India's economy continues to be supported by strong macroeconomic fundamentals and a favourable growth-inflation outlook, but policymakers have flagged several near-term risks that could test stability in the coming months, which included heightened external uncertainties, including the possibility of further escalation in geopolitical and trade tensions and a widening of geoeconomic fragmentation, according to the Reserve Bank of India's (RBI) Financial Stability Report.
Such developments could increase volatility in the rupee, weaken global trade flows, compress corporate earnings and dampen foreign direct investment inflows, even as domestic demand remains resilient, report said.
From a financial stability standpoint, global market risks remain elevated. A sudden and sharp correction in the US equity markets could spill over into Indian equities, hurting investor confidence and household wealth. This, in turn, could trigger foreign portfolio outflows and lead to tighter domestic financial conditions, report added.
Domestic economic activity remained robust despite an unfavourable global backdrop. The real gross domestic product (GDP) growth surprised on the upside in both Q1:2025-26 and Q2:2025-26 at 7.8 per cent and 8.2 per cent, respectively, supported by strong private consumption and public investment.
Growth outlook remains positive, aided by low inflation, easy financial conditions, above normal monsoon, direct and indirect tax reforms, and the ongoing expansion of digital public infrastructure. This is also reflected in the upward revision of India’s growth forecast by multilateral agencies such as the IMF, the Organisation for Economic Co-operation and Development (OECD) and the World Bank.
The RBI has also revised its forecast for real GDP growth for 2025-26 upwards from 6.8 per cent to 7.3 per cent.
“Spillovers from geopolitical and trade tensions and a sell-off in global financial markets pose downside risks to the growth outlook,” RBI report said.
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