MUMBAI : While maintaining India’s FY2026/27 GDP growth forecast at 7 per cent, the agency flagged rising geopolitical uncertainty as a key downside risk to the outlook.
In its latest India outlook report released on Tuesday, BMI said that despite favourable policy uncertainty readings so far in 2026, risks are mounting following the escalation of hostilities in the Middle East.
“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,” BMI said.
The conflict intensified on February 28 when the United States and Israel jointly launched military strikes on Iran. Tehran retaliated with drones and missiles targeting Israel, US military installations in the Gulf, and Dubai, a key global business hub.
BMI cautioned that Iran’s threats to shipping in the Strait of Hormuz could have serious economic implications. The Strait, a narrow 33-kilometre passage connecting the Persian Gulf to the Arabian Sea, is a critical energy corridor. Following the attacks on Iranian government, military and nuclear facilities, Iran warned ships against traversing the strait, prompting insurers to withdraw coverage and effectively halting tanker movements.
A full closure of the Strait of Hormuz could directly shave up to 0.5 percentage points off India’s GDP, BMI estimated, primarily due to higher energy costs.
India imports nearly 88 per cent of its crude oil requirements, making it highly vulnerable to oil price spikes. Any sustained disruption in supply would inflate the country’s import bill and fuel domestic inflation, further straining economic stability.
At the same time, BMI noted that trade developments could offer an upside. India and the United States agreed early last month on a framework for an interim trade deal under which Washington would reduce tariffs to 18 per cent. However, the framework must still be converted into a legally binding agreement for implementation.
In a significant development in February, the US Supreme Court 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 a 10 per cent tariff on all countries for 150 days effective February 24. Former President Donald Trump has indicated plans to raise the tariff to 15 per cent, though no official order has yet been issued.
Meanwhile, India and the European Union agreed in January on a free trade agreement (FTA), which is expected to be implemented within a year after legal ratification.
BMI said that while the new India-US trade deal and the easing of tariff pressures could boost the economy more than currently anticipated, the unfolding geopolitical tensions remain a significant variable. The agency added that it is closely assessing the situation to quantify the potential impact on India’s GDP.
BMI warns that escalating Middle East tensions could jeopardize India's projected 7% GDP growth by 2026/27. The conflict, particularly Iran's threats to the Strait of Hormuz, poses risks to energy supply and investment, potentially shaving 0.5 percentage points off GDP. Despite positive trade developments with the US and EU, geopolitical uncertainties remain a significant concern.