W Asia crisis poses risks to growth, inflation in the short run, says RBI

The ongoing geopolitical tension, which has resulted in elevated energy prices, poses a risk to growth and inflation in the short run, even as the growth outlook remains positive, the Reserve Bank of India's annual report for 2025-26 said.

Furthermore, even if the Indian banking system is expected to remain resilient, lingering geopolitical tensions and supply chain disruptions may pose near-term risks to corporate earnings and the performance of loan portfolios.

The report said that though the Indian economy exhibited resilience in 2025-26 amid several external headwinds, the growth outlook remains positive going forward.

At the same time, the West Asia conflict and the attendant risks of elevated energy prices, supply chain disruptions, financial market volatility, uncertainty surrounding global trade policies and weather-related disruptions could pose headwinds to growth and inflation in the short run.

RBI said that in such uncertain times, continuous assessment of evolving developments is warranted to frame the appropriate policy response on an ongoing basis.

On the positive side, healthy corporate and bank balance sheets, the government's continued thrust on capital expenditure and the implementation of trade agreements with key partners are expected to sustain investment and growth momentum, the report said.

The report noted that the Indian banking system is expected to remain resilient, supported by prudent regulatory reforms, stable credit growth and adequate capital buffers.

“On balance, supported by sound fundamentals and healthy balance sheets, the domestic financial system has sufficient buffers to withstand adverse shocks,” it said.

Elevated sovereign yields may also exert pressure on financial institutions' investment portfolios, the report said.

“Domestic bond yields could face upward pressure if the global monetary easing cycle stalls or reverses in response to persistent oil price shocks amid fragile conditions in the Middle East,” it said.

“However, the government's commitment to fiscal consolidation, along with the liquidity injection measures by the Reserve Bank, is expected to contain the upward pressure on yields,” it added.