The report flags economic momentum from the previous fiscal year, evidenced by the downturn in activity during Q1 2026 as a reason behind the cautious outlook. The FY27 GDP forecast is revised downward with the escalating situation in Iran under consideration, that continues to impact global supply chains.
Also read: India’s FY27 GDP growth forecast downgraded to 6.8-6.9% amid energy supply disruptions: Report
“Our Middle East team now expects the conflict to last for another month. Aside from raising business costs through higher energy prices, the conflict will also keep uncertainty elevated. This discourages investment and further drags down GDP growth,” BMI highlighted in its India outlook report.
The GDP growth revision reflects deteriorating high-frequency indicators of economic activity.
As per the report, industrial production grew just 4.3% yoy in Q1 FY26, a climbdown from its 5.3% pace in the previous quarter.
Similarly, the value of real time gross settlement transactions in India’s financial system fell by more than 11 percentage points (pp) to 0.7% yoy.BMI’s highlighted four key reasons behind GDP growth revision to be limited to 0.3p.
Firstly, Reserve Bank of India‘s monetary policy measures remains conducive to growth. In 2025, the central bank cut its policy rate by 125 basis points as inflation plunged. The Fitch unit expects lower interest rates to support the economy this fiscal year.
Secondly, India has access to partial alternatives to energy from the Gulf. Aside from producing coal domestically, New Delhi also imports significant quantities of Russian crude.
Further, the government has taken specific measures to address rising fuel prices, like reducing excise duties and negotiating with Tehran for safe passageway of oil tankers to Indian shores. The Centre has also created $6.2 billion fund to cushion the blow of the shock.
The rupee’s rapid deterioration in March and beyond should support India’s exporters, BMI highlighted as another key consideration behind GDP growth revision.
The report highlighted that risks to the outlook skew downwards, as many of the risks revolve around foreign investments in India, which turned negative on a net basis during the last fiscal year. During the present dynamic geopolitical scenerio, a greater than expected increase in uncertainty or sudden rupee depreciation may hurt business confidence. “This could exacerbate investments outflows and dampen growth,” it warned.
Rise in cose of logistics and trade can pose downside risks to India’s economy, as the ongoing Israel-Iran conflict presents a negative terms-of-trade shock to India.
Under its baseline forecast, even as consumption and investments fall due to costlier energy, BMI report noted that the higher relative price of imports to exports partially offsets domestic demand’s impact on GDP by improving real net exports.
However, higher freight costs could amplify the effects of this terms-of-trade shock by contracting India’s supply of imported inputs or hurting demand for India’s exports.