Mumbai: Despite geopolitical frictions in West Asia and fresh US tariffs, India’s robust macroeconomic fundamentals continue to cushion the domestic economy, according to the Reserve Bank of India’s August bulletin on Tuesday.
According to its state of the economy article, the global outlook remains clouded by these risks, but domestic economic momentum is intact, with high-frequency indicators pointing to sustained activity in manufacturing and services and to double-digit expansion in merchandise exports and imports.
The recovery in the southwest monsoon in July helped kharif sowing move closer to normal acreage, partly mitigating agricultural risks. Headline consumer price index () inflation edged above RBI’s target of 4% but was primarily driven by supply-side pressures, while stable core inflation indicated limited pass-through of cost pressures, the article said.
In July, CPI inflation increased marginally to 4.45% on year from 4.38% in June, driven by food and beverages. Core inflation remained steady at 3.9% in July, with elevated inflation persisting in personal care, social protection and miscellaneous goods and services and restaurant and accommodation services divisions. Excluding precious metals, core inflation rose to 2.7% in July from 2.5% in June.
Financial conditions also improved, with strong credit growth, comfortable liquidity, and softening of government bond yields, aided by a rebound in capital inflows.
Resilience amid difficulties
The resilience comes against a difficult global backdrop. The article said the temporary ceasefire inproved short-lived, with hostilities resuming in July, leaving oil and other key commodity supply chains vulnerable and weighing on business confidence.
Fresh US tariffs have compounded uncertainty around global trade. At the same time, global equity markets gained in August, supported by strong corporate performance among major technology companies, while emerging-market equities recovered from their July lows.
However, flows into emerging-market equities declined further in July, even as overall flows increased due to bond inflows.
The article also highlighted financial market risks stemming from higher US yields and geopolitical uncertainty. The 10-year US Treasury yield rose in July and reached an 18-month high around mid-August, while inflation picked up in some major economies amid higher energy and commodity prices. Indian equities gained in July and August on resilient corporate earnings and renewed foreign portfolio inflows, although lingering geopolitical uncertainties capped the gains.
The external sector also showed signs of resilience. Foreign portfolio investor flows turned positive in the equity segment in July after four consecutive months of outflows, while foreign investors pumped in $1.9 billion during 1-20 August, largely through equities. Net foreign direct investments () stood at $7.8 billion in the June quarter, against $4.8 billion a year earlier, while gross inward FDI rose to $30.7 billion from $26.7 billion.
The RBI identified uneven monsoon and El Niño, geopolitical disruptions to global supply chains, volatility in international financial markets and weather-related shocks as key domestic risks.