Global Economic Fragility Persists Despite US-Iran Truce, India Well-Positioned

Global economic fragility persists despite a temporary US-Iran truce with the risks of renewed inflation pressure, supply disruptions, slower investments and financial instability if tension escalates, the Reserve Bank of India's state of the economy report said.

The uncertainties could impact trade, capital flows and commodity prices, the RBI report warned. The central bank published the report Monday as part of its June bulletin.

Also read: RBI flags rising fuel-price pressures amid West Asia war, says crude is easing as Hormuz fears recede

India, however, is relatively better placed due to its strong fundamentals -- steady growth, anchored inflation, fiscal discipline, a manageable current account and robust forex reserves -- although a weak monsoon could still weigh on the domestic growth and inflation outlook, the central bank said.

"The Indian economy entered this turbulence with much better fundamentals relative to many other countries to sustain the shock. India maintained a consistently high growth, anchored inflation expectations, sustained fiscal consolidation, manageable current account balance and foreign exchange buffers over the previous few years, which adds to its strength vis-a-vis similar other events in the past," said the report, prepared by the central bank economic researchers under the guidance of deputy governor Poonam Gupta.

The US-Iran negotiations in Switzerland have raised hopes of a formal peace agreement and the reopening of Strait of Hormuz while RBI researchers warned that any breakdown of the talks may reignite risks of higher inflation, disruption in critical energy infrastructure, delayed investment spending, food security concerns, adverse financial stability outlook and structurally lower growth.

Also read: RBI expected to hold repo at 5.25% as uncertainty eases, will watch food and fuel pass-through: BofA Securities

Despite the headwinds, the Indian economy grew at 7.8% in the fourth quarter while high frequency indicators indicated a sustained momentum till May. The country's external sector remained resilient, supported by steady foreign direct investment inflows and foreign exchange reserves covering 10-months of imports.

The inflation measured by Consumer price index increased to to 3.9% in May from 3.5% in the preceding month but remained within the 4% target so far.