India's Economy Grows 7.8% in Q1, Faces Headwinds from Middle East Conflict

India's economy grew at 7.8% year-on-year in the three months to the end of March, a faster-than-expected pace, despite being partially affected by the economic disruptions from the Middle East conflict. A Reuters poll had forecast a 7.2% growth for Jan-Mar, lower than the 7.8% in the previous quarter.

In the first half of the quarter, India's trade prospects improved sharply with a finalized "mother of all deals" with the European Union and reduced U.S. tariffs on its goods from 50% to 18%, later lowered to 10% after the U.S. Supreme Court ruled against President Donald Trump's tariffs. However, the Iran war, which began at the end of February, poses a severe risk to India's economy, anticipated to hurt growth and raise inflation.

On Friday, the Reserve Bank of India (RBI) raised its inflation projection for the financial year ending March 2027 by 50 basis points to 5.1% and tempered the economy's growth forecast to 6.6% for the year, down from 6.9%. Energy supply disruptions from the conflict have inflated India's import bill, pressuring the rupee already hit by record foreign investor outflows.

Despite inflation being under the RBI target of 4% as of April, the government passed on global fuel price hikes to consumers in May. India is expected to face weather-related disruptions due to El Nino, potentially causing crop shortages and higher food prices. The RBI noted a "cautious" policy stance due to deteriorating global economic conditions.