Indian economy resilient amid global uncertainties, says RBI

However, members of the MPC indicated that as headline inflation is projected to peak to a level as high as 5.9% in Q3 2026-27, a “case for a hike may emerge” during the course of the year, according to the minutes of the MPC meeting released last week.

“The global economy is confronting a fragile geopolitical environment and continuing trade-related uncertainties. Nevertheless, the domestic economy has demonstrated notable resilience to the ongoing global headwinds, characterised by buoyant domestic demand, and rising manufacturing and services activity,” the article authored by RBI researchers and economists said.

“The south-west monsoon picked up in July after recording a deficit in June. While headline CPI inflation rose fractionally, reflecting food inflation, core inflation remained stable. Liquidity conditions eased, supporting credit growth and ongoing investment activity. Foreign capital inflows rebounded, reinforcing the external sector,” the article said.

It said the global economic outlook continues to be shaped by geopolitical frictions in West Asia and fresh US tariffs. Despite these risks to global trade and the growth-inflation matrix, India’s robust macroeconomic fundamentals continue to provide a cushion to the domestic economy, it said.

“The momentum of Q1:2026-27 continued in July with most of the high-frequency indicators reflecting sustained manufacturing and services activity, and double-digit expansion in merchandise exports and imports,” the article said. The recovery in southwest monsoon in July helped kharif sowing reach closer to normal acreage, partly mitigating some of the risks to the agriculture sector, it said.

Headline CPI inflation edged above the target mainly due to supply-side pressures. “Stable core inflation reaffirmed the lower pass-through of cost pressures. Financial conditions are characterised by high credit growth, comfortable liquidity, and softening G-sec yields supported by a rebound in capital inflows,” it said.

“The economy continued to display strength notwithstanding these headwinds. Domestic demand remained buoyant, as reflected by several indicators, including vehicle and tractor sales,” according to the report.

Petroleum product consumption growth returned to positive territory after three straight months of contraction. Industrial production strengthened sharply in June, recording its strongest growth in nearly two years, supported by a broad-based acceleration in manufacturing.

The services sector also exhibited resilience. Both merchandise exports and imports grew strongly in July 2026, with exports growing at a four-month high (in 2026-27 so far). Merchandise trade deficit widened in July, both sequentially and on a year-on-year (y-o-y) basis, reflecting a widening of the deficit in electronic goods, it said.

“The pick-up in monsoon activity during July supported kharif sowing, taking it closer to the previous year’s level. Backed by a high stock of public foodgrains, the government has also announced an Open Market Sales Scheme for the current financial year to augment supply,” it said.

However, it said global uncertainty has been moderating for the fourth consecutive month, aided by the de-escalation of tension between the US and Iran. Geopolitical Risk Index has also fallen sharply. Financial market volatility eased in emerging market economies (EMEs) in August with the easing of crude oil prices. “Volatility in advanced economies also moderated in August, underpinned by relatively stronger economic fundamentals. It, however, witnessed a marginal uptick in mid-August due to inflation concerns and uncertainty in West Asia,” the report said.