RBI Bulletin: India’s strength faces fresh test as US-Iran war fuels inflation
Mumbai: The economy is holding up well despite rising tensions in West Asia, but higher oil prices, supply chain disruptions, and growing inflationary pressures are beginning to cloud the outlook, the Reserve Bank of India (RBI) said in its October Bulletin.
“The Indian economy continued to demonstrate strength as evidenced by high-frequency indicators across both industry and services,” RBI said in its State of the Economy article.
Strong consumer demand, a healthy services sector, and double-digit export growth continue to support the economy even as global markets grapple with conflict, high energy prices, and bouts of volatility.
The assessment comes weeks after RBI raised interest rates by 25 basis points and adopted a more hawkish policy stance, signalling that rate cuts are unlikely any time soon. At the same time, the central bank raised both its inflation and growth forecasts for the current fiscal year.
India’s external position remains relatively strong, helped by rising exports, foreign investment, overseas borrowing and remittance inflows. Still, RBI warned that prolonged geopolitical tensions, rising commodity prices and choppy global markets could create fresh headwinds in the months ahead.
The impact of these developments has become increasingly visible in commodity markets. Rising crude oil and food prices, alongside persistent uncertainty over global trade, have compounded the challenges facing policymakers, while financial markets have experienced renewed volatility amid concerns about technology stock valuations and fiscal sustainability in major economies.
Headline consumer price index (CPI) inflation edged up in September to 5.54% on year, against 4.82% recorded a month ago. This was driven by a broad-based increase in food, fuel and core components, the article said.
Uncertainty over trade policies and strengthening El Niño conditions have also added to inflationary risks.
However, double-digit growth in merchandise exports during the first six months of 2026-27 helped narrow the trade deficit. The article also pointed to stronger foreign direct investment, external commercial borrowing and remittance flows in August.
The International Monetary Fund raised its growth projection for India for 2026-27 by 60 basis points to 7% from its July estimate, citing stronger-than-expected momentum driven by resilient domestic demand and robust services activity. The broader global economy has also demonstrated resilience despite the geopolitical turbulence. For the global economy, the IMF projected growth of 3.1% in calendar year 2026, rising to 3.4% in 2027.
However, RBI cautioned that the resilience of economies has been uneven, depending on their exposure to geopolitical shocks and investment linked to artificial intelligence.
According to the article, global financial market volatility–which remained largely contained through September in most major economies–increased by mid-October amid renewed conflict in West Asia and concerns over technology stock valuations.
Meanwhile, higher global bond yields, elevated public debt and concerns over fiscal sustainability continue to weigh on the international economic environment.
