When it comes to the Indian economy, domestic resilience is often cited as one of its greatest strengths. But how long will the Indian economy continue to withstand external pressures in the form of supply disruptions and rising import prices? The Reserve Bank of India (RBI) in its latest bulletin has pointed to emerging pressure points, while also expressing confidence in India’s ability to absorb shocks.For the RBI the situation is clear: the resilience of the global economy, already strained by trade tensions, is being tested by the conflict in West Asia. The near halt in tanker movement through the Strait of Hormuz has added pressure to global supply chains. The durability and intensity of the conflict amid widespread supply chain disruptions and increased energy prices creates substantial uncertainty for global growth prospects.The halt to tanker traffic in the Strait of Hormuz caused significant disruption to global supply chains in March. RBI says the World Bank Commodity Price Index rose sharply due to higher prices of energy and fertilizers.In this scenario, India is not immune to global shocks – but it is managing to cope for now. RBI says, “Despite a major supply shock due to the conflict in West Asia, the Indian economy is holding its own.”
Rupee, Market and PeripheralsThe RBI says key external sector vulnerability indicators, such as external debt-to-GDP ratio, net international investment position (IIP) versus GDP ratio and debt service ratio, remain under control till the end of December 2025. Moreover, India’s foreign exchange reserves remain comfortable, covering about 11 months of goods imports and about 92 per cent of outstanding external debt by the end of December 2025.
As many global stock markets have fallen due to the war, Indian stocks have also come under pressure. “Indian equity markets declined in March amid persistent uncertainty and selling pressure by foreign portfolio investors before a modest recovery in April due to the announcement of temporary ceasefire and softening of crude oil prices. Net FPI outflows increased in March and net sales continued in April,” the RBI said.The rupee, already struggling with devaluation due to FII outflows, has received another blow in the form of war.
“The Indian rupee depreciated against the US dollar in March amid volatility in the financial market due to the West Asia conflict. However, the depreciation pressure eased in April following steps taken by the Reserve Bank and the announcement of ceasefire between the US and Iran. “The Indian rupee depreciated in March in real terms, nominal effective terms and relatively low inflation in India compared to its major trading partners,” the central bank says.What do the indicators tell us about India’s situation?What does the latest data suggest about how different regions of India are bearing the impact of higher crude oil prices and input costs, along with disruptions in raw material supplies?According to the RBI, available high-frequency indicators of economic activity displayed distinct trends in March: Despite some deceleration in economic momentum, demand conditions remained resilient.
However, RBI’s forward-looking surveys point to a softening in consumer confidence on the current situation and a build-up of cost pressures as well as a decline in business optimism. These need to be monitored, and the duration of the Middle East conflict will be an important determining factor in how deeply the disruptions may impact economic growth.The situation is summarized in a few points:
- Globally, commodity prices except precious metals rose sharply and the rally became widespread.
- Consumer sentiments declined due to reduced purchasing power and weak asset valuations due to concerns over high prices.
- Business optimism fell to a five-month low in March, one of the weakest levels since the pandemic struck in 2020.
- International Monetary Fund (IMF) forecasts a slowdown in global growth in 2026 along with a rise in inflation.
- The slowdown in growth and inflationary pressures are expected to be more pronounced in emerging markets and developing economies.
Is a recession looming? Some pockets show signs of pressureWhile the RBI has pointed out that domestic economic resilience protects the economy from any major shocks, externally linked sectors are showing signs of stress. Some sectors which are showing early signs of recession are:
- Below are selected indicators such as port cargo, air passenger traffic and purchasing managers’ perspective. The manufacturing PMI, although still in expansion territory, fell to its lowest level in nearly four years.
- According to the RBI, cost pressures and uncertainty have weighed on new orders and output, which actually grew at the slowest rate since rates seen in mid-2022.
- The services PMI, although showing resilience, slowed the pace of its expansion to a 14-month low. This reflects the slowdown in new business.
- The indices of eight major industries have also declined. It has reached a 19-month low due to decline in the production of fertiliser, crude oil, coal and electricity.
However, the RBI also notes that domestic high-frequency indicators for March, in general, do not reflect much adverse impact of global supply chain disruptions.
“The government has overcome some of the key risks while ensuring uninterrupted availability of petroleum products across the country. Aggregate demand conditions remain resilient with greater support from rural areas,” it said.India’s resilience testedEven as external pressures continue to mount, the IMF has actually upgraded India’s GDP growth forecast for the current fiscal year. But inflation estimates have also been revised downwards. The biggest takeaway from the RBI bulletin is that India’s domestic supply chains could be at risk from a prolonged war scenario, although strong macroeconomic fundamentals provide a buffer.“There has been a significant change in the global macroeconomic environment with supply chain disruptions and rising energy costs due to the West Asia conflict. Increased volatility in commodity prices and financial markets have added to the uncertainty,” the RBI said.
“Intensification of the conflict, its prolongation and widening geographic spread remain key downside risks to the global outlook. The intensity and duration of the conflict and the resulting damage to energy and other infrastructure raise risks to the inflation and growth outlook,” the central bank says.These risks also impact the Indian economy. As the central bank points out: If the conflict persists and supply chains are not quickly restored, it could create challenges for the domestic economy in the form of higher energy costs, input cost pressures, disruption in trade flows and financial market spillovers. Due to this caution, RBI had to keep the repo rate unchanged in its April monetary policy.“Although inflation remains within the tolerance range, upside risks have increased due to supply-side disruptions, including weather-related uncertainties. Potential second-round effects along with supply shocks will also translate into demand shocks, hence need for careful and sustained assessment,” the RBI warned.“However, the temporary two-week ceasefire between the US and Iran has provided some relief to the global economy. Strong macroeconomic fundamentals should help the Indian economy maintain resilience to such shocks,” it concluded.