"Our Middle East team now expects the conflict to last for another month. Aside from raising business costs through higher energy prices, the conflict will also keep uncertainty elevated. This discourages investment and further drags down GDP growth," BMI said in a note.

The research agency also lowered its projection on India's economic growth for fiscal 2025-26 to 7.6 per cent, from its earlier estimate of 7.8 per cent.

BMI's projection for 2025-26 is in line with the National Statistical Office (NSO) forecast of 7.6 per cent. India's GDP expanded by 7.1 per cent in 2024-25, as per the latest official data.

BMI said its downward revision of its projection on India's economic growth "reflects deteriorating high-frequency indicators of economic activity." Industrial production grew just 4.3 per cent year-on-year in the January-March quarter, down from 5.3 per cent recorded in the previous quarter.

Likewise, the value of real-time gross settlement transactions in India's financial system fell by more than 11 percentage points to 0.7 per cent year-on-year during the quarter ended March 2026.

"We think the downturn in activity partly reflects rising uncertainty during Q12026. The announcement of an India-US trade deal, followed by the Supreme Court possibly revoking the deal when striking down Liberation Day tariffs, and the increasing probability of war in Iran greatly increased policy uncertainty," it said.

It added that the risks to the outlook skew downwards. Many of these risks centre around foreign investments in India, which turned negative on a net basis during the last fiscal. A greater than expected increase in uncertainty or sudden rupee depreciation may hurt business confidence. This could exacerbate investment outflows and dampen growth.

Higher trade and logistics costs also pose downside risks to India's economy. We currently envision the Iran conflict as presenting a negative terms-of-trade shock to India. In our baseline forecast, even as consumption and investments fall due to costlier energy, the higher relative price of imports to exports partially offsets domestic demand's impact on GDP by improving real net exports, BMI said in its research note.

Higher freight costs could amplify the effects of this terms-of-trade shock by contracting India's supply of imported inputs or hurting demand for India's exports. Either of these effects would dampen GDP growth.

Other agencies have also lowered their projections on India's GDP growth citing West Asia conflict. Ratings agency Moody's has lowered its projection on India's economic growth for the current fiscal to 6 per cent, from its earlier estimate of 6.8 per cent.

The Organisation for Economic Cooperation and Development (OECD) has pegged India's FY27 growth projection at 6.1 per cent.