India’s economic growth could slow sharply in FY27 as the ongoing Middle East conflict triggers a prolonged energy shock, disrupts supply chains and pushes inflation higher, according to a new report by UBS Research. 

The global brokerage has cut its FY27 India GDP growth forecast to 6.2% from 6.7%, warning that risks remain tilted to the downside if oil prices stay elevated and monsoon conditions worsen. 

The report said the conflict has evolved beyond crude oil disruptions and is now impacting refined fuel supplies, shipping routes and industrial supply chains, creating what UBS described as a “historically large energy shock” for emerging markets like India.

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At the same time, the India Meteorological Department’s first long-range forecast has projected sub-normal rainfall for the 2026 monsoon season, adding pressure on rural demand and food inflation. 

Economic momentum already slowing 

UBS said India’s economic momentum had already started moderating in March. Manufacturing activity weakened, core sector growth slowed and fertiliser production contracted sharply amid gas shortages and rationing. 

While demand indicators such as auto sales and bank credit growth remained resilient, supply-side disruptions have started affecting several sectors disproportionately. 

The brokerage now expects India’s real GDP growth to moderate to 6.2% in FY27, assuming the Indian crude basket averages around $100 per barrel. 

However, it outlined two alternate scenarios. In a quick de-escalation scenario, where oil prices ease to around $85 per barrel and supply routes normalise, India’s growth could recover to 6.5%. In a prolonged disruption scenario with oil prices surging toward $150 per barrel, GDP growth could slow sharply to 5-5.5%. 

Rural and urban consumption under pressure 

According to UBS, household consumption — which accounts for nearly 56% of India’s GDP — faces rising pressure from higher inflation, lower real incomes and weaker employment conditions. 

Fuel and transport together make up roughly 15-16% of household expenditure, making consumers vulnerable to sustained energy price shocks. The report also warned that Indian households are now more exposed to financial market volatility than in previous cycles because equities and mutual funds account for a growing share of household savings. 

Rural demand could weaken further if rainfall remains below normal. UBS noted that more than 60% probability of El Niño conditions during the June-September period raises risks for agricultural output, rural wages and FMCG demand. Rural India contributes around 38% of total FMCG consumption. 

Urban consumption is also expected to come under stress from slower wage growth, weak hiring trends in the IT sector and negative wealth effects caused by equity market weakness. UBS noted that corporate salary growth remains well below post-pandemic averages while AI-led disruptions continue to weigh on technology sector hiring. 

Export weakness and rupee risks rise 

On the external front, the report flagged growing vulnerabilities in India’s trade balance and currency outlook. 

Goods exports to the UAE and Saudi Arabia reportedly plunged more than 50% year-on-year in March because of disruptions around the Strait of Hormuz. India’s current account deficit is projected to widen to 2.5% of GDP in FY27 while foreign portfolio outflows remain elevated. 

UBS now expects the rupee to weaken further and forecast USD/INR at 96 by FY27-end. 

Inflation concerns may push RBI toward rate hikes 

The brokerage also warned that inflation risks are becoming more persistent. 

Headline CPI inflation is now expected to average 5.2% in FY27, up from an earlier estimate of 4.6%, driven by higher fuel prices, costlier airfares, supply chain disruptions and food inflation risks linked to weak rainfall. 

UBS said even if the geopolitical conflict eases, inflationary pressures may linger longer than growth concerns. 

That shift in inflation expectations could eventually force the Reserve Bank of India to reconsider its monetary stance. UBS now expects the RBI’s Monetary Policy Committee to gradually pivot toward rate hikes in the second half of FY27 instead of maintaining a prolonged pause as previously anticipated. 

Government likely to rely on fiscal support 

Despite the risks, UBS said India’s energy supply situation remains manageable for now because of the country’s large refining capacity, diversified sourcing strategy and government intervention measures. 

India has increased purchases of Russian crude while expanding LPG and LNG imports from countries including the US, Norway, Canada, Australia and Russia to reduce dependence on Middle Eastern supplies. 

The report added that the Centre is likely to rely more on fiscal measures than monetary easing to cushion the economy from the energy shock. UBS expects the government to stick broadly to its revised fiscal deficit target of 4.4% of GDP in FY27, though a temporary overshoot remains possible if energy disruptions persist for longer.