Economists across CareEdge, Bank of Baroda, and Kotak Institutional Equities warn that the macroeconomic outlook has deteriorated meaningfully since the West Asia conflict began, with a weak, El Nino-hit monsoon and rising fuel costs threatening to compound the strain in the first quarter of FY27.
The grim outlook comes despite India’s growth moderating in Q4FY26. Economists believe that in the March quarter the economy remained partially shielded from the adverse effects of geopolitical tension as the war started in late February. Progress on the global trade front and companies’ reliance on existing inventories also helped cushion the impact of rising input costs.
Earlier, Kotak Institutional Equities report concluded that India’s economy is set to slow sharply in FY27, with GDP growth expected to ease to 6.1% from 7.6% a year earlier and average inflation forecast to double to 5% from 2.5%, as the West Asia conflict drives up crude oil and natural gas prices.
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“Growth momentum is expected to weaken further in Q1FY27 as the impact of the West Asia crisis gradually transmits across sectors of the economy,” CareEdge said.
Growth momentum may weaken further in Q1
CareEdge warned that, beyond the West Asia crisis, India’s economy now faces higher input costs from El Niño-induced weak monsoon conditions.
India’s wholesale inflation rose 8.3% in April, while retail inflation, measured by the Consumer Price Index (CPI), stood at 3.48%.
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“The gradual pass-through of higher energy prices to consumers, coupled with the risk of elevated inflation weighing on real income growth, could dampen consumption demand,” CareEdge said.
Industrial growth faces headwinds: Bank of Baroda
India’s industrial production growth slowed to 4.9% in April 2026 from 5.7% a year earlier. Bank of Baroda cautioned that industrial activity could stay under pressure in the coming months because of geopolitical uncertainty and the ongoing West Asia conflict.
“Since there is no concrete timeline for the war to end, it is likely to have some bearing on industrial growth, especially in Q1FY27,” the report said.
The bank added that heatwave conditions and any delay in the monsoon could lift demand for consumer durables and boost electricity consumption.
“Despite the negative bias from global factors, the Indian economy might see uneven growth in the short term, but it is expected to recover given the underlying strength in the economy,” it said.
Gas supply disruptions cloud manufacturing outlook
Kotak highlighted that manufacturing faced disruptions from gas supply cuts announced for several industries. It also expects agricultural growth to slow to 2.1% in Q4FY26 from 3.8% a year earlier, as higher input costs and unusually high March temperatures weighed on crop production, particularly summer crops.
Kotak also noted that, while corporate sales growth improved in Q4FY26, rising input costs squeezed profit margins.
West Asia conflict clouds the economic outlook
Kotak said India’s macroeconomic outlook, which has weakened since the West Asia conflict began, will impact the corporate earnings and market as well.
“The Indian market’s performance over the next few months would depend on the outcome of the ongoing West Asia war. A swift resolution could result in a moderate negative impact on the macro and limited negative impact on earnings. However, a prolonged crisis could result in a deeper negative impact on both the economy and earnings,” the brokerage said.
The extent of the damage, Kotak said, will depend on how long the conflict lasts and whether the Strait of Hormuz reopens soon, a route India relies on heavily for its oil and gas imports. It warned that the duration and intensity of the conflict will determine the impact on growth, inflation, fiscal balances, and the external sector.
In its base case, Kotak expects the conflict to ease in the coming weeks, allowing oil supplies to normalise gradually and leaving the economy with moderate growth. But it cautioned that “the range of possible outcomes is quite wide” and that a prolonged disruption could place a “large strain on the economy.”
Growth may slow, inflation could rise
Kotak expects India’s GDP growth to slow to 6.1% in FY27 from 7.6% in FY26, while average inflation could climb to 5% from 2.5% the previous year. Higher crude oil prices, weaker monsoon conditions, and rising food prices, it said, pose the main upside risks to inflation.
“We model CPI inflation to average 5% in FY2027 in our base case after 2.5% in FY2026, but we note upside risks from higher-than-assumed crude oil and related raw material prices, weaker-than-assumed monsoons and higher-than-assumed food prices,” Kotak said.
Under its adverse scenario, inflation could rise to 5.5–6%, while GDP growth could slow to 5.5–6%.
The brokerage added that inflation could surprise on the upside if retail fuel prices are raised to reflect higher global crude prices, as companies have already begun passing on rising energy and raw material costs to consumers.
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