India’s economy remains resilient but is entering a more uncertain phase as rising geopolitical tensions, energy price shocks and global financial tightening begin to weigh on the outlook, Reserve Bank of India (RBI) Governor Sanjay Malhotra said, signalling a shift towards caution even as domestic demand stays firm.
In his monetary policy statement on Wednesday, Malhotra said the economy had entered the current period of global volatility from a position of strength, supported by “buoyant growth and low inflation”. However, conditions deteriorated in March following the intensification of the West Asia conflict, raising concerns over inflation, trade and capital flows.
Notably, the central bank said that the real gross domestic product (GDP) growth for 2026-27 is projected at 6.9 per cent, with Q1 at 6.8 per cent; Q2 at 6.7 per cent; Q3 at 7.0 per cent; and Q4 at 7.2 per cent. “Further escalation and wider spread of the conflict, heightened volatility in global financial markets and weather-related events, however, weigh on the domestic growth outlook,” he stated.
The Monetary Policy Committee (MPC) kept the policy repo rate unchanged at 5.25 per cent, maintaining a neutral stance as policymakers assess evolving risks. The standing deposit facility rate remains at 5.00 per cent, while the marginal standing facility and bank rate are at 5.50 per cent.
The central bank’s decision shows a growing recognition that while domestic fundamentals remain strong, external headwinds are intensifying. Malhotra warned that global growth faces increasing downside risks amid elevated energy prices, supply chain disruptions and heightened geopolitical uncertainty, all of which are contributing to inflationary pressures and financial market volatility.
These developments have strengthened the US dollar and tightened global financial conditions, putting pressure on emerging market currencies, including the rupee. At the same time, higher freight costs and shipping disruptions are expected to weigh on exports.
Macroeconomic Fundamentals And West Asia Crisis
Despite these challenges, India’s macroeconomic fundamentals are seen as stronger than in previous crises, offering a degree of resilience. However, Malhotra cautioned that the economy is currently facing a supply shock that could evolve into a broader demand shock if disruptions persist.
The RBI’s policy stance shows a balancing act between supporting growth and containing inflation, with authorities opting to “wait and watch” as global uncertainties unfold.
Economists say this marks a clear shift in the policy narrative.
Sakshi Gupta, Principal Economist at HDFC Bank, said the central bank has acknowledged emerging upside risks to inflation while remaining cautious on growth. “The central bank recognised the upside risks to inflation that have already emerged, upping its forecast for FY27 due to higher energy costs while being cautious on growth,” she said.
At the same time, Gupta noted that the RBI has taken comfort from the economy’s underlying strength prior to the recent geopolitical shock. “This outlook was balanced by the reiteration of the fact that the economy was witnessing strong fundamentals before the war, which enhances the absorptive capacity of the economy to the current West Asia shock,” she added.
India’s growth outlook remains relatively strong compared with global peers. The RBI estimates real GDP growth at 7.6 per cent for 2025-26, supported by robust private consumption and investment demand. However, growth is projected to moderate to 6.9 per cent in 2026-27 due to rising input costs, supply disruptions and weaker global demand.
Independent estimates point to even sharper moderation. Morgan Stanley has cut its FY27 growth forecast by 30 basis points to 6.2 per cent, citing a supply-side shock from higher global commodity prices, particularly crude oil. Growth is expected to bottom out at 5.9 per cent year-on-year in the June 2026 quarter before gradually recovering.
High-frequency indicators suggest the economy entered 2026 on a relatively firm footing. Government data showed GDP growth of 7.8 per cent in the October-December quarter of FY2025-26, driven by strong performance in manufacturing, construction and services.
However, a convergence of risks is prompting caution among policymakers and analysts. These include rising energy prices, volatile capital flows, currency pressures and geopolitical uncertainty.
Moody’s Ratings has warned that prolonged instability in major oil-producing regions could lead to heightened credit stress for energy-importing economies such as India. Meanwhile, CareEdge Ratings estimates that India could face an additional fiscal burden equivalent to 0.5 per cent of GDP in FY27 if crude oil prices remain elevated.
According to the agency, the government may need to absorb nearly Rs 1.9 trillion in additional fiscal pressure through higher subsidies, lower tax collections and revenue foregone from potential fuel duty cuts if crude averages around USD 90 per barrel.
