The finance ministry on Monday said it’s closely tracking the rise in sovereign bond yields worldwide and the movement of investment capital, as developed economies seek to fund their fiscal spending and refinance debt.
“The rise in (global) yield can cut both ways. Our bond yields can rise in tandem. Or, if they don’t, the spread compression can put pressure on the domestic currency,” the ministry said in its economic review for August.
Elevated can potentially reduce the appeal of Indian securities to foreign investors unless domestic yields rise in tandem. The yield on the 30-year US treasury bond hit a 19-year high of 5.33% earlier this month.
Foreign capital inflows are key to maintaining the current account deficit in developing countries, including India, at sustainable levels.
The finance ministry said it’s also closely monitoring the potential rise in global inflation, driven by higher prices for electronic goods and food commodities, as it may influence central bank responses across key economies.
“These will have implications for our monetary policy, domestic interest rates and the financing of the current account deficit,” the ministry said.
Need to be watchful
Reserve Bank of India governor had earlier this month underscored the need to be watchful of risks of higher food, fuel and other input prices translating into a broad-based increase in inflation. “Any evidence of these risks materialising may need policy tightening,” he had said.
The central bank’s monetary policy committee this month kept the benchmark repo rate unchanged for a fourth straight meeting at 5.25%. Retail inflation in July scaled a 19-month peak of 4.45%, driven mainly by elevated price pressure in food but still remaining within the RBI’s 2-6% range.
Amid the external headwinds, the finance ministry highlighted that the domestic economy retained its vigour in August, with demand remaining strong and the external sector displaying stability.
But it also called for close monitoring of food prices, dry weather conditions and global uncertainties in the coming months.
Comfortable forex
India’s external position, too, continued to be supported by comfortable foreign exchange reserves of $707 billion as of 7 August, it said.
“The global economy entered the second half of 2026 on a resilient, though uneven, footing,” it said, adding that external developments will continue to shape the domestic economic outlook.
remained broadly steady, even as the pace of global disinflation moderated and the West Asia war continued to impact energy markets, it said.
While domestic economic activity remained resilient through July, the pace of expansion moderated in some high-frequency indicators, including manufacturing and services PMI and e-way bill generation.
But domestic demand remained firm, with consumption and mobility indicators continuing to record robust growth and freight activity staying resilient.
“Easing input cost pressures provided some relief to business conditions, even as heightened external uncertainties continued to cloud the outlook,” it said.
The farm sector activity has stayed broadly stable, the ministry said, but the kharif outlook has been impacted by uneven rainfall.
Looking ahead, the emergence and persistence of El Niño conditions, “warrant close monitoring given their implications for rainfall, crop outcomes and food inflation”, it said.
As for the external sector, India continued to show unexpected strength in July amid heightened global uncertainty, with total exports of merchandise and services registering strong growth, led by robust merchandise exports, it said.
Robust remittance inflows provided an extra cushion to the external sector and bolstered the resilience of the overall balance of payments, it added.