The RBI has warned that a West Asia war could hurt India’s growth outlook

MUMBAI: The prolonged West Asian conflict represents a major downside for 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 to an estimate of 7.6% for the previous fiscal.

The central bank said the impact of the conflict was likely to be contained in the near term but warned that the escalation could derail India’s otherwise positive growth path.

“Going forward, India’s growth outlook remains positive, although West Asian conflicts and elevated energy prices, supply chain disruptions, financial market volatility, uncertainty around global trade policies and weather-related disruptions could create headwinds for growth and inflation in the short term,” the Reserve Bank said.

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Positive Macro Outlook

It listed as positives healthy corporate and bank balance sheets, the government’s continued emphasis on capital spending and the implementation of trade agreements with key partners to help sustain investment and growth momentum.

“Nevertheless, in a highly uncertain global environment, continuous assessment of evolving developments is necessary to formulate an appropriate policy response on an ongoing basis,” the report said.

The central bank said that although portfolio flows showed a net outflow in 2025-26, strong buffers in the form of adequate foreign exchange reserves and modest external debt obligations continue to strengthen the external sector, contributing to overall macroeconomic and financial stability.

According to the RBI, despite possible El Nino conditions and above-normal summer temperatures, adequate foodgrain stocks, adequate reservoir levels and stable agricultural prospects will keep inflation in line with the target in 2026-27. However, upside risks could arise from rising global fuel and commodity prices amid geopolitical tensions, potential spillovers in input and wage costs and volatility in exchange rates.

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The central bank projected consumer price inflation at 4.6% for 2026-27, with risks tilted to the upside, significantly higher than its revised estimate of 3.7% in the previous fiscal.

Pressure on bonds
Domestic bond yields could face upward pressure if the global monetary easing cycle stalls or reverses in response to continued oil price shocks amid fragile conditions in West Asia, it said.

According to the RBI, geopolitical risk has re-emerged as a dominant drag on global growth in 2026. “In the IMF’s baseline scenario, the global economy is projected to grow by 3.1% in 2026 (against the previous estimate of 3.3% in January), while the volume of global merchandise and services trade is expected to decline to 2.8% in 2026. There is a risk of further intensification, prolongation or widening of conflicts. Global Economic Outlook,” the report said.

“However, the government’s commitment to fiscal consolidation, coupled with liquidity injection measures by the Reserve Bank, is expected to contain upward pressure on yields. Equity market dynamics will be conditional on geopolitical developments, global financial market volatility and risks remitted to the US dollar along with strengthening foreign portfolio investment flows. Capital inflows,” RBI’s annual report said. “At the same time, ongoing efforts to expand the local currency settlement framework are expected to further boost rupee-based cross-border transactions.”