South Asia
In South Asia, growth will continue to be supported by strong domestic demand, though expected to moderate in 2026. GDP growth in the subregion is projected to ease from 6.8% in 2025 to 6.3% in 2026 before returning to 6.8% in 2027.
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Despite a worsening global economic and geopolitical environment, growth in India is forecast to remain robust at 6.9% in fiscal year (FY) 2026. Activity will be underpinned by strong domestic demand, supported by easing financing conditions, and lower US tariffs on Indian goods. Growth is projected to rise to 7.3% in FY2027, driven by domestic reforms, the effects of trade agreements with the European Union, and expected government salary increases. In Pakistan, growth is forecast to pick up as private investment strengthens on accommodative monetary policy and improved investor confidence following sovereign credit rating upgrades in 2025. In Bangladesh, growth is projected to rise over the forecast period supported by the new government’s regulatory initiatives and benefits from ongoing financial sector reforms. In Bhutan, growth will remain robust in 2026 and 2027, driven by the construction of new hydropower plants. In Maldives, growth is projected to slow as a surge in fishing activity last year unwinds, the conflict in the Middle East dampens tourism revenue and raises energy costs, and dwindling fiscal and external resources constrain countercyclical policy response. Growth in Nepal and Sri Lanka is projected to slow in 2026, partly due to the impact of the Middle East conflict, before accelerating in 2027.
Inflation in South Asia is set to rise from 2.9% in 2025 to 5.0% in 2026, reflecting higher food and energy prices. It will then ease to 4.6% in 2027 as oil prices soften. In India, inflation is projected to more than double from 2.1% in FY2025 to 4.5% in FY2026 on a rebound in food prices from earlier declines, higher global oil prices, currency weakness, and rising precious metal prices, then ease to 4.0% in FY2027 on account of lower oil prices.
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Inflation is projected to increase in Pakistan on stronger economic activity, temporary disruption to wheat supplies, and higher oil and liquefied natural gas prices. In Bangladesh, inflation is expected to remain high in FY2026 and ease a little in FY2027 as the effects of external shocks diminish and domestic supply conditions improve. In Afghanistan, supply-chain disruptions stemming from the border closure with Pakistan are expected to push food prices higher, compounded by elevated global oil prices. Inflation in Bhutan will increase temporarily not only due to oil prices, but the introduction of a goods and services tax as well. Rising energy prices are also expected to add to inflationary pressures in Maldives, Nepal, and Sri Lanka in 2026.