2026-04-03 07:04

Key takeaways The Year of the Horse is off to a turbulent start, with the consequences of the tragic conflict in the Middle East rippling across ASEAN. Higher energy prices are bound to push up inflation and harm growth, with the poor especially facing acute threats to their livelihoods. Still, the region’s resilience and strong fundamentals will help it tackle the challenges, eventually settling again into its customary trot. Exposure to the conflict in the Middle East varies across the region but ultimately all economies in ASEAN will be affected. For example, Thailand is dependent on net oil and gas imports the most, while Malaysia, and Indonesia have considerable resources at home. Other raw material disruptions will affect ASEAN manufacturers, too: Indonesia accounts for more than half of global nickel production, but 75% of its sulphur imports needed for processing comes from the Gulf. Meanwhile, one-third of global helium supply, a key ingredient in chip fabrication, comes from the Middle East. Nearly 50% of global urea supply, a key ingredient for fertiliser, comes from the Middle East, accounting for 74% of Thailand’s urea imports. Economy profiles Key upcoming events Source: LSEG Eikon, HSBC Indonesia Growth urgency GDP growth picked up to 5.4% y-o-y in the December quarter (versus 5% in the previous one), the highest in 13 quarters. Substantial fiscal and monetary policy easing had started showing up in indicators like credit growth and PMI manufacturing, even before the GDP print was released. That said, we estimate that the economy continues to have a negative output gap (where actual GDP is less than its potential), and details suggest that households are running down saving, while cash-rich corporates are not investing. Furthermore, the fiscal deficit is already close to the 3% cap. And while there is space to cut rates, a volatile IDR is getting in the way. A string of domestic news around personnel changes amongst policy makers, concerns raised by credit rating agencies and MSCI, and news on fiscal sustainability, have raised market volatility across asset classes. As is well known, currency stability is a prime mandate for Bank Indonesia. The Middle East tension is only exacerbating the situation. Indonesia’s net oil imports may be lower than the region’s (1.4% of GDP versus the 3% regional average), but so are its strategic domestic reserves (at 20-25 days of oil supply). A spike in prices can widen the current account deficit, stoke inflation, and hurt growth. The impact on inflation can be lower if the government subsidises oil prices for consumers. Still, cuts may have to be made in other areas to ensure that the deficit doesn’t rise too much. Meanwhile, higher oil prices could widen the current account deficit, keeping the currency volatile, and coming in the way of rate easing. We recently lowered our GDP growth forecast for the year to 4.7% (from 5.2%), which assumes oil prices to average USD80/b in 2026. An obvious way to get higher and more sustainable growth would be to prioritise fiscal reforms. For instance, on the tax revenue front, improving VAT compliance and strengthening administration through better data use can help. Danantara, the new Sovereign Wealth Fund, is expected to manage the country’s SOEs efficiently, act as a vehicle for investment, and over time, transfer higher dividends to the government. For this to take shape, Danantara must be professionally run, with strong governance independence, or there may be concerns of rising quasi-fiscal debt. And it’s not just fiscal reforms. Indonesia has embarked on important trade reforms, such as finalising more trade deals with the world (e.g., the EU and US trade deal in 2025 and 2026, respectively). But much more needs to be done here, if the country wants to truly benefit from the China + 1 opportunity, just as some other ASEAN economies are. Indonesia’s persistent negative output gap Source: CEIC, HSBC Inflation is elevated now; likely to fall back closer to target in 2027 Source: CEIC, HSBC Malaysia The perks of an energy exporter As a relatively mature emerging market, Malaysia saw strong growth of above 5% for two consecutive years, above its potential growth rate. This made Malaysia the second-fastest growing economy in ASEAN. Beyond rosy GDP number, what is more encouraging is how broad-based growth is, thanks to strong trade and resilient domestic demand. Despite facing 19% US tariff in 2025, Malaysia’s trade jumped to a record high, largely benefitting from the AI-driven tech cycle. Over the past decade, Malaysia has gained substantial market share in certain semiconductors, including processor and amplifier chips, as well as parts of integrated circuits (IC). Meanwhile, private consumption continues to flourish, thanks to an improving labour market and some subsidies, while investment continues to grow at a double-digit pace. While Malaysia is not insulated from the two biggest challenges – the tariff developments and the Middle East conflict, it is in a relatively better position to weather the storms in the Year of the Horse than its Asian peers. For one, the headline US tariff is now lower after the US Supreme Court’s decision than what Malaysia faced last year. On the other