IMF revises India’s FY27 GDP growth a notch up to 6.5%

The International Monetary Fund (IMF) on Tuesday revised India’s 2026-27 economic growth forecast upwards to 6.5%, from its January estimate of 6.4%, as the benefits of a reduction in additional US tariffs on Indian goods from 50% to 10% outweighed the adverse impact of the US-Israel-Iran war.

The IMF said in its latest World Economic Outlook released on Tuesday that positive contributions from the carryover of the strong 2025-26 outturn also helped.

Before the West Asia war began, India's Economic Survey 2025-26 projected a 6.8-7.2% growth for the current fiscal year.

The multilateral agency also revised India’s 2025-26 growth up from its January forecast by 0.3 percentage points and its October estimate by one percentage point to 7.6%, the same rate projected in the country's second advance estimates, reflecting a better-than-expected performance in the second and third quarters and sustained strong momentum in the fourth quarter of the fiscal year ended 31 March.

2026 reference forecast

The IMF presented a ‘reference forecast’ for global economic growth in calendar year 2026, assuming the West Asia war will have limited duration, intensity, and scope, such that the disruptions will fade by mid-2026.

Based on this assumption, it said the global economy will grow by 3.1% in 2026, 0.2 percentage points below its January forecast. In 2027, the global economy will expand 3.2%, unchanged from its January forecast.

This growth rate is slower than the 3.4% expansion in 2024-25. The global economy is expected to settle at about the level projected for 2027 in the medium term, slower than its historical (2000-19) average of 3.7%, the IMF said.

The revision coincides with intensifying geopolitical tensions as the US administration started a naval blockade of the Strait of Hormuz following the failure of peace talks with Iran. The move has raised fears of further escalation of geopolitical tensions and of higher energy costs.

Global headline inflation is expected to increase to 4.4% in 2026 and decline to 3.7% in 2027, the IMF said, marking upward revisions for both years.

Inflation in India is expected to return to near target levels after subdued food prices drove a marked decline in 2025, the IMF said.

It said that under an adverse scenario with larger, more persistent increases in energy prices, global growth would slow further to 2.5% in 2026, and inflation would reach 5.4%. Under a more severe scenario in which energy infrastructure in the conflict region suffers greater damage, the impact would be even larger.

Early on Tuesday morning India time, the International Energy Agency (IEA), the IMF and the World Bank said in a joint statement that the situation remains very uncertain, and shipping through the Strait of Hormuz is yet to normalize.

“Even after a resumption of regular shipping flows through the Strait, it will take time for global supplies of key commodities to move back towards their pre-conflict levels—and fuel and fertilizer prices may remain high for a prolonged period given the damage to infrastructure,” the agencies said.

IMF warnings

The IMF pointed out that geopolitical tensions could worsen further, turning the situation into the largest energy crisis in modern times.

Political stress factors can get entangled with shifts in trade and other international policies, or trade-related disputes could flare up independent of geopolitics, the IMF cautioned.

It also pointed out that rare earth elements in global supply chains are a particular point of friction.

A potential correction in financial markets could come from artificial intelligence. A re-evaluation of profit expectations or lowered expectations of viable markups stemming from more intense competition, even if productivity gains are realized, could lead to a decline in investment and trigger an abrupt correction in financial markets, the IMF warned.

It also has a word of caution for countries where central bank independence is compromised. “An erosion of institutions, including central bank independence and monetary policy credibility, could raise inflation expectations, especially at a time when headline inflation is increasing because of a shock in salient prices,” it said.

Under current policies, US public debt is projected to continue to climb from 124% of GDP in 2025 to 142% in 2031, according to the IMF.

Sustained large fiscal deficits in the US and China’s continued reliance on export-led growth and limited rebalancing to domestic consumption contribute to external imbalances in these two countries, the IMF said.

D.K. Srivastava, chief policy advisor, EY India, said that for India, the IMF's baseline scenario projects growth of 6.5% for 2026-27 and Consumer Price Index-linked inflation of 4.7%.

In a scenario where the West Asian crisis may last well beyond the expectation of a short-lived conflict, India’s growth may be around 6.5% and inflation somewhat higher, said Srivastava.

“If the price of the Indian crude basket averages around $120/bbl during the year, in the context of a relatively longer conflict, our estimates indicate that India’s GDP growth may reach the level of 6.1% to 6.2%. Even so, it will be more than double that of global growth under the adverse scenario.”

The IMF suggests careful calibration of policy responses, since there is little room for fiscal manoeuvres or monetary policy, Srivastava said. "Any fiscal responses may need to be well-targeted so that any deviation from the medium-term fiscal consolidation path is minimal.”