New Delhi: Though headwinds from the West Asia conflict are receding with the signing of an interim peace deal between the United States and Iran, the Indian economy and the financial system continue to remain susceptible to geopolitical tensions and associated shocks, the Reserve Bank of India (RBI) said on Tuesday.
“Exchange rate volatility may rise if oil prices increase due to the delayed normalisation of supply chain disruptions and additional demand to replenish inventory,” the RBI said in its latest edition of the Financial Stability Report.
“A sharp correction in global equity markets, particularly if driven by a reassessment of corporate earnings growth and elevated valuations in AI-related stocks, could spill over to domestic markets,” it added.
However, the central bank noted that the peace deal in West Asia provided tailwinds to the Indian economy.
“The interim peace deal has laid the foundation for cessation of this conflict and normalisation of supply chains, which could provide tailwinds to growth,” it said.
In the foreword to the half-yearly report, RBI Governor Sanjay Malhotra said the central bank remains alert to the evolving external and domestic risks.
“The Indian economy and the financial system have demonstrated remarkable resilience despite facing external shocks of significant magnitude. Strong growth, low inflation, healthy balance sheets of financial and nonfinancial firms, and ample buffers have helped preserve macro-financial stability,” Malhotra said.
“Nevertheless, we remain alert to evolving external and domestic risks and are committed to further strengthening the guardrails that protect our economy and financial system from potential shocks,” he added.
Meanwhile, in its Monthly Economic Review, the Union Finance Ministry flagged the risks to the economy from uneven monsoon rainfall, emerging El Nino conditions and geopolitical uncertainties.
“The weak progress of the southwest monsoon has weighed on kharif sowing, and the monsoon rainfall deficit is a concern. Among the many things India needs to build buffers for in the coming years, water may be at the top of the list,” the ministry said.
While the report, released by the Department of Economic Affairs, claimed that overall the Indian economy continues to exhibit resilience, emerging signs of moderation in industrial activity, along with evolving inflationary pressures, demand closer attention ahead.
“While easing oil prices and improving global supply-chain conditions may help alleviate some external pressures, uncertainties surrounding the monsoon and geopolitical developments in West Asia continue to pose downside risks to the growth and upside risks to the inflation outlook,” it said.
