By Shubham Batra
NEW DELHI, Oct 6 (Reuters) - The World Bank raised its growth forecast for South Asia, citing resilient consumer demand despite an energy shock, but warned that persistently high oil prices, a severe weather shock and a global market correction could threaten the region's outlook.
The Bank now expects the region to grow 6.9% in 2026, 60 basis points (bps) higher than its previous forecast and 10 basis points above its estimate a year ago as "higher energy prices have not interrupted
momentum in consumption growth."
"This is because government measures to shield consumers, strong remittances and resilient domestic demand have helped cushion the impact," World Bank Chief Asia Economist Franziska Ohnsorge said in an interview with Reuters on Monday.
The region, heavily dependent on energy imports, has so far proved more resilient than expected to supply disruptions from the US-Israeli war on Iran.
The Bank predicted India, the largest economy in the region, will grow 7.1% in 2026/27, up from the 6.6% it predicted in June but significantly lower than the 8.6% recorded in 2025/26.
Growth has held up even as higher inflation has eroded consumer purchasing power, a decoupling that has been "quite striking", Ohnsorge said.
"Inflation is expected to remain elevated into 2027," she said, adding it could take time for higher inflation to affect growth. "In emerging markets, the normal lag between such shocks and their effect on economic activity is around 18 months."
The Bank has not given a specific aggregate South Asia inflation forecast for 2026 but does provide country-level forecasts.
India's central bank expects inflation to average 5% in the current financial year and is expected to raise interest rates by 25 basis points on October 7, its first increase since 2023, with another hike likely in December, according to a majority of economists polled by Reuters.
A strong El Niño could pose another risk, particularly for India, where agriculture is key for rural demand and inflation, Ohnsorge said. India last experienced El Niño conditions in 2023, when monsoon rainfall was 95% of the long-period average.
The World Bank urged countries to adopt AI to maintain growth momentum over the medium term.
"One promising avenue for creating more, better jobs is the widespread deployment of AI. AI adoption in South Asia remains well behind that in advanced economies, but is catching up fast," the report said.
In India, which accounts for a large share of the region's economic expansion, some 23% of firms report using AI, against 43% of US firms.
(Reporting by Shubham Batra in New Delhi; Editing by Kate Mayberry)