hand, there is no better time to be a net energy exporter when it comes to the Middle East conflict. Malaysia, despite being a small net crude oil importer, is a large net natural gas exporter. Recall in 2022, when Malaysia benefitted from elevated global commodity prices and a chip crunch, growth ultimately hit 9%, the fastest in ASEAN. Granted, there are stark differences with today and this does not mean there are no downside risks to growth. But on a relative basis, the impact on its economy is likely to be much smaller than that on regional peers that are heavily dependent on oil imports, most of which transit through the Straits of Hormuz. We were thinking of upgrading Malaysia’s GDP growth before the Middle East conflict, but fresh uncertainty prompted us to maintain our GDP growth forecast at 4.5% for 2026. Recently, the government also held off from raising its growth forecast range of 4-4.5% (The Star, 6 March). Elsewhere, inflation has largely remained benign, even though core inflation has picked up slightly to above 2% y-o-y. That said, there are still upside risks to inflation from the uncertain fate of subsidies for RON95 petrol. Overall, we have recently upgraded our headline inflation forecast to 2.1%, from 1.7%, for 2026. But we do not believe price pressures are significant enough to prompt Bank Negara Malaysia (BNM) to hike anytime soon. Malaysia is a small net oil importer but a large net natural gas exporter Source: CEIC, HSBC Core inflation has picked up slightly above 2% y-o-y but is still benign Source: CEIC, HSBC Philippines In a deeper jam The Philippine economy was already caught in a jam even before the conflict in the Middle East escalated. The growth stumble, brought on by a fallout in public infrastructure spending, was already widely known, but the latest GDP figures emphasise the predicament. Growth surprised materially to the downside, slowing to 3.0% y-o-y in Q4 2025, the slowest since 2011, barring the COVID-19 pandemic. That’s understandable: as the government undertook an expansive corruption investigation, the slowdown in public spending pulled growth down by 2.1ppt. With a tenth of the labour force in construction, the drag in spending has trickled its way to households, with growth in private consumption clocking in its slowest pace since 2010, barring the pandemic. The labour market also was not spared. From the lows of 3.2%, the unemployment rate has risen to 5.8%. Headline inflation has finally returned to within the Bangko Sentral ng Pilipinas’ (BSP) 2-4% target band in February after 10 months of floating below it. But the inflation outlook turned grim when retail rice prices jumped by c10% since December. With rice being the heaviest component in the CPI basket, this jump in prices, if sustained, could increase inflation by 0.9ppt. Then the energy crisis, brought on by the conflict in the Middle East, came in. This represents a headwind to both growth and inflation, complicating the jam the economy already finds itself in. Growth-wise, every 10% increase in global oil prices represents a 0.4% of GDP incremental cost to the Philippines, which is above the average in Asia. On the inflation front, readers don’t need to look far; in the 2022-2023 oil shock, inflation jumped to as high as 8.7% y-o-y, the highest in ASEAN then. Under our baseline scenario of global oil prices easing to USD80/b after a significant spike from USD120/b, we recently increased our full-year inflation forecast for 2026 to 4.0% from 2.4%. This implies that year-on-year inflation will eventually breach the BSP’s 2-4% target band for half of the year, thus necessitating a monetary response. This is despite the mounting challenges to growth: we expect full-year growth in 2026 to remain below potential for another year at 4.6% (from 5.2%). However, as the economy deals with many uncertainties and challenges, some of its fundamentals should improve. The slowdown in public spending should, eventually, lead to a narrower current account deficit and less public debt. The timing may not be ideal, but it’s a silver lining, nonetheless. The fallout in public capital spending has spilled over to private demand Source: CEIC, HSBC Rice prices spiked in February, altering the inflation outlook Source: Macrobond, HSBC Singapore The fiscal bullets are there Singapore, a developed market, is growing like an emerging market. For the past two years, it has generated impressive growth of around 5%, surpassing its potential growth. This reflects Singapore’s status as a bastion of trade, which has helped it withstand the tariff impact imposed by the US. But we have entered the Year of the Horse with unprecedented challenges, and Singapore is not immune. After the US Supreme Court ruled the use of IEEPA tariffs unconstitutional, the US administration announced the imposition of a global 10% tariff under Section 122, valid for 150 days unless Congress extends the tariff. Meanwhile, the US administration has also launched a range of Section 301 investigations that could lead to additional tariffs. While this leaves Singapore exposed, robust AI hardware demand globally should help provide some cushion against the impact. However, the bigger challenge has surfaced from the Middle East conflict. The direct mechanism of transmission to growth would be through erosion of consumption power via rapidly rising oil prices, as Singapore is heavily dependent on oil and gas imports. Meanwhile, it also poses downside risks to petroleum-related sectors, with Singapore being a hub for refining. 