India must take proactive measures to limit impact of West Asia conflict: RBI bulletin

As India imports around 80% of its oil requirements, the Reserve Bank of India (RBI) in its article on the state of the economy published in the March bulletin, has said that India must closely monitor the evolving situation in West Asia and take proactive steps to limit any adverse spillover effect. However, it noted that India’s foreign exchange reserves remain adequate to cushion the economy from global turbulence. It added that the government’s plan to create an Economic Stabilisation Fund would further provide fiscal headroom and buffer to proactively respond to global shocks.

The article said the conflict in the Middle East, coupled with fresh US trade investigations, has resulted in increased volatility in the global financial markets. The renewed conflict in the Middle East and the US investigations into trade practices of key trading partners have brought uncertainties regarding global energy security, US import tariffs and global supply chains back to the centre stage. It cautioned that a prolonged period of war and high uncertainty would be detrimental to the broader global outlook, which was already in a state of flux prior to the recent events.

Despite these risks, it emphasised that India’s ability to absorb external shocks has strengthened over time, supported by its strong growth, sound macroeconomic fundamentals and robust external sector buffers. On the energy front, it said India has progressively diversified its crude oil import sources and augmented its domestic refining capacity. It said that since the start of the conflict, several policy measures have been implemented to blunt the immediate impact of the disruptions in global fuel supply chains and to achieve more effective use of domestic capacity to meet shortfalls.

It further said the second advance estimates of GDP for 2025-26 indicate sustained resilience of the Indian economy. High frequency indicators signal towards economic activity gaining momentum in February. CPI headline inflation picked up in February on account of food and beverages. System liquidity has remained comfortable, and the total flow of financial resources to the commercial sector rose, with a rise in financing from both the bank and non-bank sources.