With total uncertainty becoming the new normal, economists and institutions are projecting growth under different scenarios; and market experts, following suit, are projecting various return scenarios under different West Asia conflict situations.
One thing can be said with certainty at this point in time: Globally, growth will be lower and inflation higher this year. Among large economies, the US, a net energy exporter, will be less affected by the crisis.
Countries like India, which are major energy importers, will be more impacted by the energy shock triggered by the closure of the Strait of Hormuz.
The IMF has projected global growth to decline to 3.1% in 2026, assuming a short-duration war. Global inflation is projected to rise to 4.8%.
In an adverse scenario of persistent energy shock and tight financial conditions, global growth is projected at 2.5%. In a severely adverse scenario characterised by deeper and long-lasting conflict, IMF warns global growth to dip to 2%.
The third scenario appears a remote possibility now; but the concern is whether the second scenario might emerge impacting economies and markets.
At the beginning of 2026, the Indian economy was in a Goldilocks setting: GDP growth was decent with FY26 growth projection at 7.6%; CPI inflation was running at 2.75%; fiscal deficit and current account deficits were well within targets of 4.4% and 1% respectively; forex reserves at around $720 billion were comfortable, and Brent crude was trading at around $62.
The fiscal stimulus provided by the government and the monetary stimulus by the RBI in 2025 had boosted the earnings growth prospects for FY27 and Nifty appeared to be resilient, trading around 26,000 levels.
Then on February 28th, all hell broke loose with the US and Israel attacking Iran, triggering a major energy crisis with Brent crude spiking above $100 and unleashing supply shocks in LPG and LNG. India’s Goldilocks macro setting started moving towards a slippery zone and is now vulnerable to the energy shock, if the conflict lasts long.
With the energy crisis, there is upside risk to inflation and downside risk to growth. The extent of the risk will depend on the duration of the energy crisis.
India has fiscal space to absorb a short-period crisis
While most countries have raised petroleum prices and some worst affected have even introduced rationing and other restrictions, India has, so far, kept prices unchanged, with the government and oil marketing companies absorbing the shock.
A major achievement of this government has been its success in fiscal consolidation, having brought down the fiscal deficit from 9.2% of GDP in FY21 to 4.4 in FY26.
This has given the government the fiscal space to partly absorb the oil shock. But a partial pass through of higher oil prices to consumers is likely after the state elections. This is necessary for financial stability. Pass-through of the higher price will trigger some cost push inflation.
The impact of the crisis on the economy and the market will depend on how the West Asia conflict evolves and the consequent trend in crude prices.
If crude averages the $80–85 level for the rest of 2026, India can absorb the shock. But if the conflict lingers and the crude price stays above $100 for the rest of 2026, India’s GDP growth for FY27 could decline to 6% and CPI inflation will rise to around 5.75 level.
This will impact corporate earnings for FY27 pushing market valuations higher. FPIs will continue to sell impacting the market. Rupee will depreciate further.
On the other hand, if the conflict is resolved soon and crude price decline, things can get back to normal with limited damage. The rupee will stabilise, FPIs will stop selling and may turn buyers, particularly if there is a correction in AI stocks globally.
In brief, the implications for the economy and markets will be decided by the duration of the war. Amidst the volatility and uncertainty, the market signals indicate that the war is unlikely to prolong since an extended conflict will be politically disastrous for President Trump and economically ruinous for Iran.
(The above article is authored by Dr. VK Vijaykumar, Chief Investment Strategist at Geojit Financial Services Limited. Views expressed are personal.)