4Q25 GDP growth of almost 7% y-o-y was pushed up by the impressive performance of electronics. Therefore, we recently upgraded our GDP growth forecast to 2.9%, from 2%, for 2026, which is around the mid-point of the government’s revised forecast range of 2-4%. That said, the downside risk to growth will likely intensify if the Middle East crisis drags on. Outside of growth, inflation is another source of concern. Core inflation started 2026 with a downside surprise, coming in at only 1% y-o-y, but upside risks remain high. Recall, Monetary Authority of Singapore (MAS)-style core inflation includes energy-related components, like electricity prices, which are sensitive to volatility in global natural gas prices. We raised our core inflation forecast to 1.8% after the MAS meeting in January. Despite the downside surprise in the January core inflation, we keep our yearly forecast at 1.8% for 2026. The impact from higher oil prices is likely to be more evident from 3Q26, as there is usually a one-quarter impact lag on core inflation. We have already pencilled in the MAS policy normalisation to start in April, but we are adding one more round of tightening in October, likely bringing the SGD Nominal Effective Exchange Rate (NEER) slope to 1.5% by end-2026. Singapore has benefitted from an AI-driven tech upturn for its chip exports Source: CEIC, HSBC Singapore’s core inflation momentum has been quickly building up Source: CEIC, HSBC Thailand Majority government A significant turn of events for the Land of Smiles. After three years of political instability, during which Thailand saw three prime ministers pass the baton, the conservatives in government surprised even the pre-election polls. These surveys predicted that the progressive People’s Party would win the most seats in Parliament but come short of garnering a majority and electing a prime minister. The February election then came and the conservatives, led by the Bhumjaithai Party, not only won more seats than the People’s Party, but they also won enough seats to form a majority on their own. Unlike in previous years, there is no hung Parliament. Instead, Thailand has likely garnered a renewed sense of political stability, with Anutin Charnvirakul of the Bhumjaithai Party continuing his role as Prime Minister. This renewed sense of stability has provided financial markets some comfort. Apart from a stable government increasing certainty over policy, stability can also give any government the foundation to pursue long-term economic policies and reform in contrast to short-term, but costly, stimulus measures. As a result, business confidence has already improved from the trough of last year, while there are hopes that the billions of baht pledged in FDI could finally find their way to Thailand’s shores. These pledges are low-hanging fruits to boost growth – we estimate THB800 billion (or 4% of GDP) worth of FDI pledges that have yet to materialise. Though there is no exact date for when the next government will officially begin, the incoming administration will be inheriting an economy with positive momentum – or so we thought. Growth in 4Q 2025 exceeded expectations, driven by strong private investment. Private consumption as well has re-emerged as a major driver of growth, with consumption accelerating since the implementation of the ‘Half-Half’ subsidy scheme in October 2025. However, the surge in oil prices, brought by the conflict in the Middle East, will be the next administration’s first major hurdle. Anutin Charnvirakul, in his capacity as a caretaker Prime Minister, is already at work: the caretaker government has put a cap on diesel prices until the end of March to mitigate inflation, with the cost of maintaining the ceiling borne by the Oil Fuel Fund. Given all the moving parts, we recently adjusted our growth forecast to 1.6% in 2026 (from 1.7%). In addition, Thailand’s exposure to oil also makes its inflation outlook susceptible to changes in global oil prices; hence, we also increased our inflation forecast for 2026 to 1.2% (from 0.6%). After years of continuous decline, business expectations turned the corner Source: Macrobond, HSBC Monetary policy has room to absorb a price shock with inflation negative Source: CEIC, HSBC Vietnam Sensitive to oil While 2025 was a rollercoaster year for Vietnam, it defied tariff concerns with growth hitting 8%. This easily placed Vietnam as the growth champion in ASEAN and the second-fastest growing economy in Asia, just after Taiwan. Although Vietnam was widely expected to be one of the economies with high US tariff risks, its trade was not disrupted but instead ballooned to a record high. Its trade surplus also remained sizeable. Despite facing a 20% headline tariff from the US, Vietnam captured even more market share for certain goods, such as footwear, textiles and consumer electronics. The positive trade momentum has been sustained in 2026, with exports growing 18% y-o-y in the first two months. That said, soon