The Reserve Bank of India (RBI) has warned that the West Asia war has emerged as the biggest threat to global and domestic economic stability, even as it maintained that the Indian economy remains relatively resilient.
In its FY26 annual report released on Friday, the central bank said risks of higher inflation, supply-chain disruptions and slower growth are beginning to weigh on the outlook for 2026-27.
“Geopolitical risk has re-emerged as the dominant drag on global growth in 2026,” it said, adding that the adverse impact of the war, which broke out in late February, is already reflected in downgraded global growth projections and higher inflation forecasts.
The central bank cautioned that a prolonged escalation of the war could hurt growth momentum and rekindle inflationary pressures through surging crude oil prices, volatile commodity markets and disruptions in shipping routes.
“Against the backdrop of a moderate global growth, 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 report said.
The RBI projected India’s real GDP growth for 2026-27 at 6.9%, in line with the Monetary Policy Committee’s (MPC) April estimates.
The International Monetary Fund has lowered its baseline projection for global growth to 3.1% for 2026 from 3.3% estimated earlier in January, while global inflation is projected to rise to 4.4% from 3.8% projected previously.
The RBI said healthy corporate and bank balance sheets, sustained government capital expenditure and implementation of trade agreements with key partners are expected to support investment activity and domestic demand despite external turbulence.
It also pointed to the Union Budget’s push towards manufacturing, especially in strategic sectors such as semiconductors, electronics, biopharma and rare earths, alongside production-linked incentive schemes and infrastructure investments aimed at strengthening India’s industrial capacity and reducing import dependence.
On inflation, the central bank said, “Surging energy prices and disruptions in key shipping routes could intensify supply-side pressures,” the RBI warned.
It said that geopolitical tensions could trigger spillovers into input costs, wages and exchange rate volatility. Consumer price inflation for FY27 has been projected at 4.6%, with risks tilted to the upside.
The report said adequate foodgrain stocks, reservoir levels and government buffer management could help contain food inflation despite the threat of El Niño conditions and rising summer temperatures.
The agriculture outlook, however, remains closely tied to the progress of the southwest monsoon. While El Niño conditions could adversely impact farm output, the RBI said that a positive Indian Ocean dipole, a climate phenomenon defined by the irregular oscillation of sea-surface temperatures, may partially offset weather-related disruptions later in the monsoon season.
The central bank also highlighted the importance of policy coordination amid rising global uncertainty. “With increased protectionism and debt sustainability concerns, the escalating geopolitical risk calls for coordinated policy actions across fiscal, monetary and multilateral fronts,” it said.
The RBI’s MPC is set to meet next in the first week of June and is expected to keep repo rate unchanged at 5.25%.