Reserve Bank of India: Potential Iran-US Interim Peace Deal Could Boost India’s Growth
The Reserve Bank of India (RBI) has indicated that the interim peace deal between Iran and the United States could bolster India’s economic growth by normalizing supply chains and alleviating geopolitical tensions. In its bi-annual Financial Stability Report (FSR) released on Tuesday, the RBI noted that India entered the recent global turmoil with robust macroeconomic fundamentals. However, it cautioned that the country’s reliance on imported energy means that some impact from external shocks is unavoidable.
“The interim peace deal has laid the foundation for cessation of this conflict and normalization of supply chains, which could provide tailwinds to growth,” the RBI stated in the report.
Growth outlook remains resilient despite global risks
The RBI reported that high-frequency indicators for April-May 2026 suggest continued strength in economic activity, indicating that growth remained “firm” in the first quarter of FY27. However, the central bank warned that elevated oil and commodity prices, along with weaker global growth, could hinder India’s domestic expansion during 2026-27.
“Nevertheless, elevated oil and other commodity prices and weaker global growth could adversely affect India’s domestic growth in 2026-27,” the report said. The RBI also mentioned that government measures, including support for MSMEs and export sectors, are expected to help sustain economic activity while mitigating the impact of external shocks.
Inflation, fiscal deficit pressures remain key concerns
The RBI flagged risks to inflation stemming from supply disruptions due to geopolitical conflicts and expectations of a weaker monsoon linked to El Niño conditions. These factors could push headline inflation towards the upper end of the tolerance band, around 6 percent in Q3FY27, while also worsening inflation expectations.
Additionally, the RBI cautioned that fiscal deficit pressures could rise due to higher energy and commodity prices, limited pass-through of rising oil prices to retail fuel prices, excise duty cuts, and increased subsidy expenditure. The central bank noted a substantial slowdown in the growth of gold imports in May 2026 compared to April.
Financial system remains strong, banks maintain healthy balance sheets
According to the RBI, India’s financial system remains resilient, supported by strong bank and non-bank balance sheets. Scheduled commercial banks are stable due to robust capital and liquidity buffers, improving asset quality, and steady profitability. Gross non-performing assets (NPAs) of banks declined to 1.8 percent at the end of March 2026, a multi-decadal low.
Under the baseline scenario, banking sector gross NPAs are expected to rise marginally to 1.9 percent by March 2028. The RBI’s stress tests indicate that banks can absorb potential shocks, with capital ratios expected to remain comfortably above regulatory requirements even under adverse scenarios.
External sector remains resilient amid capital flow pressures
The RBI noted that recent declines in net foreign direct investment (FDI) could reflect tighter global financial conditions, while foreign portfolio flows into India have also faced pressure. Despite these challenges, the central bank stated that India’s external sector remains resilient.
“The recent measures announced by the Government and the RBI are expected to bolster capital inflows. Therefore, even if the CAD widens, stronger capital inflows are likely to mitigate the funding constraint,” the report said. According to separate RBI data, India’s net international investment position improved significantly during the January-March quarter of FY26.
AI cyber threats emerge as major financial risk
The RBI highlighted technological disruption and geopolitical fragmentation as major forces reshaping the global economy and financial system. RBI Governor Sanjay Malhotra stated that India’s economy and financial system have shown “remarkable resilience” despite significant external shocks.
“Strong growth, low inflation, healthy balance sheets of financial and non-financial firms, and ample buffers have helped preserve macro-financial stability,” Malhotra said. However, he warned that risks from external shocks have increased, with geopolitical conflicts and fragmentation emerging as key challenges for policymakers. The report identified AI-enabled cyberattacks as the most pressing near-term challenge from a cybersecurity perspective, emphasizing the need for stronger safeguards across the financial system.
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