Iran war poses risk to India's growth, inflation: RBI Report

The Reserve Bank of India (RBI) cautioned in its annual report for 2025-26 that geopolitical tensions in West Asia pose near-term risks to India’s economic growth and inflation. Lingering conflicts could elevate energy prices, disrupt supply chains, and trigger financial market volatility, creating headwinds for corporate earnings and loan portfolios despite the banking system’s resilience. The report noted that while India’s corporate and bank balance sheets remain healthy, government capital expenditure and trade agreements with key partners could sustain growth momentum. However, elevated crude oil prices, fertilizer costs, and gold imports—all denominated in foreign exchange—are straining India’s foreign reserves, according to Finance Minister Nirmala Sitharaman. The RBI highlighted that domestic bond yields may face upward pressure if global monetary easing stalls due to oil price shocks from Middle East instability. Fiscal consolidation efforts and liquidity injections by the central bank are expected to mitigate these pressures, though the report acknowledged potential vulnerabilities in the short term. Sitharaman emphasized the triple burden of rising fuel, fertilizer, and foreign exchange costs, warning that these ‘three Fs’ are forcing India to pay higher foreign currency outflows. The conflict’s spillover effects, including trade policy uncertainty and weather disruptions, further complicate India’s economic outlook despite strong domestic financial buffers.