SPEECH: The Indian Economy in an Ever More Volatile and Complex World*
Dr. Poonam Gupta
Deputy Governor, Reserve Bank of India
It is my pleasure to be here at the SBI's 13th Banking and Economics conclave to share my views on the Indian economy and put them in the global context—a context that is becoming increasingly more volatile and complex. In my brief comments, I will discuss the challenges that the global economic backdrop has posed for all emerging markets including India, how the Indian policymakers have addressed these challenges to both alleviate immediate pain and turn them into opportunities, and what the near future may look like for us.
I. The Global Context
The global economic context has become less conducive since the global financial crisis of 2008-09. Several structural shifts have impacted the growth and policy outlook for emerging market economies, including peaking of global trade, ageing societies, climate risks, and stretched public finances. While the COVID crisis of 2020-21 added an unprecedented layer of shock and complexity to the global backdrop, a fresh wave of shocks since 2022, has further aggravated it. These recent shocks include two back-to-back commodity and energy shocks amidst unending geopolitical conflicts, policy uncertainty and tariff-led disruptions in trade; an El Niño event; tech-related developments and disruptions—led by AI.
India has perhaps been among the most challenged emerging market economies over past year and a half. Whereas most other countries were subject to only a subset of these shocks, India has been subjected to each one of these shocks—simultaneously and cumulatively. On trade, it had faced among the highest tariffs rates the US had imposed on any partner country and an acute policy uncertainty. As a large net oil importer, it has been particularly exposed to the oil supply disruptions and price shocks. Agriculture being a significant part of the economy, and sensitive to rainfall, El Niño is somewhat of a risk to the sector this year. And finally, unlike in many other countries, AI has not yet been a boon. If anything, global AI exuberance has been somewhat of a vulnerability so far through the capital outflows channel.
II. Domestic Outcomes and Policymaking
Yet, the economy has emerged from these shocks largely unscathed, and perhaps even stronger structurally. This strength is manifested in India's growth being the highest among peers, inflation anchored, fiscal outcome on a consolidation path and a financial sector that is more resilient than ever.
This brings us to how policymakers have handled the aforementioned shockwaves. What do the theory or best practices tell us about responding to external shocks of this kind, and did India's policymakers measure up on that count?
As far as textbook advice goes, the following principles matter:
First, policy makers need to communicate clearly, provide policy certainty, and stay committed to the long-term goals of prosperity and stability.
Second, policymakers ought to protect both financial-sector and macroeconomic stability—neither should be compromised in response to such shocks.
Third, they should make an efficient use of available tools and buffers to alleviate the immediate pain of the shocks.
Finally, they ought to steadfastly continue on the path of efficiency enhancing reforms, irrespective of the pace, for even gradual, incremental reforms cumulate over time.
This is precisely how the Indian policymakers have responded to the compounding shocks. They have remained composed, and communicative, while navigating the ship purposefully. They have been engaged with all stakeholders, through all available channels. They have maintained policy certainty while responding to the evolving circumstances.
Throughout, the emphasis has been on strengthening the long-term foundations of the economy, so that it becomes more resilient to future shocks. Multiple free trade agreements (FTAs) have been fast-tracked, export destinations have been diversified, and constructive discussions have continued with trading partners. Goods and Services Tax (GST) rationalization has given domestic consumption a boost, and a range of structural reforms have been front loaded.
As for the ongoing energy shock too, India has fared well—notwithstanding its dependence on energy imports. The policy response has unfolded in stages. Initially, in anticipation that the conflict would be relatively short-lived, the emphasis was on securing adequate supplies, rather than passing on the shock to economic agents through higher prices or constrained supply. Thus, unlike in many other economies, hardly any rationing took place. This prevented panic and ensured that the shock didn't incur disproportionate economic costs.
When it became clear that prices would remain elevated for longer than anticipated, part of the price impact was passed on to the final consumers in a calibrated manner. Instead of broad-based rationing of supplies, the approach was to verbally encourage households and firms to use a supply-constrained resources prudently.
In response to such shocks, one mistake countries often make is that they try to pump-prime their economies beyond their productive capacities while stretching their fiscal envelopes beyond sustainable levels. Such endeavors end up compromising macroeconomic stability and thereby leading to growth sacrifice for a much longer period subsequently.
Instead, for the past decade, India has prioritized fiscal prudence. In the latest edition of its Fiscal Monitor, the IMF (2026) projected that, in contrast to most other countries, India's public debt, as a proportion of GDP, would decline between now and 2031 by 5.7 percentage points.¹ This consolidation is attributed both to fiscal prudence as well as high GDP growth (both real and nominal).
Such measures ensured that the Indian economy, led by its engines of consumption, exports, and investments, proved to be as resilient as ever. Growth was at 7.8 percent in 2025-26; and a similar dynamism has continued into Q1 of 2026-27, with growth estimated at 7.8 percent.
In addition, the financial sector has not only proven to be stable and resilient, it is also growing through a virtuous cycle of faster and higher quality growth. Regulators have actively pursued the ease of financial intermediation. On its part, the RBI has worked on improving the quality and efficiency of financial intermediation and ensuring that liquidity needs of all productive uses of the economy are met. All stress tests, published in the latest Financial Stability Report in June 2026, indicate that the financial sector is extremely resilient and will remain so under the harshest of conditions.
