India’s overseas money flows hit a stress test

A critical external lifeline under strain

Economists flag downside risks

Multiple channels amplify the shock

Short-term pain, medium-term ambiguity

Currency, capital flows and household impact

Buffers remain, but so do vulnerabilities

Ground stress emerges in the Gulf

A delicate balancing act

India’s remittance engine is staring at a stress test it hasn’t quite encountered in years.For a long time, the country’s external sector has rested on a quiet but powerful cushion: a steady flow of money sent home by Indians abroad.As conflict involving Iran and US–Israel escalates in West Asia, alongside the Trump administration’s actions on Iran, spilling beyond geopolitics into labour markets and household incomes, India’s remittance story is entering a more uncertain chapter.The Economic Survey 2025–26 notes that private transfer receipts, primarily remittances, continue to be a “key source of external-sector strength.”Inflows rose to $73 billion in the first half of FY26, up from $64.7 billion a year earlier.Over time, these flows have expanded sharply — from $55.6 billion in FY11 to $135.4 billion (provisional) in FY25 — accounting for about 3.5% of GDP, according to the Survey.More importantly, remittances have not just grown, they have become structurally central.This strength has also coincided with a shift in geography.As per the RBI, as mentioned in the Economic Survey, remittances for FY24 reveal notable shifts in remittance composition, geography, and mode of transfer.While Gulf Cooperation Council (GCC) countries historically dominated, advanced economies now account for a rising share, led by the United States (27.7%), followed by the United Arab Emirates (19.2%), the United Kingdom (10.8%), and Singapore (6.6%).Reserve Bank of India data further shows that six GCC countries together accounted for 37.9% of the $118.7 billion remittances received in 2023–24.The shift reflects the increasing contribution of skilled and professional Indian workers. Yet the legacy dependence on the Gulf remains significant, and that is where the current risks are concentrated.These micro-level disruptions feed directly into one of India’s most important macroeconomic buffers.“Remittance inflows are also likely to be affected, as about 38% of total inward remittances originate from the Middle East, half of which come from the UAE alone,” according to a report by SBI Funds Management.According to the Ministry of External Affairs, with nearly 8.9 million Indians working across Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the UAE, the scale of dependence is substantial.There is broad agreement among economists that remittances will come under pressure if the conflict persists, though views differ on the magnitude, with estimates indicating a potential 10–30% decline under sustained disruption.“Offshore remittances have been a steady source of support for India’s external balances, offsetting nearly half of the goods trade deficit,” said Radhika Rao, senior economist at DBS Bank.“While in the early stages of the cycle there may be a tendency to front-load remittance transfers to safeguard beneficiaries’ spending capacity, a prolonged conflict could alter these decisions.”She added: “The Gulf region made up nearly 40% of the total remittance inflows into India, with workers in hospitality, retail and construction likely to be amongst the most vulnerable from an economic slowdown, which consequently will slow inflows by 10-20%.”On the macro side, the implications could be significant.“Slower remittances in addition to a wider energy import bill could potentially take the full year current account deficit closer to 2% of GDP.”Despite this outlook, the deficit remains modest in the near term, moderating to $15 billion (0.8% of GDP) in H1 FY26 from $25.3 billion (1.3% of GDP) in H1 FY25, according to Ministry of Finance data from January.As a net importer of oil and other key energy commodities, the country faces the twin headwinds of a wider current account gap and weak capital inflows, in the face of high prices and delayed supplies.This raises the risk that the balance of payments could remain in deficit not just for two consecutive years, but for three, marking a first for the economy, she said.Others see sharper downside risks.“Escalation of conflict in the Middle East is going to impact remittances drastically in the short to medium term through various channels,” said S P Sharma, chief economist at Assocham.“This would occur because of fear and panic in business confidence which will have a prolonged impact on the overall remittances scenario. The downside risk could be at least more than 30% in the short to medium term.”At the same time, he added a note of macro resilience: “We don’t see a major impact on India’s GDP, although a slight impact on higher growth can’t be ruled out. The Indian economy is expected to grow above 7% but certainly the West Asia crisis will have an impact on our balance of payment (BoP).”On the current account: “There will be a significant impact on the current account deficit. CAD may witness some diversion from the trend of post COVID years (less than 1% of GDP in 2023-24 and 2024-25) to a higher level.”The remittance risk is only one part of a broader external shock.“The Middle East conflict not just springs up an energy shock, but also a trade shock, a freight cost shock and a remittance income shock,” said Dipti Deshpande, principal economist at Crisil.“Its impact on India flows through four key channels – exports, input costs, capital flows and uncertainty.”She pointed out that about 13% of India’s goods exports are directed to the region — across engineering goods, chemicals, gems and jewellery, and food products — making them vulnerable if trade routes remain disrupted.“Similarly, higher input costs – energy, fertiliser – push up manufacturers’ cost of production,” she said, adding that these would also increase the import bill and widen the trade deficit.