India’s GDP growth seen slowing to 6.7% as Iran war drives oil shock: BMI

India's economic growth is likely to decelerate to 6.7 per cent in the current fiscal, from 7.7 per cent in 2025-26, with the GDP expansion expected to slow significantly due to waning momentum and oil price shock from Iran war, BMI said on Monday. BMI, a Fitch Group firm, also said that the prospect of the Iran-US conflict escalating in scope presents downside risk to its growth outlook and India must balance spending needs on defence and fuel price stabilisation against fiscal consolidation agenda. The tax reforms in GST and income tax carried out in 2025 will partly offset effects of cost-push inflation, BMI said, adding looser monetary policy will support capital spending, as increased uncertainty amid the war and higher input prices hurt investment. BMI estimates that India's economy grew 8 per cent y-o-y in the January-March quarter of 2026, faster than its original 7.8 per cent projection.

It has revised its growth forecast for 2025-26 upwards by 0.1 percentage points to 7.7 per cent. "We maintain our forecast of 6.7 per cent GDP growth during FY2026-27 due to our belief that the effects of last year's tax reforms will fade as input costs increase in the new fiscal year," BMI said, adding GDP growth could "slow significantly" due to waning momentum and oil price shock from Iran war. It said one factor behind the unchanged FY27 forecast is its assessment that the effects of last year's tax reforms will dissipate by April-June quarter of 2026. Such waning is already apparent in the vehicle registrations data, showing new registrations grew 9 per cent y-o-y in April after rising 23 per cent in January-March. Likewise, while electricity generation grew 2.7 per cent y-o-y last quarter, the growth was driven by power demand in January-February. During March, electricity consumption rose by a mere 0.9 per cent y-o-y. "We also anticipate restricted supply of energy and food in FY2026-27 to slow consumption growth while raising price inflation," BMI said. It said that conflict in Iran has already curtailed supplies and that has already been factored in the 6.7 per cent growth estimate for FY27. However, India's weather department is also predicting 'below normal' rainfall during this year's monsoon (June-September) due to El Nino. The International Monetary Fund estimates a typical El Nino weather shock hurting India's GDP by 0.1 per cent. "We think this impact could further offset economic momentum inherited from FY2025-26," BMI said.

BMI said its models indicate that GDP growth will fall by up to 0.4-0.7percentage points if the price of Brent Crude rises to around USD 90/bbl. The size of this impact makes India's economy amongst the most sensitive to changes in energy prices within Asia, BMI said. Crude prices have jumped to USD 105/barrel on Monday after the United States rejected Iran's peace proposal, rekindling fears that the blockade of the Strait of Hormuz will continue for a longer time. The prices have jumped from about USD 73/ barrel level prevailing before the war started on February 28. Crude prices touched a 4-year high of USD 126/barrel on April 30.