US-Iran Conflict, Rising Crude Prices and Inflation Risks Could Weigh on Consumer Demand and Economic Momentum

India’s economic growth is expected to moderate in the current financial year as higher global oil prices and inflationary pressures begin to impact domestic demand. Global rating agency Fitch Ratings has revised its GDP growth forecast for FY27 to 6.4%, down from its earlier estimate of 6.7%, citing the economic fallout from the ongoing US-Iran conflict and the resulting surge in energy prices.

The revised forecast comes at a time when concerns over global supply disruptions and elevated crude oil prices are increasing uncertainty across major economies. Fitch believes India will remain one of the fastest-growing large economies in the world, but growth is likely to slow from the robust 7.4% recorded in FY26.

Oil Price Surge Emerges as Key Risk

According to Fitch, the biggest challenge facing the Indian economy is the sharp rise in energy prices following disruptions in global oil markets. The prolonged closure of the Strait of Hormuz, one of the world’s most important oil shipping routes, has pushed crude prices significantly higher and raised concerns about supply shortages.

The agency has revised its average Brent crude oil price assumption for 2026 to $87 per barrel from the earlier estimate of $70 per barrel. Higher fuel costs are expected to increase transportation, manufacturing and logistics expenses, creating broader inflationary pressures across sectors.

Consumer Spending Likely to Slow

Fitch expects the economic slowdown to become more visible during the second and third quarters of FY27. Rising fuel and commodity prices could reduce household purchasing power, leading to softer consumer spending.

Private consumption remains a major pillar of India’s growth story, and any prolonged increase in living costs may affect discretionary spending on goods and services. While urban demand has shown resilience in recent quarters, inflationary pressures could limit the pace of recovery.

Inflation Outlook Turns Challenging

Although consumer inflation has remained relatively contained so far, Fitch believes price pressures are beginning to build. The agency expects inflation to rise steadily through the remainder of the year and could reach around 5.3% by the end of calendar year 2026.

Additional risks stem from weather-related factors. Forecasts of below-average monsoon rainfall and persistent heatwave conditions in several regions may affect agricultural output and food prices, further complicating the inflation outlook.

RBI May Need to Tighten Policy

With inflation expected to move higher, Fitch believes the Reserve Bank of India may have limited room to maintain an accommodative stance. The agency expects the central bank to raise interest rates once during the fiscal year, taking the policy rate to approximately 5.5%.

A rate increase would be aimed at controlling inflation and preserving macroeconomic stability, though higher borrowing costs could also moderate investment and consumption activity.

Domestic Demand and Capex Offer Support

Despite the downgrade, Fitch remains optimistic about India's medium-term prospects. Government-led infrastructure spending, private sector investments and manufacturing expansion continue to provide support to economic activity.

The agency noted that domestic demand will remain the primary driver of growth, while lower imports may contribute positively to net external demand. Continued investment in infrastructure, digital transformation and manufacturing capacity could help cushion the economy from global headwinds.

Global Growth Forecast Also Revised Lower

The impact of the oil shock is not limited to India. Fitch has reduced its global growth forecast for 2026 to 2.4%, citing weaker economic prospects across several regions due to higher energy costs.

However, the agency noted that strong investment in technology and artificial intelligence infrastructure worldwide is helping offset some of the negative impact of rising oil prices. Increased spending on digital infrastructure, cloud computing and AI-related projects is expected to support economic activity, particularly across Asia.

Growth Recovery Expected in FY28

Looking beyond the current fiscal year, Fitch expects India’s growth trajectory to improve once energy market disruptions ease. The agency projects GDP growth of 6.7% in FY28 as inflation moderates and consumer demand recovers.

Stronger investment activity, improved household spending and easing commodity prices are expected to support the recovery. Over the longer term, Fitch sees India’s economy stabilizing around a trend growth rate of approximately 6.4%.

Outlook Remains Resilient Despite Challenges

While global uncertainties and geopolitical tensions have increased near-term risks, India's economic fundamentals remain relatively strong. Robust infrastructure investment, a growing manufacturing base, improving formalization of the economy and expanding digital adoption continue to support long-term growth prospects.

However, policymakers and investors will closely monitor developments in global energy markets, inflation trends and monetary policy decisions in the coming months, as these factors are likely to determine the pace of economic growth during FY27.