Moody's Lowers India's Growth Forecast Amid West Asia Tensions

Moody's Ratings has revised India's economic growth forecast for the current fiscal year down to 6% from 6.8%, citing the ongoing conflict in West Asia as a significant factor. The agency warns of rising inflation risks and potential household shortages due to disruptions in LPG shipments. With geopolitical tensions affecting economic stability, Moody's anticipates that policy rates may be held steady or increased gradually. The report also highlights the impact of elevated energy prices and the government's infrastructure spending on investment activity. As India navigates these challenges, the outlook for GDP growth and inflation remains uncertain, prompting concerns about fiscal consolidation and external demand.

By Narendra Chaudhary Apr 6, 2026, 13:28 IST

Economic Growth Projections Adjusted

Moody's Ratings has revised its forecast for India's economic growth for the current fiscal year, reducing it from 6.8% to 6%. The agency cites the ongoing conflict in West Asia as a factor that will dampen growth momentum and heighten inflation risks. In its recent credit opinion report, Moody's highlighted that prolonged disruptions, especially in LPG shipments due to the conflict, could lead to immediate household shortages, increased fuel and transportation costs, and a rise in food inflation due to India's dependence on imported fertilizers.

The region is responsible for approximately 55% of India's crude oil imports and over 90% of its liquefied petroleum gas (LPG) supplies. Moody's noted that while inflation is currently under control, geopolitical uncertainties have shifted the inflation outlook upwards, projecting an average inflation rate of 4.8% for FY27, a significant increase from 2.4% in FY26.

With inflation risks resurfacing and growth remaining strong, the agency anticipates that policy rates may either be maintained or gradually increased in fiscal 2026-27, depending on the length of geopolitical tensions and their impact on food and fuel prices.

Moody's report, dated March 31, indicates that due to India's economic ties to the ongoing military conflict in the Middle East, real GDP growth is expected to slow to 6% in fiscal 2026-27, influenced by weaker private consumption, reduced industrial activity, and a decline in gross fixed capital formation amid rising prices and higher input costs.

Last month, the Organisation for Economic Cooperation and Development (OECD) also projected a decrease in India's GDP growth to 6.1% for the current fiscal year, down from 7.6% in 2025-26. Additionally, an Economy Watch report by EY suggested that India's real GDP growth for FY27 could drop by about 1 percentage point, while retail inflation might increase by approximately 1.5 percentage points if the conflict in West Asia continues through 2026-27.

Domestic rating agency ICRA forecasts a moderation in growth to 6.5% for FY27, attributing this to the negative effects of high energy prices and concerns regarding energy availability due to the West Asia conflict. However, it noted that the government's ongoing focus on infrastructure investment and gradual easing of trade barriers would continue to bolster investment activity.

India's real GDP growth was robust at 7.5% in the calendar year 2025, an increase from 7.2% in 2024, making it the highest among G-20 economies, primarily driven by a strong recovery in manufacturing.

Moody's also pointed out that elevated prices for oil, gas, and fertilizers would increase pressure on targeted subsidies, leading to higher government expenditures and reduced revenue compared to budget forecasts. Since the U.S. and Israel initiated military actions against Iran on February 28, global crude prices have surged nearly 50%, prompting significant retaliation from Tehran.

The recent reduction in excise duties on petrol and diesel is expected to negatively impact tax revenues. Persistently high input costs are likely to constrain household consumption and reduce corporate profitability, which in turn could soften GST collections and corporate income tax revenues.

Moody's anticipates that the combination of increased expenditure commitments and weaker revenue generation will limit fiscal space and slow down fiscal consolidation unless offsetting revenue measures or expenditure rationalization are implemented.

The agency expects a gradual consolidation of debt, aligning with the government's medium-term goal of reducing central government debt to around 50% of GDP by 2030-31, down from approximately 57% in 2024-25.

In 2025, India's current account deficit slightly decreased to about 0.4% of GDP from 0.9% the previous year, and it is projected to remain between 1-1.5% of GDP for 2026 and 2027. This stable external position is largely due to a gradual rise in goods exports, counterbalanced by high goods imports, particularly in fuels and raw materials.

Moody's expects that while goods and services exports will remain relatively stable, goods imports will increase due to higher global commodity prices, depending on the duration of the ongoing conflict in West Asia, which could widen India's current account deficit. The agency also foresees higher import costs as India seeks alternative and potentially pricier sources of fertilizers and gas.

Trade disruptions in West Asia, a crucial market for India's agricultural exports, are likely to dampen external demand, further contributing to the widening current account deficit. Additionally, remittance inflows pose another vulnerability, as the Gulf region accounts for around 40% of total remittances.