Supply dislocations arising out of the West Asia conflict, which is close to two months now, can turn into demand shock that needs careful assessment, said an article on the State of the Economy in the Reserve Bank of India’s (RBI’s) monthly bulletin released on Thursday. Supply disruptions and weather-related uncertainties also increased the upside risks to inflation, though it contained within the tolerance band, the article added.
The India Meteorological Department has forecast that southwest monsoon in 2026 is likely to be “below normal” for the first time since 2023 at 92 per cent of the long-period average.
“Possible second-round effects, with the supply shock transforming itself into demand shock, also warrant careful and continuous assessment,” the article said. It highlighted that the temporary 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 report, authored by RBI staffers with the guidance of Deputy Governor Poonam Gupta, does not reflect the view of the central bank.
The report said if the conflict persists and supply chains are not restored early, it may create challenges to the domestic economy in the form of higher energy costs, input cost pressures, disruption in trade flows, and financial market spillovers.
Domestic economic activity displayed resilience in many segments, with slowdown in a few others, it said.
The report flagged early signs of deceleration, which are 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,” it said.
The report also highlighted that the index of eight core industries declined, marking its 19-month low, driven by a fall in production of fertilisers, crude oil, coal, and electricity.
“The Indian economy continues to hold its ground despite facing a major supply shock due to the conflict in West Asia,” the report said, while observing that March high-frequency indicators of economic activity displayed divergent trends: demand conditions remained resilient, despite some pockets of slowdown in economic momentum.
It said RBI’s forward-looking surveys pointed towards softening consumer confidence on the current situation, and moderation in business optimism along with buildup of cost pressures.
On the supply side, the report noted that the high-frequency indicators of industrial activity for March pointed towards moderation due to the West Asia conflict.
On the farm sector, while noting that favourable summer sowing for pulses, oilseeds, and coarse cereals can help balance any decline in rice amid concerns over input supplies following the West Asia war, the report said the likelihood of below-normal rainfall during the southwest monsoon due to possible El Niño conditions poses downside risk to agricultural output.
The report highlighted that the swift supply management by the government to tackle the supply side bottlenecks helped in containing inflationary pressures.
Commenting on the exchange rate, which depreciated sharply in March, the report said the announcement of temporary ceasefire and the RBI’s measures aimed at curtailing speculative arbitrage positions between onshore and offshore markets provided some support to the currency in early April.
The rupee depreciated by over 4 per cent in March to become the worst-performing Asian currency, but then reversed its trajectory following the regulatory restrictions. With some of the restrictions now rolled back, the currency has weakened for the last four trading sessions.
“India’s key external sector vulnerability indicators remained contained at end-December 2025, and foreign exchange reserves continued to remain comfortable as on April 10, 2026,” the report said.
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