Rising Oil Prices and El Nino Pose Significant Threats to India's Economic Growth in FY 2026/2027
India's economic growth for the fiscal year 2026/2027 is likely to fall below previous expectations due to escalating oil prices, heightened Middle East conflicts, and the El Nino phenomenon, according to a senior official from the International Monetary Fund (IMF).
"Risks to growth are probably two-way," stated Ranil Salgado, IMF's resident representative in India and Bhutan, in an interview published by Reuters on Tuesday. He noted that one risk is the rescaling of the conflict, which affects oil prices, while the other is El Nino, which could lead to a poor monsoon season.
IMF Downgrades India's GDP Growth Forecast
Earlier this month, the IMF lowered India's GDP growth forecast by 10 basis points, from the previously expected 6.5% in April to 6.4% for the fiscal year 2026/2027 ending on March 31, 2027, due to higher energy prices.
"High-frequency indicators through April showed a significant recovery in overall economic activity, but these positive effects were fully offset for fiscal year 2026/2027 in our July base update due to higher energy prices, as well as the stronger pass-through of these prices to Indian petrol pumps," explained Deniz Igan, deputy director of the IMF's Research Department's Macroeconomic Analysis Division, in early July.
By that time, the ceasefire between the US and Iran was still partially maintained, but collapsed just days later. The renewed closure of the Strait of Hormuz and escalation of hostilities in the region pushed Brent oil prices up 16% in a single week to nearly $90 per barrel.
India's GDP Growth Forecast Comparison
| Forecast Period | Expected GDP Growth Rate | Change |
|---|---|---|
| April 2026 | 6.5% | - |
| Early July 2026 | 6.4% | -0.1% |
India Confronts Historic Oil Supply Challenges
India is striving to mitigate the economic and financial impacts of the worst oil supply disruption in its history, as analysts note that high oil prices will continue to pressure the country's currency, economic growth, and public finances as long as supply remains constrained in the Strait of Hormuz.
India, which imports over 85% of its oil consumption, received approximately half of its total imports from the Middle East before the conflict. Currently, state-owned and private refiners are attempting to diversify import sources, including record imports from Russia, and seeking additional crude oil from Venezuela and Brazil to compensate for lost Middle Eastern supplies.
India's Oil Supply Before and After Middle East Escalation
| Supply Source | Pre-Conflict | Post-Escalation |
|---|---|---|
| Middle East | ~50% of total imports | Significant reduction |
| Russia | Normal import levels | Record levels |
| Venezuela & Brazil | Limited | Significant increase |
| Total Imports | 85% of consumption needs | 85% of consumption needs |
Dual Impact from Conflict and Weather
Salgado emphasized that two primary factors are threatening India's economic outlook. Geopolitically, the escalation in the Middle East region is directly impacting oil prices—a critical import for India. Naturally, the El Nino phenomenon could cause a poor monsoon season, affecting agriculture—a sector that significantly contributes to India's GDP and employment.
The IMF indicates that recent economic indicators show recovery, but these positive effects are being overshadowed by higher energy prices and their strong transmission to consumers.
New Delhi's Diversification Strategy
In the face of oil supply challenges, India has implemented robust diversification strategies. State-owned refiners such as Indian Oil Corporation, Bharat Petroleum, and Hindustan Petroleum have increased imports from Russia, which are typically sold at significant discounts to market prices.
Additionally, India is seeking to strengthen relationships with oil producers in Latin America, particularly Venezuela and Brazil. Analysts suggest that while sanctions remain in place, India may find ways to leverage trade channels to increase imports from these countries.
However, experts warn that changing oil supply sources will not be easy and may take considerable time. Dependence on longer shipping routes and less stable supply sources could lead to higher logistics costs and increased geopolitical risks.
Future Outlook
India's economic outlook for fiscal year 2026/2027 now depends on several uncertain factors. The development of the Middle East situation, global oil price movements, and the impact of El Nino on Indian agriculture will be decisive factors.
The IMF and other international financial institutions will continue to closely monitor the situation and adjust their forecasts as more information becomes available. For India, maintaining economic stability amid dual challenges from geopolitical and weather factors will be the top priority.