Winning Bizness Desk

Mumbai. India’s economic growth is expected to slow in the current financial year as global uncertainties triggered by the US-Iran conflict begin to weigh on economic activity. Global ratings agency Fitch Ratings has lowered its GDP growth forecast for India for FY2026-27 to 6.4%, down from its earlier estimate of 6.7%. The agency believes that rising crude oil prices, weakening consumer spending and prolonged disruptions in global energy supplies will affect growth, particularly during the September and December quarters. Despite the downgrade, Fitch expects domestic demand to remain the primary engine of economic expansion.

Energy crisis casts shadow on economy

In its June Global Economic Outlook report, Fitch said the ongoing US-Iran conflict has intensified concerns over global energy supplies. The agency noted that the resulting oil shock is likely to have a visible impact on both the global and Indian economies.

The slowdown is expected to be most pronounced during the second and third quarters of FY27. Higher fuel prices are likely to increase business costs and reduce purchasing power, creating pressure across sectors dependent on energy and transportation.

Consumer spending likely to weaken further

Fitch believes rising prices are eroding real incomes, leaving households with less money to spend. As a result, consumer expenditure, a key pillar of India’s growth story, could come under pressure in the coming months.

At the same time, the agency pointed out that capital expenditure within the country continues to remain resilient, offering some support to economic activity.

Key reasons behind the slower growth outlook:

• Rising global oil prices due to geopolitical tensions
• Declining real incomes affecting household spending
• Persistent disruptions in energy supply chains
• Pressure on inflation and borrowing costs

Hormuz closure pushes crude oil estimates higher

A major concern highlighted by Fitch is the continued closure of the Strait of Hormuz, one of the world’s most important oil transit routes. According to the agency, the route has remained shut for the past 14 weeks and is unlikely to reopen before July.

Reflecting the worsening energy situation, Fitch has revised its forecast for average Brent crude prices in 2026 from $70 per barrel to $87 per barrel. Fuel prices have already increased by around 4-5% in recent weeks.

Even so, the agency expects domestic demand to remain the biggest contributor to India’s growth. Lower imports in real terms are also expected to support growth through a positive contribution from net external demand.

Inflation may climb to 5.3% by year-end

Although India’s retail inflation based on the Consumer Price Index currently stands at 3.5%, and wholesale inflation was 8.3% in April, Fitch warned that inflationary pressures are steadily building.

The agency expects inflation to rise to 5.3% by the end of the calendar year because of favourable base effects fading away and rising energy costs. Additional risks stem from heatwave conditions in several regions and forecasts of below-normal monsoon rainfall.

Important inflation triggers:

• Expensive fuel and energy imports
• Heatwave conditions affecting supply
• Concerns over weaker monsoon performance
• Higher transportation and logistics costs

RBI may raise rates; rupee remains stable

With inflation pressures increasing, Fitch expects the Reserve Bank of India to consider tightening monetary policy. While the RBI kept the repo rate unchanged at 5.25% during its April policy meeting, the ratings agency believes a supply-driven inflation shock could prompt a rate hike to 5.5% later this year.

Notably, the RBI itself reduced its growth projection to 6.6% last week and estimated inflation at 5.1%.

Fitch, however, offered some reassurance on the currency front. It does not foresee any sharp depreciation in the Indian rupee during the remainder of the year and expects the average exchange rate to remain around 97.50 against the US dollar.

Global growth outlook also downgraded

The agency has lowered its global growth forecast for 2026 by 0.2 percentage points to 2.4%, citing the impact of higher oil prices. Fitch Chief Economist Brian Coulton said the oil price shock is hurting global economic activity, although heavy investment in the IT sector is helping offset some of the damage, particularly across Asia.

Fitch does not view the present oil disruption as severe as the crises witnessed during the 1970s. In 1979, real crude oil prices touched nearly $170 per barrel, while global dependence on oil was significantly higher. Today, oil consumption accounts for a much smaller share of global GDP.

Looking ahead, Fitch expects India’s economy to regain momentum in FY2027-28, with growth improving to 6.7% as energy-related pressures ease and consumer spending and investment recover. The agency expects growth to eventually settle back to its long-term trend rate of 6.4% in FY2028-29.

Rating agencies such as Fitch Ratings, Moody's and S&P Global Ratings assess the financial strength, policy framework and debt-servicing capacity of countries and companies. Their forecasts and ratings are closely watched by global investors and can significantly influence investment flows into emerging economies like India.