India’s economy is facing a difficult external environment, but the latest data suggest that domestic activity has not lost its footing.
The Reserve Bank of India’s August 2026 Bulletin points to resilient demand, sustained manufacturing and services activity, improving liquidity and a recovery in the monsoon.
At the same time, inflation has moved above the RBI’s 4% target, crude oil remains a risk and policymakers have signalled that rate hikes could return if price pressures broaden.
Domestic Activity Remains Firm
The RBI said the momentum from the first quarter of FY2026-27 continued into July, with most high-frequency indicators showing sustained manufacturing and services activity.
Merchandise exports and imports also recorded double-digit expansion during the month. The central bank said liquidity conditions eased in July and August, supporting credit growth and investment activity.
The latest RBI assessment comes alongside a growth forecast that remains relatively strong. At its August 3-5 monetary policy meeting, the Monetary Policy Committee raised its FY2026-27 real GDP growth forecast to 6.7%, from 6.6% earlier. It kept the policy repo rate unchanged at 5.25% and retained a neutral stance.
There is, however, an important distinction between the official forecast and the latest economic data. A Reuters poll of 58 economists, conducted ahead of the official GDP release due on August 31, estimated that growth in the April-June 2026 quarter would have slowed to 7.1%, from 7.8% in the preceding quarter. The poll projected FY2026-27 growth at 6.7%.
Inflation Tests RBI’s Patience
The resilience story comes with a clear caveat: inflation is moving in the wrong direction.
India’s headline consumer inflation rose to 4.45% year-on-year in July 2026, according to data cited by the RBI and Reuters.
That was above the central bank’s 4% medium-term target, although it remained comfortably within the RBI’s 2%-6% tolerance band. The RBI attributed the increase largely to supply-side pressures, while stable core inflation indicated that those pressures had so far not spread broadly through the economy.
The RBI’s August minutes show why policymakers are watching this closely. Governor Sanjay Malhotra said higher food, fuel and input costs could translate into broader inflation if second-round effects emerge.
Deputy Governor Poonam Gupta said there was no scope for further easing at present and that a case for a rate hike could emerge during FY2026-27 if inflation risks intensify.
The MPC nevertheless reduced its FY2026-27 inflation projection to 5% from 5.1%, indicating that policymakers still expect inflation to remain manageable over the full year.
Monsoon Supports Rural Economy
Agriculture has received some relief from weather conditions. The RBI said the southwest monsoon recovered in July after recording a deficit in June. The improvement helped kharif crop sowing move closer to normal acreage, partly reducing the risks posed by an earlier deficient and uneven monsoon.
That matters for the broader economy because rural demand remains an important part of domestic consumption.
A better agricultural season can support farm incomes and consumption, while improved crop availability can also help contain food-price pressures. The RBI, however, continues to flag weather conditions as a risk, rather than treating the monsoon recovery as a guarantee of lower food inflation.
Capital Flows Strengthen External Buffer
The external sector has also shown signs of improvement. The August RBI Bulletin said foreign capital inflows rebounded, reinforcing the external sector.
It also reported that FDI flows into India improved in June 2026 from the previous month, with Singapore, the Netherlands, the US and Canada together accounting for around 74% of equity inflows during the month. Manufacturing attracted the largest share, followed by electricity generation and computer and communication services.
Foreign exchange conditions have improved as well. RBI data showed the central bank bought a net $561 million in the foreign exchange market in June, after selling a net $6 billion in May and $8.9 billion in April. The RBI purchased $30.89 billion and sold $30.33 billion during June.
The improvement continued into August. India’s foreign exchange reserves reached $716.9 billion as of August 14, their highest level in six months, according to Reuters.
Global Risks Still Loom Large
India is not insulated from the global shocks surrounding it. The RBI identified geopolitical tensions and continuing trade uncertainty as key risks. Rising oil prices are particularly important because India imports nearly 90% of its crude oil requirements, making energy prices a direct threat to both inflation and the external balance.
The latest RBI Bulletin therefore offers a measured assessment rather than an all-clear signal. Domestic demand, manufacturing, services, liquidity and capital flows are providing support, while the monsoon has improved the agricultural outlook. But inflation, crude oil prices, geopolitical tensions and trade uncertainty could still change the growth-inflation equation.
For businesses, the immediate message is one of resilience with caution. The RBI still expects 6.7% growth in FY2026-27, but its own policy minutes make clear that future decisions will depend heavily on whether current supply shocks remain contained or begin feeding into broader prices.
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