The Reserve Bank of India has cautioned that the West Asia conflict now poses the main risk to worldwide and local economic stability, while noting that the Indian economy continues to show relative strength. In its annual report for FY26 issued on Friday, the central bank stated that rising inflation, supply chain issues and weaker expansion are starting to affect prospects for 2026-27. Geopolitical tensions have again become the chief constraint on global growth this year, it said, noting that the effects of the conflict that began in late February already appear in reduced worldwide growth forecasts and increased inflation estimates. The bank warned that further escalation could weaken expansion momentum and revive price pressures via higher crude oil costs, unstable commodity markets and interruptions to sea routes. Despite moderate global expansion, the outlook for the Indian economy in 2026-27 stays positive thanks to solid macroeconomic foundations, though extended conflict in West Asia may create downside risks, the report added. The RBI kept its forecast for real GDP growth at 6.9 percent for 2026-27, matching earlier Monetary Policy Committee estimates from April. The International Monetary Fund has cut its global growth projection to 3.1 percent for 2026 from 3.3 percent in January, while worldwide inflation is now seen rising to 4.4 percent from 3.8 percent. The central bank said strong corporate and banking balance sheets, continued public capital spending and new trade pacts with major partners should support investment and domestic demand even amid external shocks. It also noted the Union Budget focus on manufacturing in areas such as semiconductors, electronics, biopharma and rare earths, along with production-linked incentives and infrastructure outlays to boost industrial capacity and cut import reliance. Surging energy prices and shipping disruptions could increase supply-side strains, the RBI said. Geopolitical tensions may also affect input costs, wages and currency movements. Consumer price inflation for FY27 is projected at 4.6 percent, with upside risks. Adequate food stocks, reservoir levels and government buffers should help limit food price rises despite possible El Niño effects and higher summer temperatures. Farm prospects remain linked to the southwest monsoon. While El Niño may reduce output, a positive Indian Ocean dipole could partly offset weather disruptions later in the season. The bank stressed the need for policy coordination amid rising global uncertainty, calling for joint fiscal, monetary and multilateral steps. The RBI monetary policy committee is scheduled to meet in early June and is likely to hold the repo rate steady at 5.25 percent.