after the Year of the Horse arrived, two imminent challenges have emerged. The tariff development after the IEEPA tariff was ruled unconstitutional by the US Supreme Court brought some tailwinds for Vietnam’s trade, as now the country is facing a lower tariff rate (though new tariffs loom on the horizon). Vietnam has not yet signed a trade deal with the US, providing itself with some negotiation flexibility. Ultimately, much will depend on the tariffs that Vietnam will face relative to its competitors, although the country remains highly competitive. The Middle East conflict poses immediate headwinds to Vietnam’s growth, as it is sensitive to global oil prices, and is heavily dependent on oil imports from the Middle East. If high oil prices were to persist, it may erode consumers’ purchasing power significantly, with household spending only starting to see a gradual recovery not so long ago. In addition, rising oil prices will translate into higher production and shipping costs for industry and trade, which are the growth pillars for Vietnam. All in all, we recently trimmed our GDP growth forecast to 6.5% for 2026 (from 6.7%), but the downside risks are intensifying, depending on how long the Middle East conflict drags on. This conflict also poses major upside risks to inflation. Based on PVOIL’s data, RON95 on 19 March 2026 has increased over 50% from the end of February, pushing up inflation significantly. Thus, we have recently upgraded our headline inflation forecast to 4.3%, from 3.5%, for 2026. But if oil prices remain high, this may risk pushing inflation above the 4.5% ceiling set by the State Bank of Vietnam (SBV). Vietnam’s exports continue to be driven by strong electronics shipments Source: CEIC, HSBC History reminds us of the acute impact of high oil prices on Vietnam’s inflation Source: CEIC, HSBC https://www.hsbc.com.my/wealth/insights/market-outlook/asean-in-focus/economic-impacts-of-the-middle-east-conflict/

2026-04-01 07:04

Key takeaways Recent energy price spikes have increased inflation expectations and market volatility. While we believe the impact should be temporary, we downgrade Consumer Discretionary in Asia and globally, following our reduced exposure to oil-importing markets such as India, to reflect higher inflationary pressures. Inflation concerns are likely to prompt policymakers to delay easing. We continue to seek attractive yields in investment grade and EM local currency debt and use gold and alternative assets to enhance diversification. As an energy exporter, US resilience stands out and continues to be supported by technology and AI-related investment, contributing to strong earnings growth across Communications, Industrials and Materials. Fed easing, M&A activity and a recovery in capital markets are positive factors for Financials. While we continue to favour US equities and USD investment grade credit, we emphasise the importance of diversification to reduce concentration risk. The outlook for Asia is mixed. India and some emerging markets are sensitive to oil prices, while South Korea benefits from AI-driven growth, and energy reserves provide an added advantage to China. In Japan, fiscal expansion, wage growth and corporate governance reforms should help offset higher energy costs. As only a limited portion of Europe’s energy supply is sourced from the Middle East, the risk of severe disruption is reduced, though growth expectations have moderated but opportunities remain in the materials, industrials, communications, financials and utilities sectors. https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-monthly/balancing-energy-driven-volatility-and-longer-term-opportunities/

2026-03-30 12:02

Key takeaways The CAD has started to reverse some of its recent resilience… …and this may continue, especially if labour markets soften and markets pare BoC tightening expectations. The JPY’s “safe haven” behaviour could be triggered. CAD – from over to under? The CAD has outperformed most G10 peers during the Middle East conflict. This outperformance is beginning to ease, and we expect the momentum to moderate further in the weeks ahead. While elevated oil prices should provide some support for the CAD, particularly against energy-importing G10 currencies, we think relative monetary policy could be a more influential driver (Chart 2). Specifically, our economists expect the Bank of Canada (BoC) to remain on hold through 2026 and 2027, while recognising there are hawkish risks to the rate path if energy disruption persists and inflation expectations rise significantly. With markets currently pricing in around two BoC rate hikes this year (Bloomberg, 26 March 2026), the balance of risks looks skewed to the downside for the CAD in the near term, especially if labour market conditions soften further. Source: Bloomberg, HSBC Source: Bloomberg, HSBC JPY – from under to over? The JPY’s recent weakness is broadly understandable, reflecting terms-of-trade headwinds from higher energy prices and Japan’s sizeable net oil and gas deficit (c2.7% of GDP in 2025). However, the bigger risk is a shift in the JPY’s behaviour (Chart 2). This could happen if global financial conditions tighten abruptly, in addition to higher equity volatility and falling US Treasury yields. Historically, in such situations USD-JPY has declined in the majority of cases (85% of weekly observations since 2006 based on our analysis). The key swing factor will be how US Treasury yields move. If yields continue to rise alongside higher oil prices, USD-JPY is likely to go higher, despite the ongoing FX intervention risk. Conversely, if risk aversion intensifies and US Treasury yields fall, potentially driven by mounting growth concerns, the JPY could rebound quickly. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/cad-and-jpy-potential-switch/

