RBI warns West Asia war may hurt India growth outlook
Mumbai: A prolonged West Asia conflict represents a key downside risk to India's economic outlook according to the Reserve Bank of India (RBI), even as it projected a lower real gross domestic product (GDP) growth of 6.9% for 2026-27 in its annual report compared with 7.6% estimated for the previous financial year.The central bank said the impact of the conflict is likely to remain contained in the near term but warned that an escalation could derail India's otherwise positive growth trajectory."Going forward, India's growth outlook remains positive, though the West Asia conflict and the attendant risks of elevated energy prices, supply chain disruptions, financial market volatility, uncertainty surrounding global trade policies and weather-related disruptions could pose headwinds to growth and inflation in the short run," the Reserve Bank said.Also Read: Iran war - PSBs asked to stay preparedPositive Macro OutlookIt listed healthy corporate and bank balance sheets, government's continued thrust on capital expenditure and the implementation of trade agreements with key partners as positives to help sustain investment and growth momentum."Nevertheless, in a highly uncertain global environment, continuous assessment of the evolving developments is warranted to frame the appropriate policy response on an ongoing basis," the report said.
The central bank said that although portfolio flows exhibited a net outflow in 2025-26, strong buffers in the form of ample foreign exchange reserves and modest external debt liabilities continue to impart strength to the external sector, contributing to overall macroeconomic and financial stability.Adequate food grain stocks, sufficient reservoir levels and stable agricultural prospects despite possible El Nino conditions and above-normal summer temperature will keep inflation aligned to the target in 2026-27, according to the RBI. However, upside risks may emanate from a surge in global fuel and commodity prices amid geopolitical tensions, potential spillovers to input and wage costs and volatility in exchange rates.Also Read: India-US trade pact may be weeks away - US Ambassador to India Sergio GorThe central bank projected consumer price inflation for 2026-27 at 4.6%, with risks tilted to the upside, significantly higher than its revised estimate of 3.7% for the previous fiscal.Pressure on BondsDomestic bond yields could face upward pressure if the global monetary easing cycle stalls or reverses in response to persistent oil price shocks amid fragile conditions in West Asia, it said.Geopolitical risk has re-emerged as the dominant drag on global growth in 2026, according to the RBI. "In IMF's baseline scenario, the global economy is projected to grow by 3.1% in 2026 (as against the earlier projection of 3.3% in January), while global merchandise and services trade volume is expected to decelerate to 2.8% in 2026. Further intensification of the conflict, its prolongation or widening geographical spread, if any, remain the key downside risks to the global economic outlook," the report said."However, the government's commitment to fiscal consolidation, along with the liquidity injection measures by the Reserve Bank, is expected to contain the upward pressure on yields. Equity market dynamics would be conditioned by evolving geopolitical developments, global financial market volatility and foreign portfolio investment flows; a deterioration in risk sentiment alongside strengthening of the US dollar could trigger capital outflows," said the RBI's annual report. "At the same time, ongoing efforts to expand local currency settlement framework are expected to further advance rupee based cross-border transactions."
The central bank said that although portfolio flows exhibited a net outflow in 2025-26, strong buffers in the form of ample foreign exchange reserves and modest external debt liabilities continue to impart strength to the external sector, contributing to overall macroeconomic and financial stability.Adequate food grain stocks, sufficient reservoir levels and stable agricultural prospects despite possible El Nino conditions and above-normal summer temperature will keep inflation aligned to the target in 2026-27, according to the RBI. However, upside risks may emanate from a surge in global fuel and commodity prices amid geopolitical tensions, potential spillovers to input and wage costs and volatility in exchange rates.Also Read: India-US trade pact may be weeks away - US Ambassador to India Sergio GorThe central bank projected consumer price inflation for 2026-27 at 4.6%, with risks tilted to the upside, significantly higher than its revised estimate of 3.7% for the previous fiscal.Pressure on BondsDomestic bond yields could face upward pressure if the global monetary easing cycle stalls or reverses in response to persistent oil price shocks amid fragile conditions in West Asia, it said.Geopolitical risk has re-emerged as the dominant drag on global growth in 2026, according to the RBI. "In IMF's baseline scenario, the global economy is projected to grow by 3.1% in 2026 (as against the earlier projection of 3.3% in January), while global merchandise and services trade volume is expected to decelerate to 2.8% in 2026. Further intensification of the conflict, its prolongation or widening geographical spread, if any, remain the key downside risks to the global economic outlook," the report said."However, the government's commitment to fiscal consolidation, along with the liquidity injection measures by the Reserve Bank, is expected to contain the upward pressure on yields. Equity market dynamics would be conditioned by evolving geopolitical developments, global financial market volatility and foreign portfolio investment flows; a deterioration in risk sentiment alongside strengthening of the US dollar could trigger capital outflows," said the RBI's annual report. "At the same time, ongoing efforts to expand local currency settlement framework are expected to further advance rupee based cross-border transactions."
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