Amid the Middle East crisis and the US-Iran conflict, the Indian economy is in focus for the possible fallout from the war and rising global crude oil prices that is now hitting the external sector’s resilience. However, striking a positive note, the Reserve Bank of India (RBI) in its annual report has expressed confidence in India’s ‘strong macroeconomic fundamentals’.Acknowledging the impact of the West Asia crisis, the RBI has said that several factors will help India counter the negative effects and emerge strong. Despite facing multiple global challenges, India maintained a strong growth trajectory, with GDP projected to expand by 7.6% in 2025-26 compared with 7.1% in the previous year.Also Read: Petrol pain: How fuel price hike complicates RBI’s inflation fightRBI’s annual report comes at a time when India is dealing with the impact of the ongoing Middle East conflict: rupee is falling, stock markets are in red, forex reserves are dipping, global crude oil prices are rising leading to a hike in petrol and diesel prices.Growth was primarily supported by robust private consumption and sustained investment activity. While the introduction of US tariffs initially raised concerns, their overall effect remained limited, with net exports shaving off only 0.1 percentage point from growth. On the production side, strong performances by the services and manufacturing sectors compensated for weaker momentum in agriculture.“The domestic economy in 2026-27 is expected to remain resilient, despite challenging external environment characterised by elevated energy and commodity prices, rising logistics costs, volatility in global financial markets and uncertainties surrounding global trade policies. Growth prospects are supported by India’s strong macroeconomic fundamentals, including robust domestic demand, relatively lower dependence on exports as a growth driver, and a stable policy environment.,” RBI says.Also read: Let rupee depreciate, use liquidity tools before rate hikes to tackle inflation: Former RBI governor
RBI’s Assessment of Indian Economy Amid US-Iran Conflict
- “Geopolitical risk has re-emerged as the dominant drag on global growth in 2026. The adverse impact of the outbreak of the conflict in West Asia in end-February 2026 is reflected in the forecasts of global growth and inflation,” says RBI.
- Under its baseline assessment, the IMF now expects the global economy to grow by 3.1% in 2026, lower than the 3.3% forecast issued in January 2026. Global trade in goods and services is also expected to slow, with growth in trade volumes projected at 2.8% during the year. Any escalation, prolonged duration or wider geographical spread of the conflict remains a significant downside risk to the global outlook.
- Persistent geopolitical uncertainty is also expected to keep inflationary pressures elevated. Higher energy prices and disruptions to major shipping routes could worsen supply-side constraints. Reflecting these developments, the IMF has revised its global inflation forecast for 2026 to 4.4%, up from the 3.8% estimate released earlier in January.
- “Financial markets may exhibit higher volatility with tighter macroeconomic conditions and broader risk-off sentiment. Elevated valuations in technology sectors may undergo reassessment, raising the risk of corrections in equity markets. With increased protectionism and debt sustainability concerns, the escalating geopolitical risk calls for coordinated policy actions across fiscal, monetary and multilateral fronts,” the central bank said.
However, even against this backdrop of slowing global growth, India’s outlook remains positive.“The outlook for the Indian economy in 2026-27 remains positive, supported by strong macroeconomic fundamentals, although a prolonged West Asia conflict may pose downside risk,” the central bank’s annual report says.“The healthy balance sheets of the corporate and banking sectors along with the government’s continued thrust on capital expenditure bode well for India’s strong growth trajectory. Moreover, implementation of various trade agreements with the key trading partners would provide further momentum to India’s growth,” it adds.At a sectoral level, the performance of the agriculture sector in 2026-27 will largely depend on the progress, timing and geographical spread of the south-west monsoon.The possibility of El Niño conditions remains a key risk factor and could weigh on farm output. However, the emergence of favourable Indian Ocean Dipole conditions later in the monsoon season is expected to provide some support and partially counterbalance these risks.Importantly, the RBI notes that agriculture’s dependence on rainfall has gradually reduced over the years due to expanding irrigation coverage, better farming practices and advances in agricultural technology.Geopolitical tensions could create challenges for the availability and pricing of critical farm inputs, particularly fertilisers. Nevertheless, government measures aimed at maintaining adequate supplies through diversified sourcing strategies and buffer stock management are expected to help contain these risks.RBI believes that the government is also expected to maintain its emphasis on growth-oriented capital expenditure, which should continue to support economic activity.Inflation during 2026-27 is projected to remain broadly consistent with the target, supported by comfortable foodgrain inventories, adequate reservoir levels and a favourable agricultural outlook despite the possibility of El Niño conditions and higher-than-normal summer temperatures.“ However, the evolving upside risks to inflation may emanate from multiple other factors such as spike in global fuel and commodity prices amid geopolitical tensions, potential spillovers to input and wage costs, and volatility in exchange rate. Considering all these factors, CPI inflation for 2026-27 is projected at 4.6 per cent with risks tilted to the upside,” the report says.