2026-03-26 12:01

Key takeaways Table of tactical views where a currency pair is referenced (e.g. USD/JPY):An up (⬆) / down (⬇) / sideways (➡) arrow indicates that the first currency quotedin the pair is expected by HSBC Global Research to appreciate/depreciate/track sideways against the second currency quoted over the coming weeks. For example, an up arrow against EUR/USD means that the EUR is expected to appreciate against the USD over the coming weeks. The arrows under the “current” represent our current views, while those under “previous” represent our views in the last month’s report. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-trends/g10-currencies-oil-linked/

2026-03-25 07:05

Key takeaways Uncertainty around oil benchmarks, LPG and natural gas stocks, and a possible El Niño is exacerbating concerns. Strong starting points are helping oil PSU finances and inflation, though not so much growth, BoP and the INR. This is likely to be more a growth shock than a price shock until pump prices are raised; we expect RBI to stay on hold. Why does the oil price shock feel different this time? Varying prices of different oil price benchmarks are creating some uncertainty, but we believe it is natural gas and LPG unavailability that are at the heart of concerns in India, given high reliance on Middle Eastern supplies, low strategic reserves, and the recent doubling of cooking gas connections, bringing the shock closer to home. We calculate a 25% supply shortfall in natural gas, which could shave off 25bp from annual GDP growth if it lasts a full quarter. Is it more a growth or a price shock? Currently the majority of the oil price burden is being borne by the public sector, i.e. the oil Public Sector Undertakings (PSUs). For now, it is more a growth shock than a price shock, since most pump prices are supressed. But if the oil shock lingers, and pump prices are raised (say after April state elections), the private sector would partake more evenly in burden-sharing, though inflation could rise. Will consumers or corporates suffer more? Corporates tend to split the cost of higher oil prices between lower profits and higher consumer prices in a 40:60 ratio. Consumers bear a double sting –higher pump prices and higher non-oil prices passed on by corporates. The overall burden sharing ratio between corporates and consumers is 30:70. Which variables are coming from a position of strength? In descending order, we outline four. Oil PSU margins were high and are able to withstand losses for now. Inflation was low and can withstand a moderate oil and weather shock, provided no changes are made in the inflation targeting framework which is undergoing review. Growth has been strong, though led by low commodity prices and normal rains, which are reversing. Alas, the BoP has been in deficit for a while. Some FX adequacy metrics need monitoring. How will various economic variables fare? We outline sensitivities to various oil prices. The external balance will take an immediate hit. Then comes the growth hit, higher if the public sector is bearing much of the burden. Inflation is set to rise, but could remain below the 6% cap. Finally, allowing pump prices to rise will keep a lid on the fiscal deficit. What can the RBI do? We believe the 8 April meeting will be all about communication to address the anxiety around the oil price shock. We expect the RBI to outline scenarios, sensitivities, and broad tenets of their reaction function. Despite the oil price shock we don’t expect rate hikes over the foreseeable future as we believe the RBI will focus on one-year ahead inflation, which may look softer than inflation in the immediate months. It’s been 23 days of conflict in the Middle East and disruption in energy markets. While broad sensitivities of economic variables to the oil price are well known (for instance, as per the RBI, a 10% rise in oil prices lowers growth by 15bp, and raises inflation by 30bp), they tend to be calculated from long-term data across previous episodes, and each episode may have differences. We ask what’s different this time, and where could we see a differentiated impact on the economy. We consider ‘starting points’ of various variables, ‘burden sharing’ across stakeholders, ‘longevity’ of the oil shock, and ‘substitutability’ across energy sources, to answer some pressing questions on economic impact and market reaction. 