Middle East conflict may hit India GDP, offset EU-US trade gains: BMI
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In its latest India outlook report, BMI retained its FY2026/27 GDP growth forecast at 7 percent, citing relatively favourable policy uncertainty readings so far in 2026.
- Middle East conflict may dampen investment sentiment in India
- Closure of Strait of Hormuz could cut India’s GDP by 0.5 percent
- India-US and India-EU trade deals may boost growth if risks ease
The escalating conflict in the Middle East could dampen investment sentiment in India and partially offset the growth gains expected from upcoming trade agreements with the US and the EU, Fitch Group arm BMI cautioned on Tuesday.
In its latest India outlook report, BMI retained its FY2026/27 GDP growth forecast at 7 percent, citing relatively favourable policy uncertainty readings so far in 2026. However, it flagged rising geopolitical risks and said it is assessing the evolving situation to quantify the potential impact on India’s economy.
“From March onwards, we expect uncertainty to increase sharply due to the ongoing conflict in the Middle East. We believe this will discourage investment in India, offsetting the (EU and US) trade deals’ positive effects on GDP,” the report said.
The warning comes amid heightened tensions after the US and Israel launched military strikes on Iran on February 28. Tehran responded with drones and missile attacks targeting Israel, US military installations in the Gulf, and the global business hub of Dubai.
BMI noted that Iran has threatened vessels transiting the Strait of Hormuz, a critical energy chokepoint. A complete closure of the strait, it said, could directly shave up to 0.5 percentage points off India’s GDP through higher energy costs.
The 33-kilometre-wide Strait of Hormuz connects the Persian Gulf to the Arabian Sea and is a vital route for global oil shipments. Following US and Israeli strikes on Iranian government, military and nuclear facilities, Iran warned ships to avoid the strait, and insurers reportedly withdrew coverage, effectively stalling tanker movements.
India, which imports about 88 per cent of its crude oil requirements, is particularly vulnerable to disruptions. Any sustained rise in crude prices would widen the country’s import bill and stoke fuel inflation.
At the same time, BMI said recent trade developments could provide an upside risk to growth. It pointed to the new India-US trade framework agreed early last month, under which Washington is set to reduce tariffs to 18 per cent as part of an interim deal. The framework must now be converted into a legal text to enable signing and implementation of the first phase of the bilateral agreement.
In a separate development, the Supreme Court of the United States in February struck down the Trump administration’s reciprocal tariffs, ruling that the president had exceeded his authority under the International Emergency Economic Powers Act (IEEPA) of 1977.
Following the ruling, the US imposed 10 per cent tariffs on all countries for 150 days starting February 24. President Donald Trump has since announced plans to raise the rate to 15 per cent, though no formal order has yet been issued.
BMI also highlighted progress on India’s trade front with Europe. In January, India and the EU agreed on a free trade agreement (FTA), which is expected to be implemented within a year after legal ratification.
While these trade deals could boost India’s growth trajectory beyond current expectations, BMI said the net impact will depend on how the Middle East conflict evolves and whether energy supply disruptions intensify in the coming months.
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