NEW DELHI: India and other Asia-Pacific economies have emerged from the West Asia conflict in better shape than many had feared, buoyed by a surge in artificial intelligence (AI)-driven exports and investment. But that support is masking a growing list of vulnerabilities—from higher energy prices and persistent inflation to trade tensions and weather disruptions—that could weigh on growth in the second half of 2026, Moody’s Analytics said in a report on Friday.
The ratings and research firm expects growth across Asia-Pacific to ease to 4.1% in 2026 from 4.3% in 2025, as the boost from -related demand begins to fade.
“That slight improvement on our May forecast of 4% reflects a better-than-expected start to the year. But as the boost from the AI fades, growth will slow to 3.6% in 2027,” said the report.
For India, the outlook remains comparatively resilient, supported by domestic and increasing participation in technology supply chains. Yet the economy remains exposed to higher oil prices and food inflation, risks that could complicate monetary policy and weigh on growth.
“While the region has avoided the sharp slowdown many feared following the Middle East (West Asia) , the list of headwinds continues to grow,” Moody’s Analytics said, citing elevated commodity prices, tighter policy settings and uncertainty around global .
According to the report, AI-related demand has become the region’s primary growth engine. Strong demand for semiconductors, electronics and other technology products has lifted exports across major manufacturing hubs while encouraging new investment.
Although India is not a major semiconductor exporter on the scale of Taiwan or South Korea, it has benefited from rising technology investment and efforts by companies to diversify supply chains and expand manufacturing beyond China.
Moody’s warned, however, that the region is becoming increasingly reliant on a single source of growth. Any slowdown in AI-related spending, supply bottlenecks or tighter regulation of advanced AI technologies could weaken export momentum over time.
Headwinds build
At the same time, pressures are beginning to build.
The surge in crude oil and commodity prices following tensions in West Asia has started feeding into consumer prices across the region. In India, part of that impact has been absorbed by marketing companies through lower margins, limiting the immediate pass-through to consumers. Sustained high crude prices, however, could eventually raise fuel and transportation costs, adding to inflationary pressures.
The report said inflation across Asia is increasingly being driven by -side shocks rather than stronger demand, making it harder for policymakers to respond.
Recent data underscore those pressures. India’s wholesale inflation rose to 9.68% in May from 8.26% in April, driven by a sharp rise in fuel, crude petroleum, and manufactured chemical and metal product prices. The provisional May reading is the first released under a revised wholesale price index series with 2022-23 as the base year, replacing the previous 2011-12 base year.
Unlike several regional central banks that have adopted a more hawkish stance in recent months, the Reserve Bank of India has so far remained relatively insulated from the inflation shock. Moody’s said persistent and food price pressures could nevertheless reduce the policy room available to support growth.
The report identified India as one of the economies most exposed to both energy and food-price shocks. Its dependence on imported crude oil leaves it vulnerable to disruptions in global energy markets, while adverse weather conditions could affect agricultural output and food prices.
A further risk is the potential return of El Niño conditions in the second half of the year. Hotter and drier weather could reduce crop yields across parts of Asia, including India, leading to higher food inflation. The previous El Niño episode in 2023-24 contributed to sharp increases in food prices across several Asian .
Despite a tentative peace agreement between the US and Iran that has eased concerns over prolonged disruption in the Strait of Hormuz, Moody’s said energy markets remain fragile and are unlikely to normalize quickly.
“Inventories, , and strategic reserves need to be rebuilt, which could keep commodity prices elevated and inflationary pressures lingering longer than expected,” the report said.
In a downside scenario in which the peace agreement collapses and the Strait of Hormuz remains closed through the Northern Hemisphere summer, oil prices could rise to as much as $158 a barrel in the third quarter, according to Moody’s.
Such a shock would have severe consequences for the region, with GDP losses potentially reaching about 6% relative to baseline projections, the report said. India would be among the hardest-hit economies because of its dependence on imported energy.
Trade tensions remain another source of risk. New US tariffs announced earlier this month, coupled with growing friction between China and the European Union, could disrupt supply chains and weaken manufacturing activity across Asia.
“AI is providing an important lifeline to the region’s economy, but rising inflation, geopolitical uncertainty and climate-related disruptions are making the outlook increasingly challenging,” the report said.
For India, the challenge is increasingly one of balancing resilience against rising external risks. Elevated oil prices, weather-related disruptions and global trade uncertainty could force policymakers to weigh support for growth against renewed inflation pressures in the months ahead.