India's real GDP is expected to grow at 6.9 percent in 2026-27, according to the RBI’s latest annual report. But the forecast comes with a rider. It rests on the assumption that the Gulf war’s adverse impact would be contained in the near term. What the central bank did not estimate is the possible impact of a prolonged conflict. As the Union finance minister noted, it’s undeniable that the three Fs of forex reserves, fertiliser subsidies and fuel prices are under intense pressure. On its part, the government has raised import duties on gold, and hopes that the higher duties on rising prices along with the Prime Minister’s plea to defer purchases will curb demand and reduce the strain on reserves. Even if the conflict ends soon, the full impact of elevated energy prices, supply disruptions, weakening rupee and trade uncertainty will be ascertained only after a lag. For now, growth is likely to print far lower than the last three years’ average of 7.3 percent.
What’s concerning beyond the headline numbers is whether India will face yet another investment crisis as the global risk appetite weakens. SBI Chairman Challa Sreenivasulu Setty has warned that the war’s risks are increasingly structural, with elevated public debt, volatile energy prices and growing geopolitical fragmentation posing long-term risks to global growth. This is doubly unfortunate for India, which has just overcome a structural slowdown that began before the Covid pandemic. To withstand another similar episode will be devastating for private consumption and investment. However, the RBI is optimistic that demand and supply-side factors would hold up even if the primary sector comes under pressure from a sub-normal monsoon and El Niño conditions. Implementation of various trade agreements is also expected to support growth.
The central bank’s reasons for positivity also includes healthy balance sheets in the corporate and banking sectors along with the government’s continued thrust on capital expenditure. That said, the first major setback will come via inflation, which is projected at 4.6 percent for 2026-27 on the RBI’s assumption that crude prices would average $95 a barrel this fiscal. But if India’s oil basket continues to average $110—as it has during April-May—for even a few more months, inflation and its second-round effects will not be far behind.