‘Geopolitical tensions point to elevated risks, policy uncertainty’

The escalation of geopolitical tensions, marked by developments such as the U.S. intervention in Venezuela, the simmering conflict in the Middle East, ambiguity surrounding the Russia-Ukraine peace deal, and escalation of the row over Greenland, point to still-elevated geo-economic risks and policy uncertainty ahead, Reserve Bank of India (RBI) officials wrote in the January edition of RBI Bulletin. However, they stated amidst these global uncertainties, the current state of the economy provided ground for optimism going forward.

“The GDP growth estimates for 2025-26 indicate that India will remain the fastest-growing major economy in the world. India has made significant efforts to diversify and strengthen its exports, aiming to mitigate external sector risks,” they emphasised in the State of the Economy chapter.

Stating that the country is currently engaged in trade negotiations with 14 countries or groups, representing nearly 50 nations, including the European Union, Gulf Cooperation Council countries, and the United States, they said December saw India concluding trade negotiations with New Zealand and Oman.

“The year 2025 also witnessed major economic reforms, including the rationalisation of tax structures, implementation of labour codes for labour market reforms, and financial sector deregulation, all of which are expected to strengthen the growth prospects,” the officials stated.

The RBI officials pointed out that the Reserve Bank’s Report on Trend and Progress of Banking in India 2024-25 underscored the resilience of the banking system, supported by strong capital buffers, improved asset quality, and robust profitability.

“Macro stress test results from the latest Financial Stability Report released in December 2025, affirmed the resilience of banks and non-banking financial companies to withstand losses under adverse scenarios and maintain capital buffers well above the regulatory minimum,” the officials mentioned.

Noting that high-frequency indicators for December suggest continued buoyancy in growth impulses with demand conditions remaining upbeat, they said headline CPI inflation edged up in December but remained below the lower tolerance level.

The flow of financial resources to the commercial sector has increased over the past year, with both non-bank and bank sources contributing to the credit pick-up. Going forward, the policy focus on striking a balance between innovation and stability, consumer protection, and a prudent approach to regulation and supervision should help improve productivity and support long-term economic growth, they concluded.