Ongoing Middle East conflict to discourage investment into India, offset trade deal positives: BMI

New Delhi: Fitch Group company BMI on Tuesday said that the ongoing conflict in the Middle East could discourage investment in India, and offset the positive effects of trade deals with the EU and US on GDP.

Despite the favourable readings of policy uncertainty so far in 2026, BMI kept the FY2026/27 growth outlook unchanged, projecting a 7 per cent GDP expansion. It, however, flagged risks to the outlook but said it is currently assessing the geopolitical situation to quantify its impact on India's GDP.

"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 in its India outlook report.

The US and Israel jointly launched military strikes on Iran on February 28. Iran responded by firing drones and missiles at Israel and US military installations around the Gulf, and also at the global business hub of Dubai.

BMI said that Iran has issued threats to ships traversing the Strait of Hormuz, and a full closure of the Hormuz Strait could directly reduce GDP by up to 0.5 pp through higher energy costs.

At the same time, the new India-US trade deal and the US Supreme Court's striking down of the Trump administration's reciprocal tariffs could boost India's economy by more than we expect, BMI said.

Following US and Israeli attacks on the Iranian government, military and nuclear facilities, Iran warned shipping away from the strait, and insurers withdrew coverage, effectively halting tanker movements. The Strait is a narrow 33-kilometre passage connecting the Persian Gulf to the Arabian Sea.

India imports 88 per cent of its crude oil needs, and any rise in prices will swell its import bill as well as fuel inflation.

India and the US, early last month, agreed on a framework to finalise an interim trade deal, under which Washington will cut down the tariffs to 18 per cent. To sign and implement the first phase of the bilateral trade agreement, the framework has to be converted into a legal document.

However, in February, the US Supreme Court ruled that the tariffs imposed by Trump on nations around the world were illegal and that the president had exceeded his authority when he imposed the sweeping levies by using the International Emergency Economic Powers Act (IEEPA) of 1977.

Following the court ruling, the US imposed 10 per cent tariffs on all countries for 150 days, effective from February 24. Trump has announced to increase it to 15 per cent, but there is no official order on that yet.

In January, India and the EU had agreed on a free trade agreement (FTA), which will be implemented within a year after legal ratification.