The Reserve Bank of India (RBI) has projected that the Indian economy will remain resilient in the financial year 2026-27 despite growing geopolitical tensions and economic uncertainties stemming from the ongoing conflict in West Asia.
In its Annual Report 2025-26 released on Friday, the central bank said India’s growth prospects continue to be supported by strong macroeconomic fundamentals, robust domestic demand, relatively low dependence on exports as a primary growth driver, and a stable policy environment.
According to the RBI, the global economic outlook has weakened due to the re-emergence of geopolitical risks as a major challenge to growth. The conflict in West Asia, which intensified in late February 2026, has affected forecasts for global growth, trade, and inflation.
Citing international projections, the RBI noted that the global economy is expected to expand by 3.1% in 2026, lower than the 3.3% forecast issued earlier in January. Global merchandise and services trade growth is also expected to slow to 2.8%.
The central bank warned that any further escalation, prolonged duration, or wider geographical spread of the conflict could pose significant downside risks to the global economy.
Growth Outlook Remains Positive
Despite external challenges, the RBI maintained a positive outlook for India’s economy.
The central bank projected India’s real Gross Domestic Product (GDP) growth at 6.9% in FY27, while cautioning that risks remain tilted to the downside if geopolitical tensions worsen.
According to the report, healthy corporate balance sheets, a well-capitalised banking sector, and the government’s continued focus on capital expenditure are expected to support investment activity and economic growth.
The RBI also said labour market conditions are likely to improve further with the implementation of the country’s four labour codes, alongside strengthening domestic demand and productivity gains.
Inflation Risks Persist
While inflation is expected to remain broadly aligned with the RBI’s target range, the central bank identified several upside risks.
The report projected Consumer Price Index (CPI) inflation at 4.6% in FY27, with risks tilted upward due to geopolitical developments and commodity market volatility.
The RBI said rising global fuel and commodity prices, potential increases in input and wage costs, and exchange rate fluctuations could place additional pressure on inflation.
At the same time, adequate foodgrain stocks, healthy reservoir levels, and favourable agricultural conditions are expected to help contain food price pressures.
Agriculture Dependent on Monsoon Performance
The outlook for the agriculture sector remains closely tied to the progress of the south-west monsoon.
The RBI noted that potential El Niño conditions could adversely affect agricultural output. However, the expected emergence of a positive Indian Ocean Dipole (IOD) later in the monsoon season may help offset some of those risks.
Trade and External Sector
The central bank acknowledged that ongoing geopolitical tensions and global policy uncertainty could weigh on India’s merchandise exports.
However, it said ongoing trade agreements with key partners and efforts to strengthen domestic manufacturing in strategic sectors are expected to improve export competitiveness and reduce import dependence.
India’s services exports, particularly in software and business services, along with strong remittance inflows from non-Gulf countries, are expected to continue supporting the country’s current account position.
The RBI also noted that foreign portfolio investment (FPI) flows will remain dependent on global investor sentiment. Nonetheless, progress in bilateral and regional trade agreements could attract additional capital inflows during FY27.
Banking System Remains Strong
According to the report, the Indian banking system remains resilient due to prudent regulation, stable credit growth, and strong capital buffers.
The RBI cautioned that geopolitical tensions, supply chain disruptions, and elevated sovereign bond yields could affect corporate earnings and investment portfolios in the near term.
However, the central bank emphasized that the financial system remains well-positioned to absorb external shocks due to strong balance sheets and sound fundamentals.
Need for Continuous Monitoring
Reflecting on FY26, the RBI said the Indian economy demonstrated resilience despite multiple global headwinds, supported by strong private consumption, sustained investment, and macroeconomic stability.
Looking ahead, the central bank expects growth momentum to continue, although developments in West Asia and weather-related disruptions could create short-term challenges.
The report concluded that continuous monitoring of global and domestic developments will be essential to ensure appropriate policy responses in an increasingly uncertain international environment.
