India could face fresh inflationary pressures if the Middle East conflict keeps energy prices high for longer, the International Monetary Fund (IMF) has warned. While India has kept its oil pipelines running by sourcing from alternative markets, the agency has predicted that prolonged high energy prices could raise costs, slow economic growth and increase the cost of living.The warning features in the IMF’s October 2026 Regional Economic Outlook for Asia and the Pacific, which lists a prolonged Middle East conflict among the major downside risks facing the region. Although India and some other large Asian economies have adjusted their oil sourcing to limit the disruption, the report cautioned that sustained energy price pressures could prolong the economic impact of the conflict.The shift in supply sources has helped India, Japan and Korea bring oil flows back to the levels recorded before the conflict. The IMF attributed this recovery partly to the countries’ ability to secure supplies from outside the Middle East.“For other large Asian economies (including India, Japan, and Korea), the resilience in part reflects adaptation by securing oil from alternative sources outside the Middle East,” the report said. It added that total oil flows to these countries had returned to their pre-conflict rates since June.Refined fuel prices add to cost pressuresThe pressure on energy costs has not been uniform across products. The IMF noted that refined petroleum products, particularly diesel and jet fuel, had recorded sharper price increases than crude oil following the conflict.If these costs remain high, businesses could face increased transportation and production expenses, with the impact potentially extending to consumers. The report warned that a prolonged conflict could keep energy prices elevated and sustain wider commodity price pressures.“A prolonged conflict in the Middle East could sustain high energy prices,” the IMF said, describing persistent energy disruptions as a key downside risk for the Asia-Pacific region.Higher energy bills pose a fiscal challengeExpensive energy could also leave governments across the region with less room to manage their finances while providing relief to households facing higher costs. The IMF warned that rising energy prices could worsen fiscal balances, making it harder to protect vulnerable sections of the population without undermining fiscal sustainability.The report recommended that governments focus on targeted assistance rather than measures that apply broadly across the economy. “Fiscal policy should prioritize preserving sustainability while protecting vulnerable households,” it said, advocating targeted and time-bound support instead of broad-based fuel subsidies or price controls.AI investments and global financial conditions among other risksThe IMF also pointed to uncertainty over artificial intelligence investments and tighter global financial conditions as potential sources of pressure on regional growth.A correction in AI-related investments or asset valuations could weigh on business investment and private consumption. Separately, higher global sovereign yields could spill over into regional bond markets, adding to the challenges facing Asian economies.The IMF has projected India’s GDP growth at 7% in 2026 and 2027, with private consumption and services activity expected to support expansion. However, managing external shocks and maintaining macroeconomic stability will remain important to sustaining this growth.To strengthen the region’s ability to withstand future disruptions, the IMF called for improvements in energy security, investment in digital infrastructure and skills, and policies focused on price stability.
