RBI flags rising inflation risks from West Asia conflict, El Nino despite

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The Economic Times daily newspaper is available online now. Read Today's Paper RBI flags rising inflation risks from West Asia conflict, El Nino despite resilient Indian economyBy Atmadip Ray, ET BureauLast Updated: Oct 23, 2026, 09:24:00 PM ISTSynopsis

India's external sector shows resilience due to a narrowing trade gap and comfortable foreign exchange reserves. Inflationary pressures have intensified due to geopolitical tensions and supply-side bottlenecks. The RBI reported an increase in both industry and services indicators, showcasing economic strength. The IMF has revised India's growth projection for 2026-27 to 7% based on resilient domestic demand. Global financial volatility has increased amid global challenges and rising inflation risks.

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Loading...×Kolkata: India's external sector stood firm backed by narrowing trade gaps and comfortable foreign exchange reserves while the renewed geopolitical tensions, supply-side bottlenecks and El Nino impacts amplified inflationary pressures and led to a broad-based rise in food prices, Reserve Bank of India (RBI) said in its latest state of economy report for the month of October.

"India’s external sector remained resilient," the report said, adding: "The Indian economy continued to demonstrate strength as evidenced by high-frequency indicators across both industry and services."

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The country's merchandise exports grew in double digits for the first six months of FY27, while gold imports contracted sharply, helping narrow the trade deficit. On the capital account side, foreign capital inflows strengthened the country's foreign exchange stockpile.

The key external sector vulnerability indicators such as external debt-to-GDP ratio, net international investment position to GDP ratio, debt service ratio and short-term debt to reserves remained contained at end-June 2026, the RBI report said.

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The forex reserves, even before the record accumulation through the dedicated dollar-mobilisation programmes, could cover for 10.6 months of goods imports and 92.7% of the external debt outstanding as at end-June.

Meanwhile, global financial market volatility increased in October amid renewed conflict in West Asia. The sovereign bond yields increased globally driven

by tighter financial conditions coupled with fiscal sustainability concerns in some major economies, the RBI report observed.

These, combined with strengthening El Nino conditions globally have raised inflationary risks. The headline inflation in India, measured by Consumer Price Index (CPI), rose to 5.5% in September, driven by a broad-based increase in food, fuel, and core components. Inflation in rural areas has been higher than that in the urban areas.

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"The Indian economy has withstood the shocks well," said the report, prepared by central bank researchers under the guidance of deputy governor Poonam Gupta.

This was evident from the fact that the International Monetary Fund (IMF) revised India's growth projection 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 IMF revised the 2026 global growth projection upward by 10 basis points to 3.1% even as the global economy is currently passing through a rough phase with multiple shocks.
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