Key facts
- The IMF has identified escalating Middle East conflict and El Nino as key risks to India's GDP growth.
- India's GDP growth forecast for FY2026/27 was cut by 10 basis points to 6.4% due to higher energy prices.
- Renewed conflict in the Middle East and the closure of the Strait of Hormuz led to a 16% surge in oil prices.
- High oil prices are expected to negatively impact India's currency, economic growth, and public finances.
- India is seeking to diversify its oil imports to mitigate supply disruptions from the Middle East.
The International Monetary Fund (IMF) has identified escalating geopolitical tensions in the Middle East and the potential impact of the El Nino weather phenomenon as significant downside risks to India's economic growth for the 2026/2027 fiscal year. Ranil Salgado, the IMF's resident representative for India and Bhutan, told Reuters that the re-escalation of the Middle East war could lead to higher oil prices, while El Nino could result in a poor monsoon, both negatively affecting economic activity.
Earlier in July, the IMF had already revised its GDP growth forecast for India downwards by 10 basis points to 6.4% for the fiscal year ending March 31, 2027. This adjustment was attributed to higher energy prices in its baseline forecast, with Deniz Igan, deputy chief of the IMF’s Research Department’s Macro-Financial Division, noting that the positive effects of resilient economic activity seen in high-frequency indicators through April were offset by these energy price concerns.
The situation was exacerbated by the collapse of a U.S.-Iran ceasefire, leading to renewed closure of the Strait of Hormuz and a subsequent 16% surge in Brent crude prices to nearly $90 per barrel within a week. Analysts suggest that sustained high oil prices, particularly if supply remains choked at the Strait of Hormuz, will continue to pressure the Indian currency, economic growth, and public finances.
India, which relies on imports for over 85% of its oil consumption, is actively seeking to diversify its crude sources. While historically importing about half of its needs from the Middle East, refiners are now increasing purchases of Russian oil and exploring supplies from Venezuela and Brazil to compensate for potential disruptions.