Such pressures could complicate macroeconomic management at a time when inflation risks are already rising.
The RBI projects inflation at 4.6 per cent for 2026-27, with risks tilted to the upside due to energy price pressures and possible weather-related disruptions. Headline inflation remains below target for now, but the trajectory is becoming more uncertain.
Radhika Rao, Senior Economist and Executive Director at DBS Bank, said the policy outlook has shifted noticeably. “With the RBI MPC keeping rates on hold, the policy outlook has shifted from a ‘benign inflation, strong growth’ scenario to a more cautious balancing act, as the central bank seeks to manage renewed inflationary pressures while sustaining growth,” she said.
Rao added that elevated risks from oil prices and geopolitical tensions are limiting the scope for near-term monetary easing. “This reinforces a prolonged pause. Rate hikes would only be considered if second-round inflation effects begin to materialise more clearly,” she said.
The central bank’s caution is also reflected in its assessment of the external sector. While foreign exchange reserves remain robust at USD 697.1 billion, providing an adequate buffer, trade deficits have widened due to higher imports, particularly gold.
Higher crude oil prices could further widen the current account deficit and fuel imported inflation, while disruptions in key commodities such as energy and fertilisers may affect output across sectors.
Domestic Demand Continues In India
At the same time, domestic demand continues to act as a stabilising force.
Rural demand remains strong, supported by favourable agricultural conditions and a healthy labour market. Urban consumption is being driven by services sector momentum and tax reforms, while private investment is expected to remain resilient due to high capacity utilisation and strong credit growth.
Vikram Chhabra, Senior Economist at 360 ONE Asset, said the RBI’s decision to hold rates was in line with expectations given the uncertain outlook. “The economic outlook remains clouded by uncertainty. While the ceasefire in West Asia has eased tensions for now, there are still upside risks to inflation and downside risks to growth,” he said.
Chhabra also highlighted weather-related risks, noting that forecasts of a below-normal monsoon due to El Niño conditions could weigh on agricultural output and price stability. “We expect the RBI to extend its pause in the near term, awaiting greater clarity on both the geopolitical situation and monsoon performance,” he added.
Industry bodies say the policy stance shows the difficult trade-offs facing policymakers.
Rajeev Juneja, President of PHDCCI, said the RBI is effectively walking a tightrope. “The decision to keep the repo rate unchanged with a neutral stance shows the evolving macroeconomic conditions, particularly geopolitical uncertainties and global supply chain disruptions,” he said.
Juneja noted that while domestic fundamentals remain robust, external risks are posing challenges to both growth and inflation. He also emphasised the importance of improving export competitiveness amid rising logistics costs and global trade disruptions.
“Overall, we remain optimistic about India’s medium-term economic prospects, supported by ongoing structural reforms,” he said.
Some analysts see recent geopolitical developments offering limited relief. Ankit Agarwal, Managing Director at Alankit, pointed to the temporary easing of tensions in West Asia as a positive factor. “The ceasefire will help ease the global crude oil and gas crisis, thereby stabilising other economies,” he said.
Agarwal added that the RBI’s decision to hold rates shows confidence in India’s economic fundamentals. “The apex bank’s pragmatic measure of not changing the repo rate for three consecutive years shows India’s strong economic fundamentals, even in the midst of the West Asia crisis,” he said.
He also highlighted the role of consumption in supporting growth, noting that projected GDP growth of 6.9 per cent in FY27 could boost spending capacity and support sectors such as fintech.
Still, the broader picture suggests that India’s economic resilience will be tested in the months ahead.
The convergence of global shocks, from energy prices to geopolitical tensions, is creating a more complex macroeconomic environment. While the economy remains on a relatively strong footing, the risks are becoming more evenly balanced between growth and inflation.
Malhotra emphasised this uncertainty, saying the central bank remains vigilant and committed to ensuring macroeconomic stability. Policy responses, he added, will prioritise the “best interest of the economy” as global developments evolve.
For now, the RBI appears set to hold its ground, relying on strong domestic demand and improved macro fundamentals to cushion the impact of external shocks. But with global risks rising and policy space narrowing, the margin for error is shrinking. |
