The persistence of global supply-side risks and external demand weakness amid the Iran-Israel conflict could pose significant headwinds in the months ahead for India, the Reserve Bank's (RBI) bulletin said on June 25.
The bulletin said the global economy is grappling with renewed volatility as fresh geopolitical tensions erupt in West Asia, triggering a surge in crude oil and gold prices and deepening concerns over the already fragile trade environment.
The conflict between Iran and Israel, which intensified in mid-June, has reversed the short-lived optimism spurred by temporary tariff freezes and trade deals earlier this year, dragging financial market sentiments into another phase of uncertainty.
The conflict has further led to high-frequency indicators showing that that global manufacturing activity contracted for a second consecutive month in May, underlining the drag from sustained trade policy ambiguities, pointed out central bank's bulletin.
The bulletin further said supply chain pressures has worsened, non-food commodity prices remained erratic and crude oil prices spiked after June 13 amid escalating geopolitical risks.
It added, gold, typically seen as a safe-haven asset, also rallied.
Meanwhile, the US dollar weakened to a three-year low on June 12 on the back of growing concerns around tariff policies and the country’s fiscal debt situation, before regaining some ground as risk aversion deepened, it said.
The June reports by the OECD and the World Bank further confirm a grim outlook.
Both institutions warned of a likely deterioration in medium-term global economic prospects as trade barriers continue to rise.
Inflation trajectories have diverged significantly across Advanced Economies (AEs) and Emerging Markets and Developing Economies (EMDEs), shaped by country-specific factors, the bulletin said.
However, amidst this uncertainty, RBI noted, provisional estimates released in May pegged India’s GDP growth at 6.5 percent for FY25, with a sharp sequential uptick recorded in the January-March quarter. High-frequency indicators for May point to sustained strength in both industrial and services activity.
India also posted the highest expansion in the Purchasing Managers’ Index (PMI) among surveyed countries, notably registering a growth in new export orders, even as most major economies saw a contraction.
Manufacturing capacity utilisation remained above its long-term average, further indicating robust domestic demand and production resilience, the bulletin said.
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