Global markets continue to face uncertainty and volatility amid repeated cycles of escalation and de-escalation in the West Asian conflict. The resulting disruptions in energy markets are persistently placing a premium on oil and gas, taking a toll on energy-importing nations across Europe and Asia. Although markets have proven their ability to handle successive shocks, they remain exposed to further stress as volatility persists.
Meanwhile, the Indian economy made a strong start in the first quarter of FY27, with annual real GDP expanding 7.8%, underscoring its resilience in a fractured global landscape. The latest GDP (Gross Domestic Product) numbers for Q1 FY27 exceeded the Reserve Bank of India (RBI)’s projections by 80 bps. Among GDP components, private final consumption expenditure grew 7.1% (y/y), while gross fixed capital formation grew 11.9% (y/y). Among sectoral growth figures, manufacturing activity remained resilient at 9.2%, while financial, real estate, IT, and professional services grew 12.1%.
Domestic high-frequency indicators also pointed to a trajectory of robust growth. The index of industrial production (IIP) maintained its growth momentum at 6.7% annually in July 2026, up from 5.4% in July 2025. Manufacturing IIP grew at 7.3% (y/y), despite elevated input costs and supply chain disruptions. On the credit side, non-food bank credit nearly doubled its annual growth rate, jumping to 19.1% for the fortnight ending July 31, 2026, from 9.9% in the same period last year.
Overall, the domestic macroeconomic outlook outperformed initial forecasts in Q1 FY27, with stronger-than-expected growth and benign inflation. However, volatility in crude prices in international markets, due to a re-escalation of the West Asia crisis, along with regional disparities in rainfall, pose upside risks to inflation in the energy and food segments in the second and third quarters of FY27.
On the external front, India’s current account deficit widened slightly despite persistent external headwinds and elevated crude prices. The deficit reached USD 4.2 billion (0.5% of GDP) in Q1 FY27, up from USD 3.4 billion (0.4% of GDP) in Q1 FY26. In the financial account, foreign direct investment performed well, recording a net inflow of USD 6.1 billion in Q1 FY27, compared with USD 5.2 billion a year earlier. However, foreign portfolio investment recorded a net outflow of USD 9.6 billion in Q1 FY27, compared with a net inflow of USD 1.6 billion in the same period of FY26.
The crisis in West Asia has also kept bond yields elevated, with yields hovering around 6.9% by the end of August 2026, even as a durable liquidity surplus in the economy has helped keep them in check. Upside risks to yields remain, however, with market participants expecting a further rate hike from the US Federal Reserve after Fed Chair Kevin Warsh struck a hawkish tone at the Jackson Hole Economic Policy Symposium on August 28, 2026. US inflation, despite cooling to 3.4% in July 2026, remains above the Fed’s 2% target. Adding to this concern is the narrowing US-India 10-year bond yield spread, which could make Indian bonds more sensitive to global risk sentiment and potentially trigger capital outflows.
Against this backdrop, the early closure of the RBI’s special Foreign Currency Non-Resident (Bank) {FCNR(B)} scheme drew market participants’ attention. The scheme was originally scheduled to run until the end of September 2026 to ease pressure on a depreciating rupee. However, given the strong response from NRIs, the RBI brought the deadline forward to August 31, 2026. According to the latest RBI data, FCNR(B) deposits under the scheme increased to USD 127.22 billion by August 31, 2026.
FCNR inflows, along with other measures to attract foreign currency, pushed India’s foreign exchange reserves to a record USD 729.33 billion by August 21, 2026. The crisis in West Asia had earlier prompted the RBI to sell dollars to curb rupee volatility, pushing reserves below USD 667 billion in June 2026. The RBI’s latest measures were well-calibrated and timely, as the success of the FCNR(B) scheme and the resulting build-up of record reserves have helped cushion the rupee against rapid depreciation.
As the Indian economy enters the current fiscal year with a growth rate that continues to outpace its peers and record foreign exchange reserves, it is well placed to absorb external shocks. Nevertheless, policymakers need to remain watchful amid global macroeconomic pressures, shifting global capital, and volatile crude.
