In the April 2026 RBI bulletin, there’s a wonderful article on the State of the economy, which very nicely summarises where we are at the moment against the backdrop of the West-Asian war. The article is about 30 pages long and I have tried to summarise the most important points here, with the help of Claude. I have further used my judgement and discretion in summarising, editing and selectively highlighting interesting parts.
I. Global Setting
The dominant story globally is the West Asia conflict. Geopolitical risk surged to the highest level since the pandemic, financial market volatility hit an 11-month high, and global supply chain pressures reached their worst since January 2023. Crude oil prices hit a four-year high of US$118.4 per barrel on March 31, and commodity prices rose broadly — aluminium, gasoline, LPG, aviation fuel, fertilisers — all driven by supply disruptions. Gold was an exception, softening as investors shifted to the dollar and fixed income. The IMF downgraded its global growth forecast in its April 2026 World Economic Outlook. Global growth is now projected at 3.1% for 2026 (down from the January 2026 projection of 3.3%), with EMDEs bearing the brunt of the slowdown. India’s own projection was revised up slightly to 6.5% for FY2026 (from 6.4%), making it one of the few upward revisions in the table. A brief two-week ceasefire between the US and Iran in early April provided some relief — equity markets partially recovered, yields eased, and commodity prices pulled back from their peaks — but uncertainty remains elevated.
II. Domestic Developments
Growth and Demand
Domestic activity painted a mixed picture. Strong points include: e-way bill generation, GST revenues (which crossed ₹2 lakh crore in March), automobile sales (retail passenger vehicles up 21.5% YoY, two-wheelers up 28.7%), digital payments, and a very strong rural demand. EV adoption, particularly in two-wheelers, added to momentum. Weak points: the manufacturing PMI fell to its lowest since June 2022 (53.9 in March, from 56.9 in February), though it remained expansionary. Port cargo was muted due to trade disruptions. International air passenger traffic fell sharply (–17.8% YoY) due to widespread flight cancellations. The Index of Eight Core Industries contracted in March, hitting a 19-month low, driven by declines in fertilisers, crude oil, coal, and electricity.
Fiscal Position
Centre’s deficit indicators (April–February 2025-26) were better than last year as a proportion of revised estimates, driven by strong tax collections (corporation tax +12.4%, customs +18%, union excise +11.3% YoY) and restrained revenue expenditure (+1.1%). Capital expenditure grew at 14.5%, reflecting the government’s quality-of-spending thrust. States, however, showed a deterioration, with deficits running higher than last year due to slower revenue receipts.
Trade
FY2026 overall: the merchandise trade deficit widened to US$333.2 billion (from US$283.5 billion in FY2025), driven by petroleum, gold, and electronics imports. Notably, China displaced the US as India’s largest trading partner, with total trade of US$151.1 billion vs US$140.2 billion with the US. The bilateral trade deficit with China widened further to US$112.2 billion. In March 2026 specifically, the trade deficit narrowed to a nine-month low of US$20.7 billion, as exports rose sequentially (to US$38.9 billion) and imports contracted (to US$59.6 billion). The conflict caused a ~54% average decline in trade with West Asian countries. Gold imports fell 31.6% YoY.
III. Inflation
CPI headline inflation rose to 3.4% in March 2026 from 3.2% in February, driven by food and fuel. The RBI noted that inflation remains within the tolerance band (2–6%), but upside risks have increased. Core inflation (excluding food and fuel) was stable at 3.7%, with precious metals remaining the main driver. Core excluding precious metals was at a moderate 2.1%. Fuel inflation picked up due to an LPG price hike (reflecting the international surge), while petrol, diesel, and kerosene retail prices were unchanged (the government cut excise duty by ₹10/litre on both petrol and diesel from March 27, 2026, absorbing some of the shock). WPI inflation also climbed for the fifth consecutive month, driven by fuel and power.
IV. Financial Conditions
Monetary Policy: The MPC unanimously voted in April 2026 to keep the policy repo rate unchanged at 5.25%, retaining a “neutral” stance.
Bond Markets: G-sec yields hardened in March (10-year yield touched 7.04%) but eased to 6.89% by April 16 following the ceasefire announcement. Yields remained elevated relative to pre-conflict levels (6.66% at end-February).
Equity: Indian markets fell sharply in March (India VIX more than doubled to 27.9), with heavy FPI selling of US$13.1 billion in March alone (full year outflow US$16.5 billion). Markets partially recovered in April on ceasefire hopes. Net FDI, however, turned positive in February after six consecutive negative months.
Rupee: The INR depreciated 3.9% in March. The RBI intervened, including capping Authorised Dealers’ net open positions and limiting activities in the non-deliverable forward market. The currency stabilised in April. Foreign exchange reserves stood at a comfortable US$700.9 billion as of April 10, providing approximately 11 months of import cover and covering ~92% of external debt.
V. Conclusion
The article’s conclusion is measured but serious. The conflict has transmitted to India through higher energy costs, input cost pressures, trade disruptions, and financial market spillovers. Inflation remains within the tolerance band, but upside risks have risen. The risk of second-round effects — a supply shock morphing into a demand shock — is explicitly flagged as warranting “careful and continuous assessment.” The temporary ceasefire has provided some breathing room. The RBI’s view is that India’s strong macroeconomic fundamentals should allow it to maintain resilience through the shock.