<h1>Exchange rate risk may rise from prolonged Middle East crisis, potentially stoking inflation and straining energy dependent sectors.</h1> Prolonged Middle East escalation can transmit higher energy prices into the domestic economy, creating exchange rate pressure and inflationary impulses via shipping disruptions and damage to regional energy infrastructure; subdued capital flows and a flight-to-safety may aggravate currency weakness, while energy dependent sectors like fertilisers and petrochemicals face vulnerability. Offsetting these risks are ample foreign exchange reserves, a low current account deficit in H1 FY26, still-moderate inflation, strong GDP momentum, and policy measures-including trade diversification and Budget 2026-27 fiscal-capex initiatives-expected to strengthen external resilience.