MUMBAI: Despite every other economist revising down their growth forecasts for the country by 50-110 bps to a low of 5.9% next fiscal due to the many shocks from the Iran war, the largest rating agency S&P Global has raised its forecast by 20 bps to 7.1%. It cited private consumption, investment and exports as the key drivers, but warned that the war could strain the fiscal position due to higher energy prices.
The upward revision signals the agency’s confidence in the country's economic momentum driven by domestic consumption, irrespective of rising global uncertainties.
"We project real GDP growth to moderate to 7.1% in the fiscal year ending in March 2027, up by 20 bps from the previous forecast, but down 7.6% in fiscal 2026. Key drivers are resilient private consumption, a modest recovery in private investment, and solid exports," S&P Global Ratings said Wednesday.
For fiscal 2026, it has revised upwards its forecast by 40 bps to 7.6% and for fiscal 2027 by 20 bps to 7.1%.
The ratings agency, which has the lowest investment grade sovereign rating for the country at BBB-, has also upgraded its projections for the following years, increasing FY28 growth by 20 bps to 7.2% and for FY29 by 20 bps to 7%, pointing to sustained expansion over the medium-term.
Moody’s Analytics had on Monday revised down the GDP forecast for the next fiscal by 50 bps to 6.9%, but warned that if the war lasts longer, it could shave as much as 400 bps off the economy next fiscal. On Tuesday, economists at the leading Wall Street brokerage Goldman Sachs slashed their forecast by as much as 110 bps to a low 5.9%. Both cited the many ripple effects of the Iran war on the economy from both macro and micro levels as the war has sent oil prices soaring by over 50% and left 20% of global oil supplies out of the market as Iran has closed the Strait of Hormuz.
S&P cited strong private consumption, investment, and exports as key drivers of growth for the next fiscal and its optimism comes from the belief that the country will continue to be a fast-growing major economy, despite potential risks like rising energy prices.
However, the report notes that geopolitical tensions in the Middle East could strain the fiscal position due to potential impacts on energy prices and trade.
The report said higher crude prices will likely widen the trade deficit, but a healthy surplus in services trade should help contain the current account deficit.
It said the Middle East conflict will weigh on the Asia Pacific economies with many nations being major net energy importers relying heavily on Middle East supply.
"Higher energy prices erode purchasing power and depress domestic demand. In countries such as India, Indonesia, Japan, Malaysia, and Thailand, higher prices will force greater spending on subsidies and thereby strain fiscal positions," it added.
S&P's baseline forecasts assume Brent to average $92 a barrel in the June quarter and about $80 in 2026. The baseline forecast assumes that the Strait of Hormuz will face material disruptions until early April, with flows recovering gradually thereafter.
However, in an unfavorable scenario, where the energy market disruption is more pronounced and lasts longer, and Brent crude may average at $185 a barrel in the June quarter, and almost $130 in 2026, S&P said the Reserve Bank will likely tighten policy in response to energy-price inflation after assessing its persistence.
On the policy front, it expects the Reserve Bank to keep interest rates unchanged, maintaining a neutral stance in the base case as it balances growth and inflation dynamics. However, S&P flagged emerging risks from rising fuel prices and elevated crude oil levels, which could push inflation higher.
However, if crude hardens in the worst case scenario “then we would expect one 25 bps rate hike in the second half," S&P said.
Consumer price inflation is now projected to rise to 4.3% in FY27 from 2.5% in FY26, reflecting these pressures.
