The Reserve Bank of India (RBI), in its latest bulletin, has pointed to emerging pressure points on the Indian economy while exuding confidence in its ability to withstand external shocks. The resilience of the global economy, already strained by trade tensions, is being tested by the conflict in West Asia. The near halt in tanker movements through the Strait of Hormuz has intensified pressures on global supply chains. The durability and intensity of the conflict pose substantial uncertainty to global growth prospects amidst broader supply chain disruptions and elevated energy prices.
Global Supply Chain Disruptions
The standstill in tanker traffic through the Strait of Hormuz caused significant disruption in global supply chains in March. The World Bank Commodity Price Index rose sharply, driven by higher energy and fertiliser prices, according to the RBI. In this scenario, India is not immune to global shockwaves but is managing to hold on for now. The Indian economy continues to hold its ground despite facing a major supply shock due to the conflict in West Asia, the RBI stated.
External Sector and Rupee
Key external sector vulnerability indicators, such as the external debt-to-GDP ratio, net international investment position (IIP) to GDP ratio, and debt service ratio, remained contained at end-December 2025. India's foreign exchange reserves remain comfortable, providing cover for goods imports of around 11 months and approximately 92 percent of the external debt outstanding as of end-December 2025. As the war has led to a decline in many global stock markets, Indian equities have also come under pressure. Indian equity markets declined in March amidst persistent uncertainty and selling pressures by foreign portfolio investors, before recovering moderately in April on the announcement of a temporary ceasefire and moderation in crude oil prices. Net FPI outflows surged in March, and net selling continued into April.
The Indian rupee, already dealing with depreciation due to FII outflows, faced another blow from the war. Amidst financial market volatility due to the West Asia conflict, the rupee witnessed depreciation against the US dollar in March. However, depreciation pressures were arrested in April following measures taken by the Reserve Bank and the announcement of a ceasefire between the US and Iran. In real effective terms, the Indian rupee depreciated in March due to depreciation of INR in nominal effective terms and relatively lower inflation in India compared to its major trading partners.
High-Frequency Indicators and Consumer Sentiment
Available high-frequency indicators of economic activity displayed divergent trends in March. Demand conditions remained resilient, despite some pockets of slowdown in economic momentum. However, forward-looking surveys point towards softening consumer confidence on the current situation and moderation in business optimism along with buildup of cost pressures. These need to be watched, and the duration of the Middle East conflict will be an important deciding factor in how deeply the disruptions may impact economic growth.
- Global commodity prices, barring precious metals, surged sharply with the upturn becoming broad-based.
- Consumer sentiments have plummeted due to concerns over higher prices eroding purchasing power and weaker asset valuations.
- Business optimism has fallen to a five-month low in March, one of its weakest levels since the pandemic in 2020.
- The International Monetary Fund (IMF) has projected a moderation in global growth in 2026 alongside an increase in inflation, with the slowdown and inflationary pressures expected to be more pronounced in emerging markets and developing economies.
Signs of Pressure in External-Linked Sectors
While domestic economic resilience continues to shield the economy from major shocks, external-linked sectors are showing signs of pressure. Select indicators like port cargo, air passenger traffic, and the outlook of purchasing managers are down. The manufacturing PMI, while still in an expansionary zone, has dropped to its lowest level in nearly four years. Cost pressures and uncertainty have taken a toll on new orders and output, which have grown at the slowest rates since mid-2022. The services PMI, although resilient, has seen its pace of expansion slowing to a 14-month low, reflecting softening in new business. The index of eight core industries has also declined to a 19-month low, largely due to a drop in the production of fertilisers, crude oil, coal, and electricity.
However, the RBI also points out that domestic high-frequency indicators for March, in general, do not reflect much adverse impact of the global supply chain bottlenecks. Some key risks have been contained by the government, ensuring uninterrupted availability of petroleum products across the country. Overall demand conditions remained resilient with greater support from rural areas.
India's Resilience Put to Test
Even as external pressures continue to mount, the IMF has upgraded India's GDP growth forecast for the current financial year, but inflation projections have also been revised up. The biggest takeaway from the RBI bulletin is that India's domestic supply chains may come under risk from a prolonged war scenario, though strong macroeconomic fundamentals provide a buffer. The global macroeconomic milieu has undergone a significant shift with supply chain disruptions and rising energy costs due to the West Asia conflict. Heightened volatility in commodity prices and financial markets has added to the uncertainty. Further intensification of the conflict, its prolongation, and widening geographical spread remain key downside risks to the global outlook. The intensity and duration of the conflict and resultant damage to energy and other infrastructure add risk to the inflation and growth outlook.
These risks also have implications for the Indian economy. If the conflict persists and supply chains are not restored early, it may create challenges in the form of higher energy costs, input cost pressures, disruption in trade flows, and financial market spillovers. This caution led the RBI to keep the repo rate unchanged in its April monetary policy. Although inflation remains contained within the tolerance band, upside risks have increased, driven by supply-side disruptions, including weather-related uncertainties. Possible second-round effects with the supply shock transforming into a demand shock also warrant careful and continuous assessment. The temporary two-week ceasefire between the US and Iran has provided some breather to the global economy. The strong macroeconomic fundamentals should support the Indian economy to maintain its resilience to withstand such shocks, the RBI concludes.
