Middle East conflict may deter investment in India, blunt gains from EU and US trade deals: BMI

The ongoing conflict in the Middle East could discourage investment flows into India and offset the growth benefits expected from trade deals with the European Union and the United States, Fitch Group company BMI said on Tuesday.

In its latest India outlook report, BMI retained its FY2026/27 GDP growth projection at 7 per cent despite flagging rising geopolitical risks. It said it is assessing the situation to quantify the impact on India’s growth.




“From March onwards, we expect uncertainty to increase sharply due to the ongoing conflict in the Middle East. We believe this will discourage investment in India, offsetting the (EU and US) trade deals' positive effects on GDP,” BMI said, PTI reported.

The US and Israel jointly launched military strikes on Iran on February 28, following which Iran fired drones and missiles at Israel and US military installations around the Gulf, and also at Dubai.

BMI warned that a full closure of the Strait of Hormuz -- a 33-kilometre-wide passage linking the Persian Gulf to the Arabian Sea -- could directly shave up to 0.5 percentage points off India’s GDP due to higher energy costs.

Following US and Israeli attacks on Iranian government, military and nuclear facilities, Iran warned ships away from the Strait and insurers withdrew coverage, effectively halting tanker movements.

India imports about 88 per cent of its crude oil requirements, and any sustained rise in oil prices would increase the import bill and add to inflationary pressures.

At the same time, BMI noted that the new India-US trade framework and the US Supreme Court’s decision striking down the Trump administration’s reciprocal tariffs could support growth beyond current expectations.

India and the US agreed early last month on a framework to finalise an interim trade deal, under which Washington will reduce tariffs to 18 per cent. For the first phase of the bilateral agreement to be signed and implemented, the framework needs to be converted into a legal document.

In February, however, the US Supreme Court ruled that tariffs imposed by President Donald Trump on several nations were illegal, saying he had exceeded his authority by invoking the International Emergency Economic Powers Act (IEEPA) of 1977.

Following the ruling, the US imposed a 10 per cent tariff on all countries for 150 days from February 24. Trump has since announced plans to raise it to 15 per cent, though no official order has been issued.

Separately, India and the EU agreed in January on a free trade agreement that is expected to be implemented within a year after legal ratification.

BMI said while policy uncertainty had remained relatively favourable in early 2026, the escalation in West Asia poses fresh downside risks to India’s growth outlook.