Indian Economy Outlook: Ongoing geopolitical tensions in the Middle East have put global economies on edge, with equity markets increasingly reflecting a decline in investor confidence.

Heightened uncertainty, particularly surrounding the conflict involving the United States and Iran, has contributed to market volatility and a cautious sentiment among investors worldwide.

Amid this backdrop, the Indian economy has demonstrated notable resilience, standing out as one of the few major economies maintaining relative stability during these turbulent times.

UBS Cuts GDP Forecast

In an interaction with ET Now, Tanvee Gupta Jain, Chief India Economist at UBS Securities India, highlighted that the Middle East conflict has created significant energy shock risks. According to UBS's leading indicator, signs of an economic slowdown began emerging in March.

Reflecting these concerns, UBS has trimmed India's GDP growth forecast by nearly 0.5 percentage points to 6.2 per cent year-on-year, down from its earlier estimate of 6.7 per cent.

Jain noted that the outlook remains highly sensitive to how the geopolitical situation evolves. If the conflict eases in the near term, growth could recover to around 6.5 per cent. On the other hand, prolonged energy disruptions stemming from Middle East tensions could weigh more heavily on the economy, potentially dragging growth down to the 5-5.5 per cent range.

Rising Inflation Driven by Energy Prices

The conflict could also have a deeper impact, with India's inflation now expected to average 5.2 per cent year-on-year in FY27.

The rise in inflation is mainly attributed to higher global energy prices. However, on the domestic front, there is no shortage of petrol or diesel. Jain added, "Strong refining capacity and diversified imports are helping maintain supply."

Rupee Weakness Adds Pressure

A weaker rupee is further adding to inflationary pressures. On May 5 (Tuesday), the Indian rupee tumbled to a record low of 95.40 against the US dollar.

This depreciation could prompt the Reserve Bank of India (RBI) to shift from a pause to gradual rate hikes in the second half of FY27, according to Jain. A rate hike helps an economy by cooling inflation, reducing excessive borrowing, and promoting financial stability.

Fiscal Deficit Projected at 4.4% of GDP

Jain also noted that fiscal policy may partly cushion the energy shock, with the government relying on targeted measures.

However, limited fiscal space restricts large-scale support. Fuel costs may be passed on, and the fiscal deficit is projected at 4.4 per cent of GDP in FY27, with possible temporary slippage. A fiscal deficit occurs when the government's total spending exceeds its revenue.