World Bank flags oil, El Niño and global market risks to growth

The World Bank has raised its growth forecast for South Asia for 2026, citing resilient consumer demand and strong domestic activity despite an energy shock, while warning that persistently high oil prices, severe weather and a global market correction could pose risks to the outlook, Reuters reported.

The World Bank now expects South Asia's economy to grow 6.9% in 2026, 60 basis points higher than its previous forecast and 10 basis points above its estimate a year earlier. The upgrade reflects stronger-than-expected consumption momentum, with government measures, robust remittances and resilient domestic demand helping economies absorb the impact of higher energy costs, the World Bank said, Reuters reported.

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The region, which relies heavily on energy imports, has so far shown greater resilience than expected to supply disruptions stemming from the US-Israeli war on Iran. However, the World Bank warned that a prolonged period of elevated oil prices could eventually weigh on economic activity and inflation.

India, South Asia's largest economy, is expected to grow 7.1% in 2026/27, according to the World Bank, up from its June forecast of 6.6%. The projection is nevertheless well below the 8.6% growth recorded in 2025/26.

Economic activity in India has remained relatively strong even as higher inflation has reduced consumers' purchasing power. The World Bank expects inflation to remain elevated into 2027, with the impact on growth potentially taking time to emerge. In emerging markets, the typical lag between an inflationary shock and its effect on economic activity is around 18 months, the bank said.

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The World Bank has not provided an aggregate inflation forecast for South Asia for 2026 but has issued individual country projections. India's central bank expects inflation to average 5% in the current financial year.

The Reserve Bank of India is widely expected to raise interest rates by 25 basis points on October 7, according to a Reuters poll of economists, marking its first rate increase since 2023. Economists also expect another hike in December as policymakers respond to persistent inflationary pressures.

Reuters reported that the expected rate increase would come as policymakers balance inflation risks against the resilience of economic growth.

Weather poses another potential threat to the region's growth outlook. A strong El Niño could hurt India in particular because agriculture plays an important role in rural demand and has a significant influence on food inflation. India last experienced El Niño conditions in 2023, when monsoon rainfall was about 95% of the long-period average.

The World Bank also highlighted artificial intelligence as an important avenue for sustaining growth and creating jobs over the medium term. AI adoption across South Asia remains below levels seen in advanced economies but is increasing rapidly, the bank said.

India, which accounts for a substantial share of the region's economic expansion, has seen 23% of firms report using AI, compared with 43% of US firms. The World Bank said wider adoption of the technology could help boost productivity and support the creation of more and better jobs as the region seeks to maintain its growth momentum.

The World Bank's upgraded forecast underscores the region's continued resilience, but the outlook remains vulnerable to prolonged energy price pressures, adverse weather and a sharp correction in global financial markets.

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)