Oil Shock Threatens India’s Growth, Moody’s Warns of 4% Output Hit Amid West Asia War

India is likely to face one of the steepest economic setbacks in the Asia-Pacific region if the ongoing war in West Asia continues, Moneycontrol reported, citing ratings agency Moody’s. According to the analysis, India’s output could potentially fall by nearly 4% from its baseline trajectory.

The Moody’s report has placed India as the most vulnerable economy in the region, followed by South Korea and China, as escalating geopolitical tensions threaten to disrupt energy supplies and push commodity prices higher.

One of the primary reasons for India’s vulnerability is its heavy reliance on oil and gas imports from West Asia. Amid mounting pressure from the West and the US, India had reduced its crude imports from Moscow and was beginning to increase its supply base in West Asia before the war broke out.

Following the combined attack by the US and Israel on Iran, crude prices surged to multi-year highs, triggering supply chain disruptions, recession concerns, and the worst cooking gas crisis in India in recent years. According to the report, as energy prices rise, the impact is expected to ripple through the economy — raising inflation, widening trade deficits, and weighing on consumption.

“India and China face sizeable damage given their dependence on oil and gas imports from Gulf economies caught up in the conflict,” Moody’s Analytics noted in its latest Asia-Pacific outlook. The report also added that a sharp spike in crude prices due to a prolonged conflict could trigger a significant economic slowdown across the region. Asia-Pacific growth is already expected to slow to 4% from 4.3% in 2026.

However, despite global headwinds, India is expected to retain its position as the fastest-growing major economy. Moody’s projects growth at 7.5% in 2026, down from 7.8% in 2025. Growth is further expected to ease to 6.5% in 2027.

According to the report, inflation is expected to remain within the Reserve Bank of India’s target of 4%, with a tolerance band of +/- 2%. However, inflation risks persist due to the possibility of rising global commodity prices. Benchmark Brent crude has risen nearly 60% in about a month, while the rupee fell to a record low of 93.94 against the US dollar.