West Asia conflict: 2026 India growth, inflation risks

Why the next data batch matters

Seven weeks of war in West Asia is now feeding into a new round of business surveys across multiple economies, with investors watching for signs that growth is slowing while prices stay elevated. Purchasing manager index readings after the first month of the Iran conflict had already shown twin blows to output and inflation, and whether those pressures intensified into month two is now a key focus. The risk being debated is stagflation, a mix of weak growth and high inflation that became synonymous with the 1970s. S&P Global’s PMI-compiler, through chief business economist Chris Williamson, has flagged that risk in connection with the overall global measure in March.

Stagflation talk returns as energy shock spreads

Even with a ceasefire in place, policymakers and economists are warning that the damage is not easily reversible. The International Monetary Fund has cautioned finance officials about a wide range of potential outcomes, including a near-recession for the world economy. IMF Managing Director Kristalina Georgieva told Bloomberg Television that “even if the war ends tomorrow, it would take quite some time for the recovery to kick in” and that “the impact is already baked in.”

Beyond surveys, the week ahead is also set to feature inflation readings in several economies and interest-rate decisions in some emerging markets. A war-driven pickup in inflation numbers from Canada to the UK to South Africa is among the highlights flagged in the broader global calendar.

Strait of Hormuz disruption moves from risk to reality

The disruption to energy routes has become a direct concern for India. One report noted Iran stopped over 14 India-bound ships in Hormuz and hit one by gunfire. India has also condemned an attack on French UN peacekeepers and sought accountability, reflecting how security spillovers are intersecting with economic risks.

India’s Department of Economic Affairs, in its Monthly Economic Review for March 2026, described the outlook as “more uncertain” due to disruptions in global energy and logistics channels. The review pointed to the Strait of Hormuz as a key shock point, saying ship transits through the strait have nearly come to a halt, dropping to “one a week, as against 200-300 a week.” The implication is tighter global oil and gas supply conditions and upward pressure on prices.

RBI Governor Malhotra flags growth and inflation risks

Against this backdrop, Reserve Bank of India Governor Sanjay Malhotra said escalating geopolitical tensions in West Asia could weigh on India’s growth and increase uncertainty, even while he highlighted resilience in domestic fundamentals. In the RBI’s Monetary Policy Committee statement, Malhotra noted that India’s macro fundamentals “exuded confidence” before the war, but “conditions turned adverse in March.”

He said global growth faces mounting downside risks as geopolitical tensions disrupt supply chains and push up commodity prices. Malhotra warned that disruptions in energy and fertiliser markets could have broader macroeconomic implications, including pressure on fiscal balances and external stability. He also said weaker global growth prospects may dampen external demand and reduce remittance flows, while heightened uncertainty and risk aversion could tighten financial conditions and affect domestic liquidity.

CEA Nageswaran outlines four transmission channels

Chief Economic Advisor V Anantha Nageswaran warned of “considerable downside” risk to India’s projected 7-7.4% growth for 2026-27 if the war persists, citing threats to inflation, the fiscal deficit and external balances. In the finance ministry’s monthly economic review for March, he described four channels through which India could feel the impact: supply disruptions to oil, gas and fertilisers and exports; higher import prices; elevated logistics costs; and a possible drop in remittances from Indians working in Gulf countries.

The same review underlined how remittance exposure can become a macro factor. Gulf economies account for about 38% of India’s total remittances in FY24, or around $15 billion, and host nearly half of India’s migrants worldwide. The review also said pressure on the rupee has been compounded by these factors along with portfolio capital outflows, requiring calibrated policy responses.

EY: growth may drop 1 percentage point if disruption persists

Ernst & Young’s report, “Economy Watch: Monitoring India’s macro-fiscal performance,” said the conflict has significantly disrupted global crude oil and energy markets by affecting supply, storage, transportation and prices. EY estimated that if the impact persists throughout FY27, India’s real GDP growth could erode by around 1 percentage point, while CPI inflation could rise by approximately 1.5 percentage points, from baseline estimates of 7% growth and 4.0% inflation.

EY also highlighted India’s external vulnerability, noting the country imports nearly 90% of its crude oil requirements and is highly dependent on imports of natural gas and fertilisers. The report said several sectors could be directly impacted, including employment-intensive areas such as textiles, paints, chemicals, fertilisers, cement and tyres. It also pointed to early signs of softening private sector activity, saying PMI manufacturing fell to a four-and-a-half-year low, while cost pressures intensified as input costs and selling charges rose at the fastest rates in 45 and seven months, respectively.

How the shock can feed into inflation, the rupee and fiscal choices

Separate commentary in the supplied material quantified the sensitivity of output to crude prices and laid out the policy trade-offs for India. It said every $10 rise in crude prices translates into a loss of about 0.5% of GDP. It also warned that if the war persists and oil prices rise by $10 per barrel on average, India’s 2026 GDP growth could drop from a projected 7.5% to a range of 5.5%-6%, while inflation could rise to 5%-6%.

That same assessment noted India forewent ₹10 per litre in excise duty to keep petrol prices from rising, adding fiscal cost, and said G-Sec yields have risen. It also said the rupee depreciation crossed 95 to the dollar, pointing to the tension between inflation management, currency stability and fiscal arithmetic when energy prices move sharply.

Global spillovers investors are tracking

In the global data pipeline, economists expect a sizable jump in overall sales for March in one release largely due to sharply increased gasoline spending, with figures not adjusted for price changes and higher pump costs attributed to the Iran war. In the UK, wage data for the three months through February is expected to show weakening pay pressures, and inflation is predicted to rise to 3.3% in March from 3% as the conflict drove up energy prices.

Elsewhere, Colombian GDP-proxy data for February may show a modest rebound from January, but analysts have been marking down 2026 growth forecasts. The consensus expectation cited is a 2.6% expansion, in line with last year, even as inflation pressures pre-dating the war keep the central bank on a tightening path.

Key figures highlighted in reports and policy statements

What to watch next

The next set of PMI business surveys will be watched for confirmation on whether output is slowing further and whether input-cost pressures remain elevated. For India, policymakers have signalled that external risks from West Asia and commodity volatility will shape the near-term outlook and require close monitoring. The finance ministry’s review also suggested that March data may not capture the full magnitude of risks and that April and May data could provide a clearer read on momentum.

For markets, the key will be how energy and logistics disruptions translate into inflation prints, currency pressure and the policy mix across central banks. In India’s case, the stated concerns span fuel and fertiliser costs, remittances, current account dynamics, liquidity conditions and fiscal space.