RBI Report: Iran-US Peace Deal Could Boost India's Economic Growth Amid Risks

Mumbai: The Reserve Bank on Tuesday said the interim peace deal between Iran and the US can provide tailwinds to Indian economic growth.

In its bi-annual financial stability report released on Tuesday, the central bank also said that the growth in gold imports has decelerated "substantially" in May 2026 over April.

It, however, flagged that fiscal deficit can come under pressure because of the higher prices of energy and other commodities, their limited pass through to pump prices, excise duty cuts and higher outgo on subsidies.

"'... the interim peace deal has laid the foundation for cessation of this conflict and normalisation of supply chains, which could provide tailwinds to growth," the report said.

The country entered the recent bout of global turbulence triggered by the West Asia conflict with stronger macroeconomic fundamentals, it said, conceding that while India's resilience provides an important buffer, some impact is inevitable given the country's substantial dependence on imported energy.

The RBI said most of the high-frequency indicators for April-May 2026 point to continued resilience in economic activity which suggests that growth has remained "firm" in Q1FY27.

"Nevertheless, elevated oil and other commodity prices and weaker global growth could adversely affect India's domestic growth in 2026-27," it said.

Several measures undertaken by the Government, including support to MSME and export sectors, are expected to help sustain economic activity, while mitigating the impact of external shocks, the central bank said.

On the inflation front, it said a combination of conflict-driven supply shock and projected weak monsoon due to El NiA±o can push headline inflation to the higher end of the tolerance band or around 6 per cent in Q3FY27 and also worsen inflation expectations.

The recent decline in net FDI (foreign direct investment) may reflect the tightening of global financial conditions, it said, adding that foreign portfolio flows to India have also been under pressure.

Asserting that India's external sector remains "resilient", the FSR said, "The recent measures announced by the Government and the RBI are expected to bolster capital inflows. Therefore, even if the CAD widens, stronger capital inflows are likely to mitigate the funding constraint.".

The report also stated that fiscal deficit could come under pressure on higher prices of energy and other commodities, limited pass-through of oil price increase, excise duty cuts, and higher outgo on account of subsidies.

Gross non-performing assets of banks reduced to 1.8 per cent at the end of March, a multi-decadal low, the report said, adding that banking system gross NPAs may inch up to 1.9 per cent by March 2028 under the baseline scenario.