The central bank said the conflict’s impact would remain contained in the near term but warned that an escalation could derail India’s otherwise positive growth trajectory.
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“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 RBI said listing healthy corporate and bank balance sheets, government’s continued thrust on capital expenditure and the implementation of trade agreements with the key partners as postives to help to 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,” RBI said.
Adequate foodgrain stocks, sufficient reservoir levels and stable agricultural prospects despite possible El Niño conditions and above-normal summer temperature, will keep inflation aligned to the target in 2026-27. However, upside risks may emanate from a spike in global fuel and commodity prices amid geopolitical tensions, potential spillovers to input and wage costs, and volatility in exchange rate. The central bank has projected consumer price inflation for 2026-27 at 4.6% with risks tilted to the upside.
Also Read: India steers boat through a risky channel between war clouds and El NinoGeopolitical risk has re-emerged as the dominant drag on global growth in 2026. “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 2026), 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, RBI said.
Domestic 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 the Middle East, RBI 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. At the same time, ongoing efforts to expand local currency settlement framework are expected to further advance rupee based cross-border transactions,” RBI said.