RBI Says Bond Yields May Face Upward Pressure If Global Easing Stalls

The Reserve Bank of India flagged the risk of upward pressure on domestic bond yields if persistent oil-price shocks stall or reverse the global monetary easing cycle, even as it said fiscal consolidation and liquidity support should help contain the move. In its annual report for 2025-26, the central bank projected India’s growth at 6.9% in 2026-27, with downside risks, and inflation at 4.6%, with upside risks, underscoring a more complicated policy setting shaped by West Asia tensions, volatile capital flows, energy prices and global risk aversion.

Key Takeaways From RBI’s Annual Report

1. RBI sees bond yields under pressure if global easing stalls
The RBI said domestic bond yields could face upward pressure if the global monetary easing cycle stalls or reverses in response to persistent oil price shocks and fragile conditions in the Middle East.

2. RBI says liquidity support, fiscal consolidation may cap yield pressure
The government’s commitment to fiscal consolidation, along with RBI liquidity injection measures, is expected to contain the upward pressure on yields.

3. RBI projects 2026-27 GDP growth at 6.9%
The RBI projected real GDP growth for 2026-27 at 6.9% in April Monetary Policy, with risks tilted to the downside, assuming the adverse impact of the West Asia conflict remains contained in the near term.

4. RBI sees 2026-27 inflation at 4.6%
Consumer price index inflation is projected at 4.6% in 2026-27 in April Monetary Policy, with risks tilted to the upside because of fuel, commodity, wage and exchange-rate pressures.

5. RBI says growth-inflation balance remains delicately poised
Heightened geopolitical risks require close monitoring of incoming data, with the monetary policy committee retaining a neutral stance to preserve flexibility.

6. RBI flags West Asia conflict as key macro risk
The RBI said a prolonged or wider West Asia conflict could pose downside risks to growth through energy prices, logistics costs, supply-chain disruptions and financial-market volatility.

7. RBI says elevated oil prices could complicate monetary policy
A persistent oil shock could revive supply-side inflation risks and force central banks to balance inflation control against growth spillovers, the report said.

8. RBI says global growth to moderate in 2026
The report cited global growth of 3.1% in 2026, below the long-term average, with trade volumes vulnerable to geopolitics and energy-price shocks.

9. RBI says global inflation faces upside risks
The RBI said energy-price spikes and disruptions to key shipping routes could intensify supply-side price pressures and keep global markets volatile.

10. RBI says strong dollar, risk-off mood may trigger outflows
The report said deterioration in global risk sentiment, along with a stronger US dollar, could trigger capital outflows from India.

11. RBI says FPI flows depend on global risk appetite
Foreign portfolio flows are expected to remain conditional on global risk appetite, especially amid geopolitical uncertainty and volatile financial conditions.

12. RBI says services surplus to support current account
A robust services trade balance, particularly software and business services, and remittances from non-Gulf countries are expected to support the current account in 2026-27.

13. RBI says merchandise exports face downside risks
Ongoing geopolitical conflicts and policy uncertainty could weigh on India’s merchandise exports, though trade agreements may help over the medium term.

14. RBI says trade agreements may support growth momentum
Implementation of trade agreements with key partners is expected to add momentum to growth, trade and investment flows.

15. RBI says strategic manufacturing push may reduce import dependence
The Budget’s focus on electronics, semiconductors, biopharma, rare earths, chemicals, textiles and capital goods is expected to strengthen export competitiveness and reduce critical import dependence.

16. RBI says government capex remains key growth support
The central government’s continued thrust on capital spending is expected to support investment momentum and reinforce domestic demand.

17. RBI says Centre’s fiscal deficit seen at 4.3% of GDP
The report noted the Centre’s 2026-27 gross fiscal deficit projection of 4.3% of GDP, reflecting continued fiscal consolidation.

18. RBI says direct taxes budgeted at decade-high share of GDP
Direct taxes are budgeted at 6.9% of GDP in 2026-27, the highest in more than a decade, according to the report.

19. RBI says state fiscal outlook remains positive
The consolidated gross fiscal deficit of states is budgeted at 3.0% of gross state domestic product in 2026-27, with transfers from the Centre expected to rise.

20. RBI says food stocks, reservoirs to anchor inflation
Adequate foodgrain stocks, sufficient reservoir levels and stable agricultural prospects are expected to keep inflation aligned with the target, despite weather risks.

21. RBI says El Niño poses risk to farm output
The outlook for agriculture depends on the progress and distribution of the south-west monsoon, with possible El Niño conditions posing downside risks.

22. RBI says fertiliser prices may face geopolitical pressure
Geopolitical tensions could affect availability and prices of key farm inputs, especially fertilisers, though government buffer management may mitigate the risk.

23. RBI says banks remain resilient despite external risks
The banking system is expected to remain resilient, supported by capital buffers, stable credit growth and prudent regulation.

24. RBI says high sovereign yields may hurt financial institutions’ books
Elevated sovereign yields could pressure investment portfolios of banks and financial institutions, though the system has sufficient buffers to withstand shocks.

25. RBI says policy response must stay data dependent
The report said continuous assessment of global and domestic developments is necessary to frame the appropriate policy response in a highly uncertain environment.