RBI flags risks if West Asia peace deal fails, says India remains strong

Mumbai: The Reserve Bank of India (RBI) on Monday cautioned that any breakdown of the recent peace agreement in West Asia could rekindle significant risks for the global and domestic economy, including higher inflation, disruptions to energy supplies, weaker investment activity and slower economic growth.

In its June bulletin, the central bank said, “Any breakdown of the agreement may reignite material risks in terms of inflationary expectations, disrupted critical energy infrastructure, delayed investment spending, food security concerns, adverse financial stability outlook and structurally lower growth.”

The central bank’s assessment comes amid easing tensions following the interim peace agreement between the US and Iran, which has helped moderate concerns around energy supply disruptions and global trade routes. The agreement has provided ‘a vital opening towards normalisation’ after months of heightened geopolitical uncertainty, the article said.

Despite the challenging global backdrop, the RBI said the Indian economy continues to demonstrate resilience. India’s gross domestic product (GDP) expanded by 7.8% in the fourth quarter of 2025-26, supported by robust private consumption and fixed investment. High-frequency indicators for the first two months of 2026-27 suggest that economic momentum has remained intact.

According to the bulletin, domestic demand conditions have remained strong, aided by urban consumption, while industrial activity improved in April on the back of stronger manufacturing output. Services sector activity also continued to provide support to growth.

The RBI, however, said inflationary pressures have begun to emerge. Consumer price inflation rose to 3.9% in May from 3.5% in April, driven by increases across food, fuel and core components. The rise in transport fuel prices reflected recent adjustments by oil marketing companies to retail fuel prices.

On the external front, the central bank said India’s position remains comfortable. Strong foreign direct investment inflows and adequate foreign exchange reserves continue to support the external sector, helping cushion the economy against global volatility.

The bulletin also highlighted improving financial conditions. Bank credit growth picked up further in May, while overall financial resource flows increased during the current fiscal year, supported by stronger non-food credit growth and rising FDI inflows. Government finances also remained on a consolidation path, with the Centre’s fiscal deficit for 2025-26 estimated at 4.4% of GDP.

Overall, the RBI’s assessment suggests that while India’s macroeconomic fundamentals remain strong, the outlook continues to hinge significantly on geopolitical developments, particularly the durability of the fragile peace in West Asia.

Subhana Shaikh is a business journalist at Mint, where she covers the Reserve Bank of India, monetary policy, and India’s bond markets. She has seven years of experience in reporting on financial markets, with a focus on banking and the broader financial system.<br><br>She began her career after completing her postgraduate diploma at the Indian Institute of Journalism and New Media, Bengaluru. She then spent five years at Informist Media, a news wire agency, where she closely tracked bond markets and the BFSI sector, developing a strong foundation in market reporting. She later moved to NDTV Profit, where she expanded her coverage across a wide range of business and economic stories.<br><br>At Mint, Subhana focuses on explaining central bank decisions, bond market movements, and banking trends for her readers. Her reporting combines on-ground inputs with careful analysis to help audiences understand complex financial developments.<br><br>Based in Mumbai, she is interested in exploring stories across the business landscape. Outside of work, she enjoys reading and spending time with her three cats.

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