Prolonged West Asia conflict to raise energy costs, hit trade and markets: RBI’s State of the Economy article

The temporary two-week ceasefire between the US and Iran has, however, provided some breather to the global economy. The strong macroeconomic fundamentals should support the Indian economy to maintain its resilience to withstand such shocks, it said.

The views expressed in the Bulletin article are of the authors and do not represent the views of the RBI, the central bank said. The RBI earlier this month projected that India’s GDP growth will decline to 6.9% in FY27 from 7.6% in FY26. On the other hand, headline retail inflation is set to average 4.6% in the current fiscal.

“The conflict in West Asia has intensified pressures on the global supply chains in March with some easing observed in the first half of April. Domestic economic activity displayed resilience in many segments with slowdown in a few others. CPI inflation, driven by fuel and food, marginally edged up in March,” it said.

The money market and bond yields moderated after the temporary ceasefire in West Asia. A slowdown in imports and expansion in exports narrowed trade deficit to a nine-month low. Foreign portfolio investment flows remained volatile, although net foreign direct investment turned positive in February, the article said.

It said the resilience of the global economy, already inflicted with 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 in the global supply chains. “The durability and intensity of the conflict pose substantial uncertainty to the global growth prospects amid broader supply chain disruptions and elevated energy prices,” it said.

Global economic activity moderated to an 11-month low as momentum weakened across manufacturing and services sectors. Global commodity prices, barring precious metals, surged sharply with the upturn becoming broad-based. Crude oil prices touched multi-year high of US$ 118.4 per barrel on March 31 and remain high, it said.

“Early signs of deceleration are, however, evident in select indicators like port cargo, air passenger traffic and the outlook of purchasing managers. The manufacturing PMI, albeit in expansionary zone, declined to its lowest level in nearly four years,” it said.

Cost pressures and uncertainty took a toll on new orders and output, which grew at the slowest rates since mid-2022.

The services PMI showed resilience, although, its pace of expansion slowed to a 14-month low, reflecting softening in new business.

The index of eight core industries also declined, marking its 19-month low, driven by a decline in production of fertilisers, crude oil, coal, and electricity, the article said.