As global economic growth faces challenges due to the West Asia crisis, the Organisation for Economic Cooperation and Development (OECD) forecasts India to achieve 6.3% growth in 2026–27 and 6.4% in 2027–28. In contrast, China’s growth in emerging markets is expected to decline from 5.0% in 2025 to 4.5% in 2026 and further to 4.3% in 2027, impacted by energy-related vulnerabilities and real estate sector adjustments.
The Middle East conflict significantly influences the global economic outlook, leading to increased energy and key input prices, inflation, and pressure on real incomes and economic growth. The Reserve Bank of India has lowered the monetary policy rate to 5.25% in February 2026 from 6.5% in January 2025, with a subsequent decrease in average lending rates.
Despite a 15.9% year-on-year expansion in non-food bank credit in March, recent trends indicate a resurgence of inflationary pressures, primarily driven by rising food prices as favorable base effects diminish. The OECD report suggests a temporary 25 basis points policy rate increase by the end of the first quarter of FY2026-27 to manage inflation within the 4% target band.
In FY2026-27, fiscal policy is expected to shift towards expansion to mitigate the impact of higher energy prices. While the budget aims to reduce the fiscal deficit to 4.3% of GDP from 4.4% in FY2025-26, measures addressing the energy price shock may widen the deficit by approximately 0.4% of GDP. These steps will offer short-term relief to household incomes and consumption but may slow down public debt reduction, projected to reach 54.7% in FY2027-28.
