Before the outbreak of the conflict, India’s macroeconomic fundamentals exuded confidence with buoyant growth and low inflation. Conditions turned adverse in March with the widening of the conflict zone and its intensification, he said in a statement announcing the decision of Monetary Policy Committee (MPC) to keep interest rates unchanged.
The global economy is facing unprecedented challenges from heightened geo-political tensions, the conflict in West Asia and the disruption in global supply chains, Malhotra noted.
“Global growth faces increasing downside risks as the sharp rise in energy prices and shortages of inputs for various industries have stoked inflation fears and pushed up the geopolitical risk premium in oil markets. Heightened uncertainty precipitated by the ongoing conflict is weighing on the outlook. Safe-haven flows have exerted depreciation pressure on currencies of major economies as the US dollar has strengthened. While commodity prices, such as of metal and gold, have moderated, financial markets have become more volatile. Equities registered a broad-based correction. Sovereign bond yields, already elevated due to long-run fiscal sustainability concerns, driven by inflation fears, have hardened across major economies,” he said.
West Asia Conflict and impact on India
Malhotra also elaborated on the impact of the West Asia Conflict on the Indian Economy.
First, elevated crude oil prices could increase imported inflation and widen the current account deficit. Second, disruptions in energy markets, fertilisers and other commodities may adversely impact industry, agriculture and services, reducing domestic output. Third, heightened uncertainty, increased risk aversion and safe haven demand could impact domestic liquidity conditions, economic activity, consumption and investment. Fourth, weaker global growth prospects may dampen external demand and reduce remittance flows, he said.
Finally, adverse spillovers from global financial markets could tighten domestic financial conditions and raise the cost of borrowing. Overall, the initial supply shock can potentially transform into a demand shock over the medium term if the restoration of supply chains is delayed, Malhotra said.
Going forward, elevated energy and other commodity prices, as also shocks to availability of inputs due to disruptions in the Strait of Hormuz are likely to impact growth in 2026-27, he said.
The Government has, however, been proactive in ensuring supply of inputs across critical sectors to minimise the impact of supply chain disruptions, the RBI Governor noted.
On the other hand, sustained momentum in services sector, persisting impact of GST rationalisation, and healthy balance sheets of financial institutions and corporates should continue to support economic activity, he said.
The agricultural sector’s prospects are supported by healthy reservoir levels. Business expectations remain optimistic, and leading indicators point towards continued resilience in manufacturing and services sectors. Moreover, the Government’s focus on scaling up domestic manufacturing in several strategic and frontier sectors augurs well for India’s ensuing growth trajectory, Malhotra said.
On the demand side, private consumption in 2026–27 is expected to be supported by discretionary spending, he said.
Rural demand remains robust. It should gain further traction on the back of favourable agricultural conditions and a healthy labour market, Malhotra added.
Urban consumption is likely to strengthen further, aided by the beneficial impact of GST rationalisation and buoyant services sector activity, he said.
While the government’s thrust on infrastructure spending continues, the revival in private sector investment is expected to sustain on the back of high capacity utilisation,10 strong credit growth and benign financial conditions, Malhotra said.
On the external front, merchandise exports could be adversely impacted from disruptions to key shipping routes, the concomitant rise in freight and insurance costs and lower global demand on account of the conflict. However, merchandise exports may benefit from the recent trade agreements, while services exports are expected to remain resilient, he added.
The real GDP growth for 2026-27 is projected at 6.9 per cent. Further escalation and wider spread of the conflict, heightened volatility in global financial markets and weather-related events, however, weigh on the domestic growth outlook. Risks to the baseline projections are tilted to the downside, with uncertainty remaining elevated due to the ongoing West Asia conflict, Malhotra said.
In January-February, headline inflation continued to remain below target (2.7 per cent and 3.2 per cent, respectively), with food group recording inflation vis a vis a deflation in the previous four months, he noted.
Inflation in fuel items was modest. Core inflation was at 3.7 per cent and the underlying price pressures benign, as evident from the much lower core inflation excluding precious metals at 2.1 per cent, Malhotra said.
