India resilient to global shocks, but inflation risks rise: RBI Bulletin

“The Indian economy has withstood the shocks well,” it said, pointing to the continued strength of high-frequency indicators despite global uncertainties. Inflation, however, has emerged as a key concern for policymakers. Consumer price index (CPI)-based inflation rose to 5.5% in September, driven by broad-based increases in food, fuel and core components. Core inflation, excluding food and fuel, edged up to 4.3%, while the measure excluding precious metals increased to 3.2%.

“In October so far (till 19th), high-frequency data suggest broad-based increase in food prices,” it said. Against this backdrop, the Monetary Policy Committee raised the policy repo rate by 25 basis points to 5.5% and shifted its stance from neutral to calibrated tightening, the article said, citing elevated inflation expectations and early signs of inflation becoming more widespread. The West Asia conflict, now in its eighth month, has kept energy prices elevated and constrained supply chains.

Strengthening El Niño conditions and uncertainty over global trade policies have added to inflation risks. Higher sovereign bond yields and tighter financial conditions have also triggered portfolio outflows from emerging market economies. On the external front, merchandise exports recorded double-digit growth for the sixth consecutive month, helping narrow the trade deficit in September from a year earlier.

Services exports remained strong, while foreign direct investment (FDI), external commercial borrowings (ECB) and remittance flows strengthened in August. “Navigating this environment, the Indian economy has been anchored by solid macroeconomic fundamentals and policy interventions to cushion downside risks,” the article said. It added that RBI measures to curb speculative activity in the foreign exchange market, along with strong inflows (of $133 billion) under the FCNR(B) swap window, supported foreign exchange reserves. As of October 16, reserves covered 10.6 months of goods imports, providing a buffer against external shocks.