Geopolitical tensions weigh on global economy; India’s growth remains resilient: RBI Bulletin

Geopolitical tensions and trade disruptions continue to test the resilience of the global economy, with supply-side pressures sustaining elevated commodity prices and inflation expectations until early June, according to the RBI Bulletin.  

Against the backdrop of conflict in West Asia, the World Bank, in its latest Global Economic Prospects report, lowered its global GDP growth projections while raising inflation forecasts. However, the recent de-escalation in the region and the interim peace agreement between the US and Iran, signed in the third week of June, have opened a path towards gradual normalisation.  

Global business activity showed signs of moderation in May, with the Purchasing Managers’ Index (PMI) weakening across major economies. Expectations of the reopening of the Strait of Hormuz and improving supply chains helped drive a correction in crude oil prices through June.  

US Treasury yields softened as inflation concerns eased after remaining elevated until early June. Emerging market bond spreads and investor sentiment remained volatile amid persistent uncertainty while equity markets gained support from strong performance in artificial intelligence and technology sectors and progress in trade negotiations.  

On the domestic front, India’s economy continued to demonstrate resilience. According to provisional estimates, GDP growth accelerated to 7.8% in the fourth quarter of FY26, supported by strong private consumption and fixed investment.  

High-frequency indicators pointed to sustained economic momentum in May, with urban demand remaining robust. Industrial output strengthened in April, aided by manufacturing growth under the revised Index of Industrial Production (IIP) series.  

India’s merchandise trade deficit remained largely unchanged in May compared with April but widened year-on-year due to higher crude oil prices.  

Retail inflation, measured by the Consumer Price Index (CPI), rose to 3.9% in May 2026 from 3.5% in April, driven by broad-based increases across food, fuel and core categories. Transport fuel prices also increased following retail price revisions by oil marketing companies, while core inflation excluding food and fuel edged higher.  

Reflecting caution over external and weather-related risks, the Monetary Policy Committee (MPC), in its June 2026 policy review, unanimously decided to keep the repo rate unchanged at 5.25% and retained a neutral policy stance. The RBI cited uncertainties surrounding the West Asia situation, along with concerns over a potentially below-normal south-west monsoon and the impact of El Niño conditions.  

Globally, the composite PMI remained in expansion territory in May, supported partly by inventory front-loading amid concerns over future price increases and supply disruptions. Manufacturing outperformed services for the third consecutive month, led by stronger production across consumer, intermediate and investment goods sectors.  

International trade, however, continued to weaken, with new export orders contracting for the third consecutive month.  

Business sentiment remained uneven across regions. Among advanced economies, PMI readings expanded in the US and Japan but contracted in the euro area and the UK. Among emerging markets, India and China continued to record growth in business activity. Export orders weakened across most economies except India.  

Commodity markets also reflected easing pressures. The World Bank Commodity Price Index softened in May as Brent crude retreated from April highs. Following the West Asia peace agreement, Brent crude fell below $80 per barrel in June.  

Food prices remained broadly stable, with gains in cereals and sugar offset by declines in vegetable oils and dairy products. The Bloomberg Commodity Index also corrected in late May and early June as agricultural, energy and precious metal prices moderated.  

Gold prices declined further amid expectations of tighter monetary policy by major central banks. Aluminium prices surged to a three-year high in early June before easing. Gasoline, jet fuel, urea, and LPG prices also moderated as supply conditions improved, and demand pressures softened.  

Within India, prices of key vegetables such as potato, onion and tomato continued to rise, while edible oil prices registered broad-based increases.  

The bulletin noted that despite recent easing, Indian basket crude oil prices remained elevated compared with April peaks. Part of the increase in global oil prices was passed on to consumers through four rounds of fuel price revisions in May, resulting in cumulative increases of around ₹7.5 per litre for petrol and ₹7.6 per litre for diesel.