West Asia war, monsoon risks weigh on India’s growth outlook: RBI bulletin

Supply-side pressures arising from the West Asia war eased somewhat from June 2026, prompting the government to withdraw temporary measures and key input supplies to normalise. However, the renewed escalation in the conflict since the first week of July has increased volatility in energy prices and revived uncertainty around global supply chains, the latest Reserve Bank of India (RBI) bulletin said on Tuesday.

Despite persistent global uncertainties, domestic economic activity has remained resilient, with high-frequency indicators pointing to a strong performance in the first quarter of 2026-27, the bulletin said. Early corporate results for the quarter indicate healthy performance in the manufacturing sector, a trend also reflected in the expansionary Purchasing Managers’ Index (PMI).

According to the article, services activity has also maintained momentum, supported by robust domestic demand. Private consumption continued to benefit from buoyant discretionary spending while investment activity remained steady, backed by strong government spending on infrastructure and construction.

Growth outlook

Looking ahead, the outlook for agriculture remains clouded by deficient and uneven southwest monsoon rainfall amid El Niño conditions. However, reservoir levels remain close to normal, providing some comfort.

Government measures focused on crop diversification, including short-duration and climate-resilient crops, as well as water harvesting and conservation, are expected to mitigate the impact of deficient rainfall.

It said that the manufacturing sector could face cost pressures, although the increasing diversification of global supply chains should help cushion the impact. The services sector is expected to remain buoyant, supported by strong domestic demand.

As per the bulletin, projected real GDP growth for 2026-27 is at 6.7%, with growth estimated at 7% in Q1, 6.4% in Q2, 6.5% in Q3, and 6.8% in Q4.

Inflation outlook

Consumer Price Index (CPI) inflation rose to 4.4% in June 2026, after remaining below the RBI's target for 16 consecutive months. Despite pressure from higher input costs, core CPI inflation, excluding food and fuel, remained unchanged at 3.9% during May-June. Core inflation excluding precious metals was lower, at around 2.3-2.5% during the period.

Going forward, the impact of El Niño on the temporal and spatial distribution of rainfall remains a key inflation risk. Global crude oil prices have also remained highly volatile, with sharp two-way movements triggered by geopolitical developments, making the near-term inflation outlook uncertain.

Financial stability remains strong

Financial stability indicators for scheduled commercial banks remain healthy, with capital adequacy, liquidity, asset quality and profitability continuing to remain strong, although net interest margins have moderated compared with the previous year.

The system-level financial parameters of non-banking financial companies (NBFCs) also remain sound, supported by adequate capital positions, improved gross non-performing asset ratios and higher profitability.

External sector faces global risks

Despite a challenging global macroeconomic environment, India's current account deficit remained modest in 2025-26 and well below levels considered sustainable for emerging markets, it said.

During April-May 2026, the current account recorded a surplus of $2.8 billion, primarily supported by a robust services trade surplus and strong remittance receipts. However, India's merchandise trade deficit widened to $86.6 billion in Q1 2026-27, from $68.7 billion in the year-ago period. The widening was mainly driven by higher imports of crude oil, electronic goods, and gold, according to the bulletin.

It mentioned that on the external financing front, gross foreign direct investment (FDI) inflows rose to $30.7 billion during April-June 2026, from $26.7 billion a year earlier, indicating continued investor interest in India. Net FDI inflows also increased during the period, supported by higher gross inflows and slower growth in outward FDI. Foreign portfolio investment (FPI) flows also turned positive during June-July 2026, with net inflows of $7.1 billion, primarily into the debt segment, after net outflows during April-May.