1. Why does the oil price shock feel different this time? Oil price shocks have always hurt the economy, and are likely to do this time too, but sentiment seems to have taken a bigger hit this time. What’s different? Various prices are moving differently for crude oil. The USD price of Brent and the Indian Basket, which earlier moved in line, have diverged significantly, with the former at USD107/bbl, while the latter is at USD146/bbl (as of 20 March, see exhibit 1). This may not be a prime concern for now, as the Indian Basket price has been pushed up by the Oman and Dubai crude components, where the supply is constrained and free-float is limited. As such the price reflected is not what India is paying for oil currently. But it is still a reflection of physical dislocation in the region, leaving a concern that once temporary global buffers are used up, prices of other oil benchmarks could rise. But the worries do not end there. We believe the LPG and natural gas availability uncertainty is creating panic. India imports 60% of its LPG needs. Of this, 80% of comes from the Middle East, most of it passing through the Strait of Hormuz. Of the 50% natural gas that India imports, Qatar, where supply has been disrupted, supplies the most (see exhibit 2). The global spot market alternative has seen prices more than double (in fact more than the rise in oil prices). Also worth noting is that a lack of underground storage facility in the case of gas means that strategic reserves are low and even short-term disruption in global supplies hurts. All of this matters more now because reliance on gas has only risen in recent years. In a way, India has become a victim of its own success. It tried to shift gently from coal to a greener alternative, gas, for industrial use, and from coal to LPG for household use. India’s imports of natural gas and LPG have risen over the last decade (see exhibit 3). As such, even though the overall usage of gas is lower than that of crude oil, lack of availability is now closer to home, denting sentiment. We estimate that at the current levels of production, consumption and imports, there could be a shortfall of 25% in gas availability (see exhibit 4). The government has responded by setting quotas for the industrial/commercial use of gas and LPG. Exhibit 5 outlines the big users of gas and the quotas they are allocated. We map each of these to their direct share in GDP. Assuming that 50% of gas users can substitute with other sources of energy, the 25% gas shortfall could shave off 25bp directly from GDP growth if it lasts for a full quarter. Bottomline – Varying prices of different oil price benchmarks are creating some uncertainty, but we believe it is natural gas and LPG unavailability that are at the heart of concerns in India, given high reliance on Middle Eastern supplies, low strategic reserves, and the recent doubling of cooking gas connections, bringing the shock closer to home. We calculate a 25% supply shortfall in natural gas, which could shave off 25bp from annual GDP growth if it lasts a full quarter. 2. Is it more a growth or a price shock? An oil price shock is a classic supply shock lowering growth and pushing up inflation. Burden-sharing ratios determine which variablehurtsmoreon the margin. So far, pump prices of petrol and diesel have not been changed (barring a INR2.35 per litre increase in the price of ‘premium’ petrol rates, not ‘regular’ petrol, see exhibit 6).For crude oil, the burden is mostly falling on the public sector. For gas it is an even mix given half of the industrial users are public companies, and half private companies. Overall, the public sector is picking up the majority of the burden. This has been made possible because of favourable starting points. Oil PSUs were making good profits before the oil shock, so they can withstand a loss for some time. The loss will be faced by the government too, in the form of lower dividends. While this goes on, the growth shock will be higher than the price shock, simply because pump prices are being suppressed. But if the oil price shock lingers, oil PSUs may not be able to take all the burden and pump prices may be raised. Consumer (and corporate) purchasing power will take some of the hit, but it is worth noting that consumers don’t fully cut spending when faced with a shock. They can also draw down savings. In fact, their marginal propensity to (or not to) consume is generally around 0.7, rarely 1. This behaviour can differ from the government’s, which has fiscal targets and may cut spending elsewhere to bear the oil burden. In short, as the burden starts getting shared by the private sector, the growth shock may ease at the margin. And the price shock may rise. What does it mean for the RBI? As long as pump prices remain unchanged, the central bank can remain more focused on growth, as it currently is, with strong domestic liquidity support. But if the expectation is that pump prices will be raised over time, it cannot avoid the inflation angle. Bottom line: Currently the majority of the oil price burden is being borne by the public sector, i.e. the oil PSUs. For now, it is more a growth shock than a price shock, since most pump prices are supressed. But if the oil shock lingers, and pump prices are raised (say after April state elections), the private sector would partake more evenly in burden-sharing, though the price shock could rise. 3. Will consumers hurt more or corporates? If high oil prices stick for longer, the subsidy bill for the government will rise. It may be a good idea to raise