MUMBAI:

India’s financial and external sectors continue to draw foundational strength from a remarkably resilient domestic economy. However, the Reserve Bank of India (RBI), in its latest monthly bulletin published on Friday, cautioned that escalating geopolitical conflicts and weather-related uncertainties remain prominent downside risks to the growth trajectory.

The article titled 'State of the Economy,' featured in the bulletin, highlighted that the escalation of conflicts in West Asia has triggered a sharp surge in crude oil prices. This development has reignited global concerns regarding potential supply chain disruptions and renewed inflationary pressures worldwide. Additionally, rising sovereign yields across major advanced economies have added friction to government finances globally.

Despite this challenging external environment, the Indian economy maintained robust GDP growth through the first quarter of the 2026-27 fiscal year.

Liquidity, Credit, and Markets

System liquidity remained in a comfortable surplus state through August and surged further during the first half of September. Banks actively tapped the central bank's Foreign Currency Non-Resident (FCNR-B) swap facility during this period, though liquidity moderated slightly later in the month due to regular tax-related outflows.

Money supply growth accelerated in August, propelled by a rapid increase in aggregate deposits. Meanwhile, credit growth maintained its steady momentum alongside the pick-up in deposits.

Indian equity markets traded on a subdued note through August and September. Investor sentiment was weighed down by persistent geopolitical anxieties and elevated global bond yields.

External Sector and Reserves

The bulletin noted that India's current account deficit stayed moderate in Q1:2026-27, heavily cushioned by robust performance in services exports and steady remittance inflows.

Foreign direct investment (FDI) inflows received a significant boost in July, touching a five-year high for net monthly inflows. Net inflows under non-resident deposit accounts also registered a sharp upward spike. Capital flow measures introduced back in June successfully aided foreign exchange reserve accumulation, pushing total reserves to an impressive USD 765.9 billion as of September 18, 2026.

Conversely, foreign portfolio investments (FPI) recorded net outflows in September—reversing August's trend—as the re-escalation of the West Asia crisis spooked international investors.

Inflationary Pressures

On the price front, high-frequency data up to September 21 pointed to a broad-based sequential uptick in food prices. While rice and wheat prices continued to climb, the pace of month-on-month acceleration for rice showed signs of moderation. Major pulses—including gram, tur, and moong—saw prices edge higher over the previous month, alongside a broad-based rise in edible oils like mustard and palm oil.

Among key vegetables, onion prices registered a sharp increase, tomato prices inched up following a two-month cooling period, and potato prices recorded a downward month-on-month correction.

Note: The central bank clarified that the views expressed in the published bulletin articles belong strictly to the respective authors and do not necessarily reflect the official stance of the Reserve Bank of India.