West Asia conflict: RBI flags 6.9% FY27 growth risk

Why the West Asia shock matters for India now

India is entering FY2026-27 with strong domestic demand but a tougher external backdrop, as the war in West Asia disrupts energy and broader supply chains. The finance ministry’s Monthly Economic Review for April described the conflict as a major supply-side shock with rising risks to inflation, trade and financial flows. It cautioned that prolonged uncertainty around energy and fertiliser supplies could test India’s macroeconomic stability. Alongside geopolitics, the review pointed to weather risks, saying the El Niño Southern Oscillation (ENSO) is expected to keep India’s Southwest monsoon below normal, with most rainfall districts likely to see below-normal rainfall.

The combined message from the finance ministry and the Reserve Bank of India (RBI) is that risks are now more asymmetric. The ministry said risks are tilted to the upside for inflation, fiscal and external deficits, and to the downside for economic growth. RBI Governor Sanjay Malhotra also flagged that escalating tensions could weigh on growth and raise uncertainty, even as he underlined the resilience of domestic fundamentals.

Finance ministry: supply shock and demand compression risk

The finance ministry said a “supply shock” is apparent, and warned that demand compression can become a serious concern if high prices and inflation reduce the pace of activity. It flagged the risk of cost-push inflation as producers pass higher input costs to protect margins. The ministry also said repairing damage to oil and gas production and supply infrastructure in the Gulf region may take several months, extending the period of uncertainty.

At the same time, the review argued India has some insulation. It cited strong domestic demand, policy buffers, a resilient financial system, and continued public investment. It also said policy, while striving to sustain growth, is expected to safeguard medium-term fiscal and external stability.

RBI’s policy stance: unchanged rate, “wait and watch”

RBI’s April Monetary Policy Committee (MPC) meeting ended with no change in the policy rate or stance. The RBI kept the policy rate unchanged at 5.25% and maintained a neutral stance. The central bank’s projections reflect a shift from a low-inflation, high-growth setting towards the risk of higher inflation with weaker growth.

RBI now expects GDP growth of 6.9% in 2026-27, with risks tilted to the downside. It also projected inflation at 4.6% for 2026-27, and said inflation risks are tilted to the upside. RBI’s Monetary Policy Report issued on Wednesday projected 6.6% GDP growth for 2027-28, assuming crude oil at $15 per barrel.

Five channels RBI flagged in the shock transmission

In his written statement after the MPC meeting, Governor Malhotra set out multiple ways the war could affect India. Elevated crude oil prices can increase imported inflation and widen the current account deficit. Disruptions in energy, fertilisers and other commodities can hurt industry, agriculture and services and reduce output. Heightened uncertainty and risk aversion can tighten financial conditions and affect domestic liquidity, weighing on consumption and investment.

He also said weaker global growth prospects may reduce external demand and remittance flows. Finally, spillovers from global financial markets can raise borrowing costs and tighten domestic financial conditions. RBI also warned that the initial supply shock can potentially transform into a demand shock over the medium term if supply chain restoration is delayed.

CEA’s warning: “considerable downside” to FY27 growth range

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. In the finance ministry’s monthly review for March, he described four channels of 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.

He also pointed to the fiscal side of the shock, where higher fertiliser and fuel subsidies and potential revenue shortfalls could widen the fiscal deficit, increasing the need to prioritise expenditure.

What market and macro indicators are already showing

The conflict has been associated with visible pressure points across prices, currency and flows in the supplied material. India’s crude basket rose to $111.93 per barrel in March from $19.01 in February, intensifying imported inflation risks. Foreign investors pulled out $13.3 billion in March, while the rupee weakened over 4% against the US dollar since the conflict began and closed at 94.81 on Friday. Separate commentary said rupee depreciation crossed 95 to the dollar.

Bond yields also moved higher on inflation concerns, and equity markets declined, according to the same material. The finance ministry review said investor confidence has been dented, disproportionately affecting Emerging Markets and Developing Economies (EMDEs), including India.

EY and crude sensitivity estimates: how big could the hit be

Ernst and Young (EY), in its “Economy Watch” report, estimated that if disruptions persist throughout FY27, India’s real GDP growth could erode by around 1 percentage point, while CPI inflation could rise by about 1.5 percentage points, from baseline estimates of 7% growth and 4.0% inflation.

Separate commentary quantified oil sensitivity more sharply. 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%.

Key facts at a glance

Financial stability and liquidity: RBI and ministry’s reassurance

Despite the macro risks, the finance ministry said the West Asia crisis is not expected to adversely affect financial stability. It cited strong indicators for capital adequacy, liquidity and asset quality in both scheduled commercial banks (SCBs) and non-banking financial companies (NBFCs). The ministry also said the RBI will continue a proactive approach to ensure adequate liquidity to meet the economy’s productive needs.

In a market note cited in the material, Citibank’s Samiran Chakraborty described the MPC as being in “wait and watch” mode amid heightened uncertainty and a temporary ceasefire that offers time to assess the balance of risks.

What to watch next: prices, monsoon signals, and external flows

For investors and businesses, the immediate watchpoints are crude and fertiliser supply conditions, shipping and logistics costs, and whether inflation becomes more broad-based through cost pass-through. The finance ministry also pointed to ENSO-linked monsoon risks, which can complicate food inflation dynamics in a year already exposed to imported inflation.

On the external side, the combination of crude prices, portfolio flows, and remittance trends will matter for the current account and currency stability. The finance ministry noted that policy will aim to support growth while safeguarding medium-term fiscal and external stability, suggesting trade-offs could intensify if the shock persists.

Conclusion

The finance ministry and the RBI have both framed the West Asia conflict as a supply shock that can raise inflation risks and weigh on growth through multiple channels, including energy, fertilisers, logistics, remittances and financial conditions. RBI has kept policy unchanged at 5.25% with a neutral stance, while lowering its FY27 growth projection to 6.9% and projecting FY27 inflation at 4.6%. The next signals will come from incoming high-frequency data, crude and currency moves, and how quickly global supply chains and Gulf energy infrastructure normalise.