West Asia Crisis Poses Risk To Growth, Inflation Says RBI Annual Report 2026

Mumbai: A prolonged West Asia war and the attendant risks of elevated energy prices, supply chain disruptions, financial market volatility, and weather-related disruptions could pose headwinds to both growth and inflation in the short run, warned the Reserve Bank of India’s (RBI) Annual Report 2025-2026 released on Friday.

For 2026-2027, against the backdrop of a moderate global growth, the domestic economy is expected to remain resilient and grow by 6.9 per cent while retail inflation at 4.6 per cent with risks tilted to the upside. In 2025-2026, India’s economy is estimated at 7.6 per cent against the backdrop of a steady global growth amidst multiple headwinds, up from 7.1 per cent in 2024-2025.

While the external environment remains challenging, India’s growth prospects are supported by India’s strong macroeconomic fundamentals, including robust domestic demand, relatively lower dependence on exports as a growth driver, and a stable policy environment.

Healthy corporate and bank balance sheets, government’s continued thrust on capital expenditure and the implementation of trade agreements with the key partners are expected to sustain investment and growth momentum.

“Nevertheless, in a highly uncertain global environment, continuous assessment of the evolving developments is warranted to frame the appropriate policy response on an ongoing basis,” warned the RBI.

The RBI also warned that domestic bond yields could face pressure if the global monetary easing cycle stalls or reverses in response to persistent oil shocks amid fragile conditions in Middle East.

The central bank noted that the imposition of US tariffs initially triggered concerns, however their overall impact remained muted, with net exports exerting a modest drag of 0.1 percentage points on growth.

The report said that inflation in 2026-27 is likely to remain aligned with the target on the back of adequate foodgrain stocks, sufficient reservoir levels and stable agricultural prospects despite possible El Niño conditions and above-normal summer temperature. However, the evolving upside risks to inflation may emanate from multiple other factors such as spike in global fuel and commodity prices amid geopolitical tensions, potential spillovers to input and wage costs, and volatility in exchange rate. “Considering all these factors, CPI inflation for 2026-27 is projected at 4.6 per cent with risks tilted to the upside, it said.

Meanwhile employment conditions in the country remained stable, with the worker population ratio and unemployment rate registering only marginal changes.

"Recently enacted labour reforms are expected to improve labour market flexibility and reduce compliance burdens while ensuring universal social security coverage, statutory minimum wages, and enhanced health and safety provisions, thereby encouraging formal job creation, worker well-being, and enterprise expansion," the RBI said.

The report also said that India's digital payments infrastructure continued its rapid expansion. Total UPI transaction volumes grew by 30 per cent, officially crossing the milestone of 200 billion transactions within a single year. To manage the massive scale of digital transactions, the RBI deployed new security measures.