pump prices then, not just for fiscal sustainability, but also other macroeconomic adjustments (e.g. higher pump prices will incentivize lower demand from consumers, lowering oil imports). Once pump prices are raised, consumers and corporates will share a bigger burden than they are bearing now. Who will suffer more? Let’s start with corporates. The pain to corporates from higher oil prices can either be absorbed in the form of lower profits, or can be passed on to consumers as higher prices, or a combination of both. Our analysis suggests that for every 1ppt rise in input costs, profits tend to fall by 0.4ppt (see exhibit 7), and the remaining 0.6ppt tends to be passed on to consumers as higher prices. From this perspective, the burden sharing between corporates and consumers is 40:60. But this is not all that the consumers bear. They grapple with a higher price of petrol and diesel they buy (mostly for transportation), as well as face higher prices for non-oil products which corporates pass on to them. Once we add up across all the channels, we find that the burden-sharing ratio between corporates and consumers is 30:70. This may put a floor on corporate profitability in the short run, but weaker demand would start hurting earnings over time. Bottom line: Corporates tend to split the cost of higher oil prices between lower profits and higher consumer prices in a 40:60 ratio. Consumers bear a double sting –higher pump prices and higher non-oil prices passed on by corporates. The overall burden sharing ratio between corporates and consumers is 30:70. 4. Which variables are coming from a position of strength? Starting points matter. Variables which are coming from a position of strength can withstand the pressure of higher oil prices better and for longer. Here are a few that are worth looking into in descending order: Oil PSU margins – as discussed earlier, because oil PSUs were making good margins in the run up to the oil shock, they can absorb losses for some time, keeping pump prices and inflation under control. Inflation – Good food production and imported disinflation from China kept CPI inflation at low levels in FY26. Even a 0.5-1.5ppt rise led by the oil shock would still keep inflation within the flexible inflation targeting band of 2-6%. As long as these are short term supply shocks of no more than a year, the RBI may not feel pressured to raise rates for now. What is importantthough is that no significant change is made to the Inflation Targeting framework, which is undergoing its periodic review. Now is the time to focus on macro stability and predictability, at least in policy choices. Growth – We find that 86% of the 100 indicators of growth we track were growing at a positive clip in January, making it a strong starting point (see exhibit 8). Having said that, some of this was led by positive supply shocks in 2025 –low oil prices and strong rains. Both may not be favourable in 2026 (the chances of an El Niño lowering rains has risen to 62%). Balance of Payments. External accounts were not as strong before the oil shock. Led by capital outflows, the BoP was in a small negative for two years. And if oil averages USD80/bbl or more in 2026, the BoP could remain in deficit for a third year (see exhibit 9). Market intervention has been high through March with FX reserves falling by USD19bn in a fortnight (27 February to 13 March), taking FX reserves to USD710bn. The INR’s depreciation against the USD has been in line with the regional average since the oil shock started (see exhibit 10, though it has underperformed the region over a one-year horizon). In net terms, FX reserves are even lower given the RBI’s rising short-forward book. The RBI may need to keep an eye on net FX adequacy. And here too, a range of metrics will help, which look not only at trade, but also capital flows and debt obligations. We find months of goods import cover and broad money cover approaching 2013 levels (when India was last under BoP stress), though short-term debt cover looks stronger (see exhibits 11 and 12). Bottom line: In descending order, we outline four. Oil PSU margins were high and are able to withstand losses for now. Inflation was low and can withstand a moderate oil and weather shock, provided no changes are made in the inflation targeting framework which is undergoing review. Growth has been strong, though led by low commodity pricesand normal rains, which are reversing. Alas, the BoP has been in deficit for a while. Some FX adequacy metrics need monitoring. 