Moody’s cuts India’s 2026 growth forecast to 6% on high energy costs amid West Asia war

India remains particularly vulnerable to high oil prices, given its dependence on imported crude oil and liquefied natural gas, Moody’s said

Moody’s Ratings on Tuesday cut India’s economic growth forecast for 2026 by 0.8 percentage points to 6% on subdued private consumption, capital formation, and industrial activity amid higher energy costs triggered by the West Asia war.

The ratings agency also lowered its 2027 growth projection for India by 0.5 percentage points to 6%, saying a prolonged conflict and fragile ceasefire between the US and Iran could keep growth subdued.

In its Global Macro Outlook May 2026 update, Moody’s said the impact of higher energy prices and disruptions in fuel and fertiliser supplies would vary across economies over the next six months, depending on their exposure and resilience.

“The global outlook remains highly uncertain amid an increasingly prolonged confrontation and fragile ceasefire between the US and Iran. Drawn-out negotiations, ongoing shipping blockades and the risk of military escalation threaten the truce’s durability,” Moody’s said. ”Against this unstable backdrop, the global economy faces another potential energy and food-price shock, particularly if transit flows to and from the Gulf remain constrained.”

Particularly vulnerable

India remains particularly vulnerable to high oil prices, given its dependence on imported crude oil and liquefied natural gas, Moody’s said.

While India could benefit in the near term from higher agricultural export prices as a net grain producer, rising fuel and fertilizer costs would strain government finances and potentially limit planned capital expenditure, it added.

“Coal powers about 70% of India’s electricity generation, while non-fossil sources (solar, wind, hydro) continue to expand. Our central scenario projection of 6.0% growth in both 2026 and 2027, following 7.5% growth in 2025, reflects more subdued private consumption, capital formation, and industrial activity amid tighter financial conditions,” Moody’s said.

Persistently high energy costs would keep inflation elevated, compress profits, weaken investment and strain public finances, while major central banks remain on hold but ready to tighten financial conditions if necessary, it added.

The ratings agency has projected India’s inflation to remain 4.5% in 2026, up 1 percentage point from its earlier estimate. Inflation is expected to remain elevated at 4.3% in 2027, 0.3 percentage points higher than previously forecast.

Threatened durability

The US-based rating agency said drawn-out negotiations between US and Iran, ongoing shipping blockades and the risk of military escalation threaten the truce’s durability.

“In our optimistic scenario, extended negotiations reopen the Strait, but fragile trust, logistical bottlenecks and inventory rebuilding keep prices elevated,” Moody’s said.

“By contrast, our pessimistic scenario assumes a protracted disruption and damage to energy infrastructure, sharply lifting oil and gas prices, triggering a stagflationary shock, tightening financial conditions and generating material downside risks for energy-importing economies, especially in Asia.”

 

The agency said the energy disruptions are hitting a global economy already grappling with trade fragmentation, geopolitical rivalry, tighter migration policies and rapid adoption of artificial intelligence, all of which are amplifying global uncertainty and exposing systemic fragilities.