India is projected to grow by 6.3 per cent in 2026-27 (FY27) and 6.4 per cent in 2027-28 (FY28), despite mounting global economic challenges stemming from the ongoing West Asia conflict, according to the latest outlook released by the Organisation for Economic Co-operation and Development (OECD) on Wednesday.
The OECD said the conflict in the Middle East has emerged as the primary factor shaping the global economic outlook, triggering a surge in energy and commodity prices and weakening growth prospects worldwide.
“The conflict in the Middle East has become the dominant force shaping the global economic outlook. Energy prices and the prices of other key agricultural and industrial inputs produced in the Persian Gulf economies have soared since February as production and exports have been curtailed,” the report said.
According to the OECD, rising input costs have contributed to higher inflation, eroding real incomes and dampening economic activity. As a result, global GDP growth forecasts have been revised downward, while inflation projections have been raised.
Among major emerging economies, China’s growth is expected to moderate from 5.0 per cent in 2025 to 4.5 per cent in 2026 and 4.3 per cent in 2027. The report cited energy-related vulnerabilities and ongoing adjustments in the real estate sector as key factors weighing on economic activity, despite mitigating factors such as increased renewable energy capacity, adequate oil reserves and fuel price controls.
On India, the OECD noted that the Reserve Bank of India (RBI) reduced the policy interest rate from 6.5 per cent in January 2025 to 5.25 per cent in February 2026, bringing monetary policy to a broadly neutral stance. Average lending rates have also declined, while non-food bank credit expanded by 15.9 per cent year-on-year in March.
However, the report warned of a renewed rise in inflationary pressures, driven mainly by higher food prices as favourable base effects fade.
“In this context, a temporary increase in the policy rate of around 25 basis points is projected by the end of the first quarter of FY2026-27 to help maintain inflation within the 4 per cent target band and anchor expectations,” the OECD said. It added that monetary policy is expected to ease again in FY2027-28 as inflationary pressures moderate.
The report also projected a more expansionary fiscal policy stance in FY2026-27 to cushion the impact of elevated energy prices.
While the Union Budget for FY2026-27 targets a reduction in the fiscal deficit from 4.4 per cent of GDP in FY2025-26 to 4.3 per cent, the OECD said measures introduced to mitigate the energy price shock could widen the deficit by around 0.4 percentage points of GDP compared with the budgeted path.
According to the report, these measures are expected to support household incomes and consumption in the near term but may slow the pace of public debt reduction. Public debt is projected to decline to 54.7 per cent of GDP by FY2027-28.
The OECD said fiscal policy is likely to return to a moderate consolidation path in FY2027-28 as energy prices stabilise and temporary support measures are gradually withdrawn.
(IANS Inputs)