5. How will various economic variables fare? Having outlined starting points, we discuss pressure points and outline sensitivities for key variables under different oil assumptions for the year (see exhibit 13): Current account deficit – We expect a 10% rise in oil prices to push up the current account deficit by 0.3% of GDP. Capital inflows could also remain challenged in a risk-off setting. This is likely to keep the BoP in another year of deficit. Growth – The main drivers of growth in the previous year are reversing. Both an oil and a weather shock could impact numbers in 2026. It has started off more as a growth shock than a price one with the public sector taking a bigger hit than the private sector. Inflation – The weight of energy in the CPI basket has been raised, but primarily led by administered energy prices. As long as pump prices are kept unchanged, the rise in inflation will likely be rangebound. Wedon’t see average annual inflation crossing the 6% RBI’s upper limit. Fiscal deficit – There will be pressure from lower taxes and higher oil and fertiliser subsidies, but offsets from higher RBI dividend, more inflows into the national small saving fund, and lower-than-budgeted capex. The slippage could remain rangebound if the government eventually raises pump prices (which we expect post the April state elections). Bottom line: We outline sensitivities to various oil prices. The external balance will take an immediate hit. Then comes the growth hit, higher if the public sector is bearing much of the burden. Inflation is set to rise, but could remain below the 6% cap. Finally, allowing pump prices to rise will keep a lid on the fiscal deficit. 6. What can the RBI doon 8 April? The 8 April policy meeting won’t be about what action the RBI takes. We don’t think there are expectations of rates change or other major measures from this policy meeting. But what this meeting will be critical for is communication to address some of the anxiety of the oil price shock. We believe the RBI can bring in some domestic certainty by outlining various scenarios and sensitivities for oil prices, outlining impact on growth and inflation in each. This would help the public get a framework to think about various outcomes. It would also give confidence that the RBI has thought of all possibilities. We expect no rate cutsor hikes in the current cycle, leaving the repo rate at 5.25%. We believe the RBI focuses on 1-year ahead inflation, which may look softer than the upcoming months, provided the oil price shock settles by the year-end. There are worries about the El Niño phenomenon taking shape in 2026 and stoking food inflation. We think the new CPI series may help withstand the El Niño inflation shock better. The overall weight of food has been lowered (from 45.9% to 36.8%). And moreover, the items where weights have been increased (like eggs, meat and fish) are less sensitive to rains, while items where weights have been lowered (like cereals) are more sensitive to rains (see exhibit 14). Bottom line: We believe 8 April meeting will be all about communication to address the anxiety around the oil price shock. We expect the RBI to outline scenarios, sensitivities, and broad tenets of their reaction function. We expect no rate cuts nor rate hikes inthis cycle as we believe the RBI focuses on 1-year ahead inflation, which may look softer than inflation in the upcoming months. https://www.hsbc.com.my/wealth/insights/market-outlook/india-economics/six-questions-as-the-energy-shock-unfolds/

2026-03-23 12:01

Key takeaways Geopolitical uncertainty keeps policy and FX volatile, supporting the USD. The GBP may face stagflation headwinds. The RBA hiked again, underpinning the AUD. FX remains closely tied to energy markets. With limited visibility on the path for energy prices, the USD is likely to stay supported as long as prices remain elevated and risk appetite fragile. However, if geopolitical risks fade, we still see scope for a reversal of much of the USD’s March strength, leaving room for a softer USD by year-end. In March, many central banks chose to hold rates steady to manage heightened geopolitical uncertainty, including the Bank of Canada, the Federal Reserve (Fed), the Bank of Japan, the Swiss National Bank, the Bank of England (BoE), and the European Central Bank. Market pricing suggests that, aside from the Fed, most other G10 central banks are likely to raise rates over the next 12 months (Chart 1). While markets lean towards a more hawkish BoE path, our economists still expect the BoE to cut rates. We also do not see energy-driven hawkishness as a durable driver of GBP strength. Instead, the UK’s stagflation risk is likely to keep the GBP under pressure vs the USD over the long term. Meanwhile, the Reserve Bank of Australia (RBA) raised its cash rate by 25bp to 4.10% on 17 March, marking a second consecutive hike amid inflation concerns. The decision was primarily driven by domestic capacity constraints, although the Middle East conflict also contributed to upside inflation risks. The vote was narrowly split, with 5-4 in favour of the hike. RBA Governor Bullock struck a hawkish tone, framing disagreement as about timing, not the overall rate trajectory. Our economists’ central case remains that additional tightening is required, with a potential hike in May, though global uncertainty increases the risk around this call. Source: Bloomberg, HSBC Source: Bloomberg, HSBC Looking ahead, the AUD is likely to remain sensitive to shifts in global risk sentiment over the near term (Chart 2). The AUD may struggle to outpace the USD, but it is likely to outpace the NZD, given Australia’s strong domestic fundamentals, including a hawkish RBA stance, commodity exposure, a modest current account deficit financed largely through foreign direct investment (FDI) and portfolio inflows, and a comparatively low debt-to-GDP ratio vs other G10 economies. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/most-central-banks-wait-but-the-rba-hikes/