India's economic growth is likely to moderate to 6.6% in FY27 from an estimated 7.6% in FY26, as escalating tensions in West Asia, higher commodity prices and potential supply-chain disruptions emerge as key headwinds, according to a report by Yes Bank.

The bank maintained a downward bias to its FY27 growth forecast, raising concerns that a prolonged conflict in West Asia could further weigh on economic activity through multiple channels, including weaker private consumption, delayed investments and higher input costs.

"FY27 is likely to see stronger headwinds to growth emerging out of the ongoing West Asia conflict that can have multi-dimensional impact on growth," Yes Bank said in its latest economic assessment.

“For FY27, our initial GDP estimate is at 6.6% but with a downward bias if estimates point to a 100-bps erosion from the currently estimated 7.6% for FY26,” it added.

Q4 GDP growth seen at 7.4%

For FY26, the bank projects India's GDP growth at 7.6%, with fourth-quarter growth easing marginally to 7.4% from an average of 7.7% in the first three quarters. Gross Value Added (GVA) growth for the full year is estimated at 7.7%.

According to the report, economic momentum remained healthy during January and February but moderated in March, partly due to emerging supply-chain concerns affecting manufacturing activity.

On the demand side, private consumption continued to receive support from higher real incomes and GST rationalisation measures. Automobile demand remained robust during the quarter, with strong volume growth in two-wheelers and passenger vehicles. However, FMCG demand showed signs of moderation, with both rural and urban consumption volumes slowing during the period.

“We saw the demand momentum continue into Q4 with robust volume growth for 2W and PV sales. On the other hand, NielsonIQ FMCG report indicated that rural and urban volumes slowed in Q4,” the report noted.

As per the report, the government capital expenditure remained a key growth driver, while private sector investment showed signs of improvement. India's trade deficit, though still elevated at $82.5 billion in the fourth quarter, narrowed from nearly $94 billion in the previous quarter.

On the production front, services activity remained resilient, supported by trade and transportation, while industrial growth showed signs of softening. Manufacturing growth slowed to 4.9% in the fourth quarter, while overall industrial production averaged 4.3%, slightly higher than the previous quarter.

Looking ahead, Yes Bank expects private consumption to face pressure from higher food prices, fading benefits of GST rationalisation and the possibility of tighter monetary policy. Private investment activity could also weaken as businesses contend with demand uncertainty and rising costs linked to geopolitical tensions.

The report noted that manufacturing industries, particularly MSMEs dependent on imported inputs, could face disruptions if supply-chain challenges intensify. Rising fuel costs have already affected sectors such as aviation and hospitality, while a potential El Niño event poses risks to agricultural output and rural demand.

“Certain sectors such as the tile manufacturing sector were reported to have faced problems due to gas shortages. Services sector indicators - Trade and Transport - remained resilient in the fourth quarter while hotels saw deceleration in March as West Asia crisis led to higher commercial LPG costs,” it highlighted.

Despite the possibility of increased subsidy burdens related to fertilisers, LPG and fuel, the bank expects the government to protect public capital expenditure, which should continue to provide support to growth.

“While there could be a strain on the fiscal as government absorbs fertilizer and LPG subsidies and not fully pass through OMC under-recoveries to end users, we think the efforts will be strong to not cut on the capital expenditures,” it said.

Amid ongoing West Asia crisis, the government of India has rolled out a comprehensive strategy aimed at safeguarding energy supplies, cushioning the economy from external shocks, and ensuring the safety of Indian citizens. Key initiatives include the creation of a ₹10,000-crore Aviation Turbine Fuel (ATF) stabilisation fund to shield airlines and consumers from fuel-price volatility, along with the formation of seven empowered groups tasked with strengthening supply chains, monitoring critical imports, and managing the impact of fluctuations in global energy markets.