IMF Warns Asian Growth to Slow in 2027 on Energy Shock, AI Risks, Rising Yields

The International Monetary Fund on Thursday projected Asia’s economic growth will moderate next year, warning of heightening risks from the Iran war-induced energy shock, a potential correction in the AI boom, and spillovers from rising global bond yields.

In its Regional Economic Outlook for Asia and the Pacific, released during the IMF’s annual meetings in Bangkok, the global lender said uncertainty over the US monetary policy path could keep Asian financial markets volatile.

“Exchange rates and capital flows have become more volatile since the energy shock this year,” with several emerging economies experiencing depreciation pressures, the IMF said in the report.

The IMF now expects Asia’s economy to grow 4.8% in 2026 and 4.4% in 2027, higher than projections made in April but still slowing from a 5.0% expansion in 2025. The revisions largely reflected the boost from the AI boom for advanced Asian economies, with their growth expected to accelerate to 3.2% in 2026 from 2.5% last year.

Emerging Asia remains the region’s main growth engine but will likely see growth moderate to 5.1% in 2026 from 5.6% last year due to the hit from higher energy prices, the report said.

“Risks to the outlook remain tilted to the downside,” the IMF said, as a prolonged stalemate in the Middle East conflict could keep commodity prices high and deplete oil reserves.

A correction in AI demand could weigh on global growth, with the effects likely to be particularly pronounced in Asia given its extensive exposure to the AI production chain. With global yields rising, market stress in major sovereign issuers like the US, the UK, the euro zone, and Japan could spill over to Asian bond markets, pushing up yields and exacerbating already-elevated fiscal vulnerabilities.

“With public debt and borrowing needs remaining high across much of the region, an abrupt tightening of financial conditions could further strain public finances by raising debt-servicing costs,” the IMF said.

India: Strong Fundamentals, Growth at 7%

India entered the energy shock with strong fundamentals and has responded well to it, Krishna Srinivasan, Director of the IMF’s Asia and Pacific Department, said at the press briefing in Bangkok. He added that pressure on India’s exchange rate should not be read as a sign of economic failure.

“India entered this with very strong fundamentals,” Srinivasan said. Growth was strong and fiscal prudence was firmly in place, and “they have responded well to the shock.”

The IMF raised its India growth forecast because the April-June quarter came in much stronger than expected. The Fund now sees growth at 7% this year and next, and 6.9% over the medium term. India remains among the fastest-growing major economies, backed by resilient domestic demand and strong services activity.

The IMF’s World Economic Outlook shows India at 7.0% in both 2026-27 and 2027-28. On a calendar-year basis the figures are 7.4% for 2026 and 7.0% for 2027. The report credited favorable demographics, a large and growing domestic market, and continued structural reforms.

Srinivasan said the exchange rate is “a function of global interest rates, investor risk appetite, and oil prices,” and India, as an oil importer, has been hit by the energy shock. He added that the exchange rate should not be treated as a measure of whether an economy is succeeding or failing.

The Reserve Bank of India opened a special window on October 10 to meet the entire daily dollar needs of three state-run oil marketing companies, taking their dollar demand out of the spot market, according to Press Trust of India. The central bank also tightened rules on forex derivatives to curb speculative bets against the rupee. The rupee closed at 95.17 against the dollar on Wednesday, its fourth straight session of gains and a one-month high, PTI reported.

Energy, Fiscal, and Monetary Policy

The IMF warned that India could face fresh inflationary pressures if the Middle East conflict keeps energy prices high for longer. While India and some other large Asian economies have adjusted their oil sourcing to limit disruption, the report cautioned that sustained energy price pressures could prolong the economic impact.

“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. Total oil flows to these countries had returned to their pre-conflict rates since June.

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.

“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.

The IMF called for fiscal policy to be targeted and temporary, urging countries in the region to avoid blanket fuel subsidies or price controls that could be more costly. “Fiscal policy should prioritize preserving sustainability while protecting vulnerable households,” it said.

Asian central banks should remain focused on price stability and “respond promptly” if inflationary pressures become more persistent, the IMF said. Srinivasan told a press conference that “central banks should communicate clearly and be ready to tighten where expectations are less anchored, frameworks are less credible, or inflation is more persistent.”

In an interview with Bloomberg Television, Srinivasan raised concerns that overlapping market risks could spill over into Asian economies.

The IMF’s baseline assumes oil at about $96 a barrel in 2026, and that the Strait of Hormuz reopens from March 2027.