India’s economy is expected to remain resilient in 2026-27 despite rising geopolitical tensions and a weakening global environment. However, a prolonged conflict in West Asia could weigh on growth, inflation and key sectors, according to the Reserve Bank of India’s annual report.
“The adverse impact of outbreak of the conflict in West Asia in end-February 2026 is reflected in the forecasts of global growth and inflation,” the RBI said.
The central bank projected real GDP growth at 6.9% for 2026-27 and CPI inflation at 4.6%, cautioning that risks to growth remain tilted to the downside while inflation risks are skewed upward due to volatile commodity prices, supply disruptions and uncertainty in global financial markets.
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The report said India’s growth outlook continues to be supported by healthy corporate and banking sector balance sheets, government-led capital expenditure, and policy support for manufacturing and infrastructure. However, the evolving geopolitical situation, particularly the conflict in West Asia, remains a major source of uncertainty for both the domestic and global economy. “The surging energy prices and disruptions in key shipping routes could intensify supply-side pressures,” the report added.
It also warned that financial markets may remain volatile amid global risk aversion and a possible strengthening of the US dollar. Domestic bond yields could face upward pressure if global monetary easing stalls due to elevated oil prices, although fiscal consolidation and RBI liquidity measures may help contain sharp movements.
The central bank said the banking sector remains resilient with adequate capital buffers and stable credit growth, though persistent geopolitical tensions and elevated sovereign yields may create near-term stress for corporate earnings and investment portfolios.
Monsoon Dualities
The RBI said the agriculture outlook would depend significantly on the progress and distribution of the southwest monsoon. “The likelihood of El Niño conditions poses downside risks to agriculture output. However, the rain-inducing positive Indian Ocean Dipole (IOD) conditions are likely to emerge towards the latter part of the monsoon season, which may partly offset adverse impacts,” the report said. Improved irrigation, technological advancements and government efforts to ensure adequate fertiliser supplies and diversify sourcing are expected to cushion the impact.
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Budgetary Multipliers
Manufacturing is expected to receive a boost from policy measures announced in the Union Budget 2026-27, with seven strategic sectors — electronics, semiconductors, biopharma, rare earths, chemicals, textiles and capital goods — identified for focused support. The RBI said schemes such as production-linked incentives (PLI), PM E-DRIVE and investments in freight corridors, waterways and logistics infrastructure are likely to strengthen domestic manufacturing capacity, improve regional integration and reduce critical import dependence.
The services sector outlook remains robust, particularly for software and business services exports, which, along with inward remittances, are expected to support the current account balance. The RBI also highlighted policy support for the digital economy and artificial intelligence ecosystem, including the IndiaAI mission, tax incentives for data centres and liberalised FDI norms in the space sector. However, it also pointed that elevated valuations in technology sector may undergo reassessment, raising the risk of corrections in equity markets.
On the external front, the RBI warned that merchandise exports could face pressure from ongoing geopolitical conflicts, supply-chain disruptions and global policy uncertainty. However, implementation of bilateral and regional trade agreements, along with a sharper focus on domestic manufacturing, is expected to improve export competitiveness over the medium term.
TOPICSeconomy newsThis article was first uploaded on May twenty-nine, twenty twenty-six, at zero minutes past ten in the night. © The Indian Express (P) Ltd