RBI flags West Asia conflict risks but remains optimistic on growth outlook

India’s economy is expected to remain resilient during 2026-27 despite a challenging global environment marked by elevated energy prices, geopolitical tensions, volatile financial markets and uncertainty over international trade policies, according to the Reserve Bank of India’s annual report released on Friday.

The central bank said India’s growth outlook continues to be supported by strong macroeconomic fundamentals, robust domestic demand and relatively limited dependence on exports as a primary growth driver. A stable policy framework, healthy corporate and banking sector balance sheets, and sustained government investment in infrastructure are also expected to support economic expansion.

The report projected real GDP growth of 6.9 per cent for 2026-27, while cautioning that risks remain tilted to the downside, particularly if the conflict in West Asia escalates or persists for an extended period.

According to the RBI, the implementation of trade agreements with key partners is likely to provide additional momentum to economic activity. At the same time, initiatives announced in the Union Budget 2026-27 are expected to strengthen growth across several sectors.

The report highlighted seven strategic industries — electronics, semiconductors, biopharmaceuticals, rare earths, chemicals, textiles and capital goods — as areas receiving focused policy support to boost domestic manufacturing capabilities. Government schemes aimed at promoting green technologies, energy security and industrial self-reliance are also expected to contribute to long-term growth.

Infrastructure investments in freight corridors, waterways, coastal shipping and last-mile connectivity are projected to improve regional integration and support industrial development across the country.

On the agricultural front, the RBI noted that prospects remain closely tied to the progress of the south-west monsoon. While the possibility of El Niño conditions poses risks to farm output, the expected emergence of positive Indian Ocean Dipole conditions later in the season could help offset some adverse effects.

The report observed that Indian agriculture has become less vulnerable to rainfall fluctuations over time due to increased irrigation coverage, better crop management practices and technological improvements. Government efforts to ensure the availability of fertilisers and other critical inputs are also expected to support the sector.

The RBI further said labour market conditions are likely to strengthen with the implementation of the four labour codes, alongside rising domestic demand and productivity gains.

On inflation, the central bank projected consumer price inflation at 4.6 per cent in 2026-27, broadly aligned with its target range. Adequate foodgrain stocks, healthy reservoir levels and stable agricultural prospects are expected to help contain price pressures.

However, the report warned that inflation risks remain tilted to the upside due to the possibility of higher global fuel and commodity prices, geopolitical disruptions, rising input costs and exchange-rate volatility.

The RBI also pointed to continued fiscal consolidation by the Centre, with the fiscal deficit projected at 4.3 per cent of GDP in 2026-27. Direct tax collections are budgeted at 6.9 per cent of GDP, the highest level in more than a decade. The recently created Economic Stabilisation Fund is expected to provide additional fiscal flexibility in the event of external shocks.

For states, the fiscal outlook remains favourable, with their combined fiscal deficit budgeted at 3 per cent of gross state domestic product, the report noted.

Overall, the RBI said India remains well positioned to navigate external challenges, provided global geopolitical risks remain contained and domestic demand continues to support growth momentum.

With IANS inputs