 24.1% YoY as gold imports remained elevated on a YoY basis. Non-oil non-gold imports grew by 13.5% YoY, whereas oil imports grew by 9.1% YoY. The trade deficit was partly offset by net services exports of USD 17.8 bn, lower than USD 21.5bn in the previous month. FX reserves declined to USD 688bn (as on March 27th), vs USD 728 bn reported at the end of previous month on account of RBI’s forex intervention. Crude prices have inched up post Iran conflict, and will be a key risk for trade deficit and CAD – USD 10/bbl of increase in crude leads to 0.4% increase in CAD.
Central Government’s gross fiscal deficit (GFD) till February 2026 was 79.8% of its annual budgeted target vs 83.5% during the same time in the previous year. Government receipts till Feb 2026 grew by 9.6%, driven by a 17.8% growth in non-tax revenues (on account of higher RBI dividends). Net tax revenue growth has remained subdued at 6.4% on a YoY basis. On the expenditure front, the government has managed to keep revenue expenditure (excluding interest) in check, recording a de-growth of 3.7%. Total expenditure increased by 3.9% yoy during April –Feb 2026, driven by an increase of 14.5% in government capex. The government collected INR 2 trillion GST in March 2026 vs INR 1.9 trillion in the previous month. Government is likely to meet its budgeted fiscal deficit of 4.4% in FY26, as the slowdown in total receipts is expected to be offset by expenditure cuts. For the next year, impact on fiscal due to subsidies (fertilizer subsidy and oil excise cuts) will bear watching. Additionally, the nominal growth trajectory will have to be monitored, specially given the government targeting the debt / GDP metric and nominal GDP coming ~3% lower in the new GDP series.
Overall domestic demand and activity levels have remained strong during the year. However, high crude prices post the start of US Iran conflict and rationing of gas supplies have increased the risks of a growth slowdown. Investment cycle remains firm supported by government capex. Overall inflation is expected to remain within RBI’s comfort zone of 2 – 6%, even though it will inch up from current levels as the second order impact of the crude prices starts seeping through inflation. Global volatility is expected to remain high, and an elongated conflict and high crude prices can weaken the growth - inflation dynamics materially.