India's financial and external sectors continue to draw strength from a resilient domestic economy, though escalating geopolitical tensions and weather-related uncertainties remain key downside risks, according to the Reserve Bank of India's September Bulletin released on Friday.The monthly Bulletin's 'State of the Economy' article stressed the resilience of the real economy and noted that financial and external sector conditions were drawing strength from domestic economic activity, even as geopolitical uncertainty and weather-related disruptions pose risks to the growth outlook.
Strong domestic momentum
Despite the uncertain international environment, India's economy posted strong growth during the first quarter of 2026-27, indicating continued momentum in domestic economic activity. The central bank's assessment also pointed to the role played by services exports and remittance inflows in supporting India's external position, with the current account deficit remaining moderate during the quarter.
Foreign investment showed improvement as well. The Bulletin noted that net foreign direct investment (FDI) flows rose in July, reaching their highest monthly level in five years, while net inflows through non-resident deposits also recorded a significant increase. Measures announced in June helped support the accumulation of foreign exchange reserves, which climbed to a record $765.9 billion as of September 18, 2026.
The liquidity position within the banking system also remained comfortable. System liquidity stayed in surplus through August and increased further during the first half of September as banks made use of the RBI's Foreign Currency Non-Resident (Bank), or FCNR(B), swap facility, before moderating later in the month due to tax-related outflows. Money supply growth accelerated in August on rapid growth in aggregate deposits, while bank credit continued to grow at a steady pace and deposit growth gained momentum.
Risks and pressure points
Not all parts of the financial system showed the same resilience. Indian equity markets remained subdued through August and September, with geopolitical developments and higher bond yields affecting investor sentiment, and foreign portfolio investors turning net sellers in September.
The escalation of the conflict in West Asia during September pushed crude oil prices sharply higher, renewing concerns about possible disruptions to global supply chains and the impact of higher energy costs on inflation. Higher sovereign bond yields across some major advanced economies added another pressure point, with implications for government finances.
The Bulletin also flagged developments in food prices. High-frequency data available up to September 21 indicated a broad-based sequential rise in food prices: rice and wheat prices continued to move higher, although the month-on-month pace of increase in rice prices moderated; prices of several major pulses, including gram, tur and moong, edged up; edible oil prices recorded a broad-based increase driven particularly by mustard and palm oil; onion prices registered a sharp rise, while tomato prices moved higher after two consecutive months of moderation; potato prices moved in the opposite direction, recording a month-on-month decline.
The RBI clarified that the observations contained in the 'State of the Economy' article represent the views of its authors and should not be interpreted as the official position of the central bank.
Sources:
India's Economy Holds Firm, But RBI Flags These 2 Risks Ahead — Times Now
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