The interim peace deal between Iran and the United States could provide support to India’s economic growth by helping normalise supply chains and easing geopolitical pressures, the Reserve Bank of India (RBI) said in its bi-annual Financial Stability Report (FSR) released on Tuesday.The central bank said India entered the recent global turbulence triggered by the West Asia conflict with stronger macroeconomic fundamentals.However, it cautioned that the country’s dependence on imported energy means some impact from external shocks remains unavoidable.“The interim peace deal has laid the foundation for cessation of this conflict and normalisation of supply chains, which could provide tailwinds to growth,” the RBI said in the report.
Growth outlook remains resilient despite global risks
The RBI said most high-frequency indicators for April-May 2026 point towards continued strength in economic activity, suggesting 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 weigh on 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 added that government measures, including support for MSMEs and export sectors, are expected to help sustain economic activity while reducing the impact of external shocks.
Inflation, fiscal deficit pressures remain key concerns
The central bank flagged risks to inflation from supply disruptions caused by geopolitical conflicts and expectations of a weaker monsoon due to El Niño conditions.It said these factors could push headline inflation towards the higher end of the tolerance band, or around 6 per cent in Q3FY27, while also worsening inflation expectations.The RBI also cautioned that fiscal deficit pressures could increase due to higher energy and commodity prices, limited pass-through of rising oil prices to retail fuel prices, excise duty cuts and higher subsidy expenditure.Meanwhile, the growth in gold imports has slowed “substantially” in May 2026 compared with April, the central bank noted.
Financial system remains strong, banks maintain healthy balance sheets
The RBI said India’s financial system continues to remain resilient, supported by strong bank and non-bank balance sheets.Scheduled commercial banks remain stable due to strong capital and liquidity buffers, improving asset quality and steady profitability, according to the report.Gross non-performing assets (NPAs) of banks declined to 1.8 per cent at the end of March 2026, marking a multi-decadal low. Under the baseline scenario, banking sector gross NPAs are expected to rise marginally to 1.9 per cent by March 2028, the RBI said.The central bank added that stress tests showed banks remain capable of absorbing potential shocks, with capital ratios expected to stay comfortably above regulatory requirements even under adverse scenarios.Non-banking financial companies (NBFCs) also remained financially sound, backed by strong capitalisation, healthy profitability and improving asset quality.
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 said 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 RBI data released separately, India’s net international investment position improved significantly during the January-March quarter of FY26.Net claims of non-residents on India declined by $52.4 billion to $209.9 billion by the end of March 2026, driven by lower foreign-owned assets and higher overseas assets held by Indian residents.
AI cyber threats emerge as major financial risk
The RBI also highlighted technological disruption and geopolitical fragmentation as two major forces reshaping the global economy and financial system.RBI governor Sanjay Malhotra said India’s economy and financial system have shown “remarkable resilience” despite significant external shocks.“Strong growth, low inflation, healthy balance sheets of financial and nonfinancial 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 important near-term challenge from a cybersecurity perspective, underlining the need for stronger safeguards across the financial system.