Turning to the inflation outlook, recent spikes in energy prices due to the conflict have emerged as a risk. Although retail prices of petrol and diesel have remained unchanged so far, the pass-through of higher global energy prices has resulted in some price increases in a few other fuel items, he pointed out.
Food price outlook remains comfortable in the near term with robust rabi production, adequate reservoir levels and comfortable buffer stocks of foodgrains. However, likely emergence of El Niño conditions could pose a risk, Malhotra said.
Consumer Price inflation for 2026-27 is projected at 4.6 per cent. Core inflation is projected at 4.4 per cent. Excluding precious metals, core inflation is even lower indicating that underlying inflation pressures are expected to remain contained. The risks are on the upside, he said.
Global trade is expected to witness a slowdown in growth during 2026 as compared to 2025, due to the lingering tariff related uncertainties, ongoing West Asia conflict and elevated energy price, Malhotra said.
India’s merchandise exports contracted by 0.2 per cent during January-February 2026 on a year-on-year (y-o-y) basis, impacted by export contraction in key markets, he noted.
Merchandise imports recorded a double-digit growth of 22.2 per cent, largely driven by higher gold imports, resulting in a widening of the trade deficit, Malhotra added.
Expected robustness in services exports and inward remittance receipts during Q4:2025-26 should keep India’s current account deficit moderate and within the sustainable level in 2025-26, he said.
Rising global uncertainties and elevated prices of key energy commodities pose some upside risks to India’s current account deficit in 2026-27. The recent bilateral and regional trade agreements with major trading partners are expected to boost India’s trade and investment opportunities, widen and diversify its trading partners and integrate India into global value chains, Malhotra said.
Gross foreign direct investment (FDI) witnessed strong growth, while net FDI showed improvement. India remains an attractive destination for greenfield FDI projects, he noted.
Foreign portfolio investment (FPI) to India, driven by outflows in the equity segment, recorded net outflows of USD 16.5 billion in 2025-26, followed by outflows of USD 5.4 billion in 2026-27 (till April 6), Malhotra said.
Flows under external commercial borrowings and non-resident deposits moderated as compared to 2024-25. 30 As on April 3, 2026, India’s foreign exchange reserves stood at USD 697.1 billion. These are adequate in terms of the standard metrics of reserve adequacy including import cover (about 11 months) and external debt (91.1 per cent). Overall, India’s external sector indicators remain favourable. Nevertheless, elevated global geopolitical, trade and investment uncertainties require continuous vigil of the evolving developments, he added.
Exchange Rate
Despite stronger macroeconomic fundamentals, the Indian rupee in 2025-26 depreciated more than the average in the previous years, Malhotra pointed out and reiterated that RBI’s exchange rate policy remains unchanged.
“Specifically, intervention in the foreign exchange market is aimed at smoothening excessive and disruptive volatility without targeting any specific level or band for the exchange rate. This is consistent with our long-standing policy of the exchange rates being market determined,” he said.
“The RBI stands committed to this policy and would judiciously contain excessive or disruptive volatility to ensure that self-fulfilling expectations do not exacerbate currency movements beyond what is warranted by fundamentals,” Malhotra said.
Going ahead, we will continue to be proactive and pre-emptive in liquidity management and ensure sufficient liquidity in the banking system to meet the productive requirements of the economy, he said.
The system-level financial parameters related to capital adequacy, liquidity, asset quality and profitability of Scheduled Commercial Banks (SCBs) continue to remain healthy. Similarly, the system-level parameters of Non-Banking Financial Companies (NBFCs) too are sound, with adequate capital position and improved Gross Non-Performing Assets (GNPA) ratios, Malhotra said.
Credit from all sources grew at 14.3 per cent (y-o-y) as compared to 11.7 per cent (y-o-y) a year ago. Bank credit growth maintained its upward trajectory, and remained broad-based, he said.
“Global economic conditions and sentiments have soured after the outbreak of the West Asia conflict. These have adversely impacted the growth-inflation outlook. As reiterated before, we shall remain vigilant of the evolving situation and put in place policies that prioritise the best interest of the economy,” Malhotra added.