As the world enters the 2nd half of the 2026 calendar year, the conflict in West Asia remains unresolved, with attacks and retaliatory strikes causing instability in the region, which is geographically important from a global logistics point of view. In June 2026, Washington and Tehran agreed to a Memorandum of Understanding (MoU) in which US officials read out the 14-point document dealing with the reopening of the Strait of Hormuz, easing financial strain on Iran, and setting out a plan to address and discuss Tehran’s nuclear program, inter alia. On 19th July 2026, the US military launched a fresh round of strikes targeting Iran’s under-construction nuclear power plant. Consequently, Brent crude prices, which were hovering around 72 dollars per barrel at the beginning of July, surged to over 90 dollars per barrel before stabilizing around 85 dollars per barrel.
Central Bankers of major economies became cautious, with a hawkish undertone, given the emerging challenges from the ongoing West Asia crisis in the form of price momentum at producer and retail levels in the economy. In the recent monetary policy meeting conducted on 29th July, the US Federal Reserve decided to keep the federal funds rate unchanged by a 9-3 vote. Three members dissented from the decision while proposing to raise the funds rate by 25 basis points.
The European Central Bank kept the policy rate unchanged, but policymakers expressed concerns about inflationary pressures in the economy, building a case for raising policy rates going forward. Similarly, the Bank of England kept the policy rate unchanged while expressing concern about inflationary pressures. Overall, it appears that major central banks are poised to raise policy rates given the trajectory of inflationary pressures in the economy.
Coming to the domestic economy, it has shown resilience and is expected to maintain the tempo. India’s GDP growth for Q1FY27 is estimated to come in the range of 6.5% to 7.0%, as reflected in momentum in high-frequency economic indicators. The Index of Industrial Production (IIP) has grown at a healthy pace of 7.3% in June 26 vs 5% in May 26. The Index of Core Industries (ICI) grew 5.0% in June 26, up from 3.2% in May 26. Bank credit continues to grow strongly with 17.7% growth as of July 15th, while deposit mobilization lagged at 12.7% on an annual basis.
Geopolitical challenges notwithstanding, India’s merchandise exports rose 15.9% y/y to USD 129.3 billion during the three months to June 26, while imports stood at USD 216.2 billion, a growth of 19.9%, thereby leaving a trade deficit of USD 86.9 billion as against USD 68.8 billion in the corresponding quarter last year. The services surplus meanwhile stood at USD 49.43 billion as against USD 47.9 billion in the corresponding quarter a year ago, leaving a large trade gap to be financed through capital flows. On the inflation front, consumer price index (CPI) headline inflation came in at 4.38% for Jun’26, exceeding the RBI 4% target after 16 months. Inflation concerns for the domestic economy remain the central talking point among policymakers, particularly food inflation, as the onset of El Niño has caused rain deficiency in the country. However, as the monsoon progressed, sowing deficiency has narrowed down from 16% as on 10th July to 2.8% as on 31st July, limiting the build-up of price pressure in the food segment.
The bond market and currency market in July also behaved in accordance with developments related to the West Asia crisis. The USD/INR, which was hovering around 95.30 at the beginning of Jul’26, surged to 96.50 in the third week before returning to around 95.35 towards the end of July 26. Cumulative dollar inflows under FCNR(B), OFCB and ECB are providing the requisite cushion to USD/INR. As of July 31, 2026, the total mobilization under the three heads is USD 40.8 billion, with FCNR (B) leading at USD 36.7 billion. Similarly, benchmark 10-year G-sec yields hovered around 6.72% at the beginning of July 26, surged to 6.84% as of 23rd July 26, and then returned to their former level towards the end of the month.
To conclude, India’s economic outlook remains in the spotlight relative to other major economies. Going forward, resolution of the West Asia crisis will augur well for the global economy in general and for India in particular. Given the uncertainty due to ongoing geopolitical tensions, central banks, including the RBI, are likely to remain vigilant and act prudently on the policy front as and when required.
