Mumbai: India's financial and external sectors are continuing to draw strength from a resilient domestic economy, even as a fresh wave of geopolitical and weather-related risks threatens to cloud the outlook, the Reserve Bank of India said in its latest bulletin.
In its article on "State of the Economy" published in the RBI Bulletin on Friday, the central bank said the escalation of conflict in West Asia in September has pushed crude oil prices sharply higher, reviving concerns about supply-chain disruptions and renewed inflationary pressure. The bulletin also flagged rising sovereign yields in some major advanced economies, saying they have begun to strain government finances abroad and add to global market uncertainty.
Despite that difficult external backdrop, the Indian economy recorded strong GDP growth in the first quarter of 2026-27, the article said, underscoring the role of domestic demand in cushioning the economy from overseas shocks. "India's financial and external sectors are drawing strength from the real economy, although geopolitical tensions and weather-related uncertainties are acting as key downside risks," it said.
The bulletin painted a picture of a financial system that remained broadly liquid and functional through August and into September. System liquidity stayed in surplus in August and rose further in the first half of September as banks tapped the Reserve Bank's Foreign currency non-resident (Bank), or FCNR(B), swap facility. That surplus later moderated toward the end of the month because of tax-related outflows, but the overall message from the central bank was one of relative stability in money markets.
Money supply growth also accelerated in August, driven by a rapid increase in aggregate deposits. Credit growth maintained its momentum, while deposit growth picked up, suggesting that the banking system continues to support economic activity without an immediate sign of funding stress. For policymakers, that combination of steady lending and improving deposits is an important sign that domestic financial conditions remain supportive even as global markets turn more volatile.
The external sector, meanwhile, remained a source of strength. The current account deficit stayed moderate in the first quarter of 2026-27, helped by robust services exports and remittance inflows. Those flows have long been a stabilising force for India's balance of payments, and the bulletin said they continued to offset pressure from merchandise trade and external volatility.
Foreign direct investment strengthened in July, with net FDI reaching its highest monthly level in five years, according to the RBI. Net inflows under non-resident deposits also rose sharply, adding another layer of support to external financing. The bulletin said various capital flow measures announced in June helped foreign exchange reserves build further, with reserves rising to USD 765.9 billion as of September 18, 2026.
That reserve buffer remains one of India's key defences against global shocks, especially at a time when foreign portfolio investors have turned more cautious. The bulletin noted that Indian equity markets were subdued in August and September as geopolitical tensions and elevated bond yields weighed on sentiment. Foreign portfolio investment registered net outflows in September after inflows in August, following the re-escalation of the West Asia crisis and the rise in global bond yields.
Inflation, however, remains a clear concern. High-frequency data up to September 21 showed a broad-based sequential increase in food prices, the bulletin said. Rice and wheat prices continued to rise, although the pace of month-on-month increase moderated for rice. Prices of major pulses, including gram, tur and moong, edged higher. Edible oil prices also rose broadly, led by mustard and palm oil.
Among vegetables, onion prices increased sharply, tomato prices inched up after two months of moderation, and potato prices declined month-on-month. The pattern suggests that food inflation pressures remain uneven but persistent, with several staples showing renewed firmness.
The RBI was careful to note that the article reflects the views of its authors and not necessarily those of the central bank itself. Even so, the bulletin's tone was clear: India enters the second half of the financial year with solid domestic momentum, healthy reserves and stable banking conditions, but with external risks that could quickly feed into inflation, market sentiment and growth if global tensions deepen further.