Global uncertainty rises in February amid trade policy risks, Middle East conflict: RBI bulletin

Global uncertainty, after easing for four consecutive months, rose again in February, driven by an uptick in trade policy risks following a ruling by the US Supreme Court on import tariffs, according to the Reserve Bank of India’s March bulletin. 

The global environment deteriorated sharply towards the end of February as geopolitical tensions in the Middle East escalated into a major conflict. The crisis disrupted key oil infrastructure and critical energy corridors, including the closure of the Strait of Hormuz, triggering widespread volatility across commodity and financial markets. 

Commodity markets under intense pressure on supply disruptions 

Global commodity markets came under intense pressure on supply disruptions in crude oil, natural gas, and fertilisers. The International Energy Agency described the situation as “the largest supply disruption in the history of the global oil market”. 

Brent crude prices turned highly volatile, surging from $78 per barrel to $112.2 per barrel in March. Apart from fuel and LNG markets, industrial inputs such as aluminium and urea were also adversely impacted. 

The energy shock quickly transmitted to global financial markets. Equity markets saw selling pressure in March, particularly in energy-importing economies across Europe and Asia. Bond markets repriced, with US sovereign yields hardening while emerging market currencies weakened amid heightened risk aversion. The US dollar strengthened on safe-haven demand. Against this backdrop, major central banks kept policy rates unchanged during February–March. 

Domestic economy shows resilience despite global headwinds 

Despite global headwinds, India’s economy showed resilience. The second advance estimates of GDP for 2025–26, based on the revised base year of 2022–23, pointed to sustained growth driven by strong domestic demand. Private consumption and investment activity remained robust, with GDP expanding 7.8% in the third quarter. 

High-frequency indicators indicated that economic activity gained momentum in February. Both urban and rural demand remained strong, supported by lower income tax and GST rates, kharif harvest cash flows, and the wedding season. Retail sales of two-wheelers, passenger vehicles, and tractors hit record highs for the month, while agriculture remained on a strong footing with foodgrain production estimated at a record level. 

Industrial activity continued to expand and the services sector remained resilient. Corporate performance improved, with listed private non-financial companies reporting stronger operating profit growth in Q3, led by manufacturing and IT firms. 

Inflation marginally up; external risks keep outlook volatile 

Inflation, however, edged up slightly. Headline consumer price index (CPI) inflation rose to 3.2% year-on-year in February from 2.7% in January, primarily on higher food and beverages prices as vegetable prices exited deflation. Core inflation remained stable across measures. 

Liquidity conditions remained comfortable since February, aided by increased government spending and the RBI’s liquidity measures, although tax-related outflows led to some moderation in mid-March. 

Financial markets in India reflected global trends. Government bond yields firmed up following the Middle East conflict, while equity markets corrected in the latter half of February amid persistent selling in IT stocks. The escalation of geopolitical tensions triggered a broader sell-off across sectors in March, with the rupee coming under pressure due to foreign portfolio investor outflows. 

India’s current account deficit widened marginally in Q3 of 2025–26, mainly due to a higher merchandise trade deficit. However, foreign exchange reserves remained adequate to cushion external shocks. 

The RBI noted that while global growth showed signs of improvement, with the global composite PMI rising to a 21-month high in February, the outlook has become increasingly uncertain due to escalating geopolitical tensions and trade disruptions. The bulletin noted that the full impact of the Middle East conflict would be clearer in the coming months as more data for March becomes available.