Goldman Sachs upgrades India growth outlook as easing Gulf tensions cool oil risks

India’s economic outlook has improved materially following the US-Iran peace deal, with lower crude oil prices reducing inflationary pressures, easing fiscal risks and strengthening the country’s external balances, Goldman Sachs said in a research note on Friday.

Citing these positives, the investment bank raised its forecast for calendar 2026 gross domestic product (GDP) growth by 30 basis points (bps) to 6.8%, lowered the inflation view by 20 bps to 4.4% and trimmed its current account deficit estimate from 1.3% to 1.1% of GDP.

The upgrade comes after India weathered the West Asia war impact better than expected, aided by fiscal and quasi-fiscal measures that absorbed a significant portion of the energy price shock and limited the pass-through of higher fuel costs to consumers, the note said. “India’s real GDP growth has held up better than our earlier expectations,” Goldman Sachs said, noting that the economy expanded 7.8% year-on-year in the first quarter of calendar 2026, about 50 bps above its earlier forecast.

Goldman Sachs' outlook aligns with the broader view among other economic agencies that have scaled up their growth projections for India. This shift follows easing geopolitical tensions and a subsequent decline in crude oil prices that comprises a chunk of India’s import bill.

Accounting and consultancy major EY, in its latest Economy Watch report, projected India’s real GDP growth at 6.6-6.8% for FY27, noting that stabilizing energy markets will ease supply-side pressures to support both growth and inflation outcomes this year.

For Goldman Sachs, this latest upgrade caps a highly volatile series of forecast revisions throughout 2026. On 9 February, the investment bank had projected a strong 6.9% growth for the calendar year, citing resilient economic momentum despite challenges such as the stiff US tariffs. However, the outbreak of the US-Iran war quickly reversed this optimism, prompting a cut to 6.5% early March, followed by a sharper cut to 5.9% on 24 March. As geopolitical conditions slowly began to stabilize ahead of the peace deal, the firm partially restored the forecast to 6.5%, before finally lifting it to the latest projection of 6.8% following the formal peace agreement.

Rishi Shah, partner and economic advisory services leader at Grant Thornton Bharat, said, “The upward revision to 6.8% for CY2026 is directionally consistent with what India’s domestic fundamentals warrant, and validates the point that this slowdown was always about exogenous energy shocks, not structural weakness. The easing of oil prices, fiscal risks and inflation pressures following the peace talks is welcome relief.”

“However, I would caution against anchoring to any single forecast in what remains a deeply volatile environment. Production infrastructure destroyed during the conflict doesn’t rebuild overnight, and any resumption of hostilities would rapidly unwind these tailwinds. India growing above 6.5% remains the base case, but the error bars around any FY27 number are wider than normal, and policymakers should plan for contingencies,” he added.

Investments, services resilient

This stronger-than-expected growth was led by resilient investment activity and robust services sector performance, said Goldman's note. Gross fixed capital formation rose to a six-quarter high of 10.8% year-on-year during the quarter, supported by healthy automobile production and stronger imports of investment goods despite supply-chain disruptions linked to the Gulf conflict.

Goldman Sachs said the US-Iran agreement has significantly reduced downside risks to the economy by lowering crude prices and easing supply constraints that had weighed on investment activity. High-frequency indicators are already showing signs of recovery, with port cargo traffic growth touching a four-month high in May after weakening during March and April.

While it expects household consumption to remain under pressure during the second and third quarters because of fuel price hikes, it believes the drag will fade after that. Eased global oil prices have reduced the likelihood of further increases in petrol and diesel prices, limiting any further hit to consumer spending, it said.

The investment bank, however, said weather-related uncertainties including forecasts of below-normal monsoon rains and heatwaves remain a near-term headwind, particularly to India's rural consumption growth.

The report highlighted continued strength in India’s services sector. Services gross value added expanded 9.9% year-on-year in the first quarter, driven by trade, hotels and transportation. Manufacturing, while somewhat moderated by weaker chemical and metals output, continued to benefit from strong automobile production, it said.

Another key beneficiary of the easing geopolitical situation is the government’s fiscal position, according to Goldman Sachs.

It said the sharp correction in global urea prices has significantly reduced the risk of a spike in fertilizer subsidies. Recent import tenders have been awarded at prices substantially below those prevailing during the peak of the West Asia conflict.

Combined with lower crude oil prices, this could ease pressure on the government's expenditure commitments and create greater fiscal room during FY27.

Lower inflation forecast

The improved outlook prompted Goldman Sachs to lower its inflation forecasts, with the headline consumer print seen averaging 4.4% in calendar 2026 and 4.9% in FY27, down from the earlier estimates.

The moderation reflects not only lower fuel costs but also declining petrochemical prices, which are expected to reduce pressure on manufacturers to raise prices across a broad range of consumer goods. Goldman Sachs has cut its forecast for core goods inflation for both the current calendar and the fiscal years, citing a diminished risk of additional cost pass-through.

On the external front, lower oil prices are expected to reduce India’s import bill, while resilient remittance inflows from Gulf economies provide additional support. Goldman lowered its forecast for India’s oil import bill in 2026 from $220 billion to $215 billion. At the same time, it raised its remittance estimate to $140 billion after inflows remained strong despite the regional conflict.

As a result, the investment bank now expects India’s current account deficit to narrow to 1.1% of GDP in 2026, and a balance of payments surplus of 0.7% of GDP, slightly higher than its previous estimate.