“The pressure on the current account deficit (CAD) could increase further if remittance flows weaken. Remittances have played a sizable role in keeping India’s CAD in check in recent years. In fact, in fiscal 2025, the quantum of remittances was large enough to fund about 18-19% of India’s import bill.”However, she cautioned against drawing definitive conclusions too early.“Remittances from the Middle East remain sizable at about 38% of total remittance inflows and the ongoing conflict introduces an element of risk to these. However, it is still early to assume such weakness. Rebuilding activity in the Middle East could potentially create demand for workers.”Dr N R Bhanumurthy, director at the Madras School of Economics, sees the trajectory as more layered and contingent on how the conflict evolves.“The Middle East is a major source of inward remittances for India. Even before the West Asia conflict , my own assessment was that in FY26 it could be far less than in FY25 as the US, another source of remittances, has imposed tax as well as the tariff impact on remittances. The West Asia war only aggravates the problem.”On trade dynamics, he added: “With the war, the demand from GCC on India exports could take a hit in the short term. However, once the war ends, as their supply and production chains are largely damaged, it is possible that they might depend on countries like India for their final consumption.”For the current account, the threshold is clear: “With remittances taking a hit and also due to trade shock, the current account deficit could widen sharply. Fortunately, India’s CAD before the war erupted was very low. Now even if it widens to 2%, India could manage. But anything over 2% would be a cause for concern.”The risks extend beyond the current account to currency stability and capital flows.“Rupee has been depreciating since the Trump tariffs… with the West Asia war, it has depreciated by over 11%,” Bhanumurthy said.“As we write this, the exchange rate hit 95 rupees per dollar for the first time… But then Rupee is not the only currency that took a hit. Most of the emerging Market Economies (EMEs) have also witnessed such sharp depreciations.”Assocham’s Sharma, meanwhile, emphasised the role of structural strengths: “India’s external sector resilience is majorly supported by services sector exports and capital inflows. Services sector exports are expected to remain intact as major markets are in America and Europe. Capital inflows are also expected to rebound as India is a long-term growth story.”Yet at the household level, the impact could be more immediate — particularly in remittance-dependent regions.DBS Bank’s Rao pointed to possible policy responses. “If remittance-dependent households face income pressure, targeted fiscal support — such as rural transfers or employment schemes — can help sustain consumption and limit second-round effects on growth.”India enters this period with significant buffers. As per Ministry of Finance data from January this year, foreign exchange reserves stand at $701.4 billion, covering around 11 months of imports and about 94% of external debt. The current account deficit remains modest at 0.8% of GDP in H1 FY26.But economists caution that buffers can only absorb shocks — they cannot fully offset sustained disruptions in flows.“There are enough reserves to mitigate the shocks in the external account. However, there are some limitations on this,” Bhanumurthy said, pointing to the need to attract FDI and sustain reform momentum.He also highlighted the broader channels of stress.“There could be at least five channels through which the conflict could inflict the Indian economy: apart from three traditional channels – price, fiscal and trade channel – there are two other channels – remittances and capital flows.”The early signs of economic strain are already visible in the UAE, one of the largest contributors to India’s remittance flows.As per a recent ET report, the UAE economy is beginning to show early signs of stress as the Gulf conflict stretches beyond a month, with layoffs, salary cuts, and unpaid leave emerging across sectors such as hospitality, travel, events, and food and beverage.“Job losses and salary reduction are already happening in some companies in the UAE since last week,” Sarah Brooks, managing director, Fikrah HR, told ET. “It's across many companies and industries unfortunately, some are hospitality, retail, and food & beverage.”The response from firms mirrors the pandemic playbook.“They are providing unpaid and annual leaves, air tickets to facilitate team members travelling home. Fewer are being laid off, they are working to preserve employment knowing that business will return and the team would be needed in time,” Brooks said.But the scale of disruption is widening.“About 60% of the impact is on the hospitality industry and the events segment, while the remaining 40% is spread across other sectors,” Amruta Heblikar, founder of Virtual Key, told ET.“Salary reductions are already happening. In many companies, pay cuts range from about 20% to even 50%. The situation is getting worse by the day.”According to data from Biz2X, consumption activity in the UAE has declined by 25–30% since the war began, based on point-of-sale (PoS) transactions.“The steepest decline has been in tourism, travel, hotels and high-end restaurants, where transactions have fallen by as much as 60%,” said Rohit Arora, CEO and co-founder of Biz2X and Biz2Credit.Market research firm Redseer Middle East’s managing director Sandeep Ganediwalla told ET that discretionary categories such as electronics, furniture, and apparel have declined 35–38%, while business formation and real estate-linked activity have slowed sharply.Events have been paused for months, compounding the hit to employment.For now, India’s external sector remains stable, supported by strong services exports, rising remittances and robust reserves. But the evolving conflict in West Asia is testing one of its most reliable anchors — remittances.