The ongoing US-Iran war, along with the resulting energy shock, supply chain disruptions, and elevated inflation, could weigh on India’s economic growth in FY27, according to UBS.
The global brokerage has revised its India GDP growth forecast downward to 6.2% for FY27, from its earlier estimate of 6.7%, factoring in higher crude oil prices, supply-side disruptions, and expectations of a below-normal monsoon.
“We believe the ongoing energy shock would weigh on consumer sentiment, real incomes and spending, while adversely affecting industrial growth and squeezing margins for several sectors. We think investment growth will slow down amid rising input costs and weak sentiment due to geopolitical uncertainty,” UBS said in a report.
UBS’s baseline assumptions include the Indian crude oil basket averaging $100 per barrel in FY27.
Describing the Middle East conflict as a “historically large energy shock with asymmetric macroeconomic risks,” UBS noted that disruptions have extended beyond crude oil to refined products, shipping, and broader supply chains, raising the risk of non-linear spillovers to both global and domestic economies.
In addition, the India Meteorological Department (IMD) has projected a sub-normal monsoon, with rainfall during the June–September period expected at 92% of the long-period average — the lowest first long-range forecast in at least 26 years.
The weather agency has also assigned a 35% probability to a ‘deficient’ monsoon, higher than the likelihood of ‘sub-normal’ rainfall, underscoring elevated downside risks.
“Our analysis suggests that a deficient monsoon poses moderate downside risks to India’s GDP growth, primarily through its impact on agriculture and rural demand. However, the spatial and temporal distribution of rainfall will be critical to monitor,” UBS added.
Economic momentum shows signs of moderation
UBS observed that India’s economic momentum had already begun to ease in March, with manufacturing activity weakening, core sector growth slowing, and fertiliser production contracting sharply due to gas shortages and rationing.
The brokerage outlined two alternative scenarios, both assuming weak monsoon conditions:
Upside scenario: A swift de-escalation in geopolitical tensions, with the Indian crude oil basket averaging $85 per barrel and gradual resumption of flows through the Strait of Hormuz during the June quarter.
Downside scenario: A prolonged energy shock involving further damage to energy infrastructure, pushing crude prices to around $150 per barrel.
Under the upside scenario, India’s GDP growth could recover to around 6.5% year-on-year. However, in the downside scenario, growth could slow more sharply to 5%–5.5%.
Rate hikes back on the table
UBS now expects headline CPI inflation to average 5.2% year-on-year in FY27, revised up from its earlier estimate of 4.6%, and significantly higher than the 2.1% level seen in FY26.
Even if the geopolitical conflict eases, UBS believes inflation risks are likely to persist longer than growth risks.
Against this backdrop, the brokerage expects the RBI’s Monetary Policy Committee (MPC) to gradually shift towards rate hikes in the second half of FY27, moving away from its earlier expectation of a prolonged pause.
With banking system liquidity currently comfortable and overnight rates trading near the lower end of the policy corridor, UBS expects the RBI to gradually push overnight rates higher and normalise liquidity towards a more neutral stance.
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