By Craig Mellow

Until recently, Indian Prime Minister Narendra Modi joined Wall Street in acting like the war in Iran was no big deal. Not anymore.

Modi declared a "Covid-type" emergency on May 10, unveiling a seven-point austerity plan that asked citizens to conserve fuel by driving less and conserve rupees by buying less gold. He strategically delayed his alarm bell until his Bharatiya Janata Party won a landmark election in West Bengal state, India's fourth-most populous. Better late than never.

Indian assets had already fallen from investors' grace, with stocks and the rupee slipping for much of last year as capital departed to jump on the artificial-intelligence train in China, South Korea, or Taiwan. "India's capital account balance has gone negative for the first time in 30 years," notes Rajeeb Pramanik, senior emerging markets strategist at BCA Research. Bad news for a country that runs chronic current account deficits.

The Strait of Hormuz closure has turned these threatening clouds into a perfect storm. India spent 5% of gross domestic product on fuel imports last year with Brent crude oil at an average price around $70 a barrel, according to HDFC Bank. Today's price is $107.

A more immediate calamity could be fertilizer shortages as India, where two-thirds of the population is still rural, heads into its June-July planting season timed to the summer monsoon, Pramanik says. Fertilizer production depends heavily on liquefied natural gas from the Persian Gulf. An expected "super El Niño" could land an additional blow by reducing rainfall.

Markets are focused on the rupee as it dwindles toward the psychological breakwater of 100 to the dollar. (Current value 96.) "The optical level of 100 could spur a speculative panic," says Rajeev de Mello, global macro portfolio manager at GAMA Asset Management. Neither Modi's jawboning nor an estimated $100 billion in Reserve Bank of India intervention has stemmed the decline so far, though, says Venkat Pasupuleti, portfolio manager for India at Dalton Investments.

The central bank buying rupees dries up liquidity for commercial banks, hampering lending, Pramanik adds. The RBI is reluctant to raise its interest rate from 5.25% with growth slowing thanks to the war and inflation so far contained around 3.5% annually. "There are no good options," de Mello concludes.

Investors maintain faith in India's medium-term future as a global growth engine. Corporate profits were on track to jump around 15% and gross domestic product at least 7% this year before Feb. 28, Pasupuleti says. The consolidation of regional power by Modi's party could catalyze structural reforms, which often get bogged down in federal-state conflicts, says Madhavi Arora, chief economist at Emkay Global Financial Services in Mumbai. "Modi-led states have done better over the past five to seven years," she says.

That doesn't translate into short-term optimism around Indian stocks. "Equities are cheaper, but still not very cheap," de Mello observes. Ironically, continued inflows from domestic investors has staved off the sort of wipeout that might lure foreigners back in, Pasupuleti adds.

India's core share offerings of banks and domestic-facing consumer companies are radically out of tune with the global rush into AI-related tech. Its tech offerings are concentrated in IT outsourcers like Infosys and Tata Consultancy Services, which have been pummeled by the so-called SaaSpocalypse, a global bet that AI will crush their business.

"The inflection point for India is a few quarters away," Pasupuleti sums up. "It's hard for anyone to catch the falling knife."

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(END) Dow Jones Newswires

May 22, 2026 21:30 ET (01:30 GMT)

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