This brings us to a relevant but confounding issue of whether our financial markets are currently fully reflecting this economic reality? Perhaps, only partly so. At one level, there seems to be a bit of disconnect between some parts of the financial markets and the underlying near- and medium-term promise of the real economy. What is causing this disconnect?
Among the markets, the bond market has performed well, both compared to its own past as well as in comparison to most other countries. The relative strength of the market is due to the fiscal commitment of the government; and the projected sustained high economic growth rates that would make the fiscal outcomes even better going forward. Credibility of monetary policy, declining structural pressures on inflation have contributed as well. So much so, that for its orderly bond markets, The Economist has remarked that, “India’s experience shows the importance of cleaning up public finances and letting central bankers fight inflation in peace.”²
The equity markets, on the other hand, have not tracked the same optimism. This is plausibly because of a relatively more promising AI-led story in certain other economies. While the Indian equity market witnessed an exceptional run of its own, roughly from June 2022 to September 2024, some other economies are having a better run now. Eventually, the promise of the underlying real economy would reassert itself. Going by the past experiences, it is only a matter of time before Indian equities look relatively more attractive again.
This brings us to the issue of India’s balance of payments (BOP) and the direction of rupee. The question often asked is whether the BOP and the exchange rate are reflecting the underlying economic strengths.
India has traditionally run a small current account deficit (CAD) and a larger capital account surplus, resulting in a net positive BOP. Its CAD as percent of GDP has declined over time, bringing resilience to the BOP. Furthermore, the CAD levels have remained far below the levels generally considered to be prudent for emerging market economies. Net services exports and remittances remain its great structural strengths. Together, they are large and resilient enough to absorb the merchandise trade deficit and keep the CAD contained at below 1 percent of GDP.
The recent oil price and gold price shocks have pushed CAD temporarily higher. In addition, in the last two years, capital account surplus has fallen short of CAD, resulting in a negative BOP of about US$ 5.0 billion in 2024-25 and US$ 23.6 billion in 2025-26.
Against these developments, the rupee has cumulatively depreciated by 13.0 percent (on a point-to-point basis) from March 31, 2025 to September 17, 2026.³ The questions then arise: How long may the BOP stay in deficit? Will it self-correct? What do history and cross-country experiences tell us about where the direction of BOP and the exchange rate; especially in an economy positioned to grow at 7-8 percent in real terms, and 11-12 percent in nominal terms, for years and decades, to come?
One plausible assessment is as follows:
First, the CAD should shrink further in coming years, with the traditional strengths persisting and the new ones emerging, including the growing success in merchandise exports. India’s dependence on imported oil is set to decline, through alternative sources of energy and the quest to find its own oil reserves, both of which will further bolster the trend reduction in the demand for oil as percent of GDP.⁴ This would be in addition to oil prices themselves stabilizing as soon as the conflict resolves. Meanwhile, the rest of the trade basket is responding well to the new trade opportunities that are being leveraged, a strength that will continue with the positive impact of recent FTAs materializing, and a conducive exchange rate.
Second, capital account too should turn more favourable, plausibly from later this financial year and then remain so. Several factors point towards this: stretched valuations elsewhere; the AI-mania saturating; strong domestic macroeconomic fundamentals; a high real and nominal GDP growth helping improve the earnings guidance; a domestic investment cycle gathering pace; healthy balance sheets of banks and corporates; continuing measures to attract variety of capital into the country; trend increase in FDI; and, in due course, the inevitable inclusion of Indian bonds in more global indices. The AI story is, in effect, an "unspent force" for us. Just as India has leveraged the potential of digital innovation thus far, it will leverage the potential of AI equally well going forward, while avoiding the risks.
For now, we have leveraged our special capital flow measures implemented in June this year, resulting in a meaningful BOP surplus for the year. This reflects India's unique ability to attract large inflows at a very small country premium.
Put together, these arguments indicate that one may think of the cumulative depreciation of the INR (or shall one say its overcorrection) in the past year and a half to be a temporary phenomenon. With the RBI remaining committed to ensuring orderly conditions in the foreign exchange market, and having the wherewithal to meet decades worth of CAD, or the net BOP deficit, the current market dynamics do not appear especially well-founded. If anything, there seems to be a fair case for the rupee to not just stabilize but perhaps even appreciate from the current levels, as was being anticipated by the market analysts when the capital flow measures were first announced.
III. Conclusion
All in all, the Indian economy has done exceptionally well, notwithstanding the multiple shocks it has faced. It is advancing ahead on a resilient growth equilibrium of 7 percent plus, that is spatially broad-based; sectorally diversified and underpinned by rising productivity, while steadily working to break into an 8 percent plus equilibrium. This is quite a feat for a large emerging market, and makes India stand out in its asset class.
There does remain some disconnect between this real economy narrative and parts of the financial markets, attributable in good measure to the pull of short-term returns in competing markets. This should however correct soon: as the shocks dissipate, for no oil price shock has lasted forever; and as the relative valuations turn competitive again. While it is hard to predict how long it may take, the longer the disconnect persists, the higher the odds that the course correction is on its way.
Policymakers, for their part, will continue to hold the fort until then and beyond, working to secure faster and more stable growth; ensuring orderly conditions across markets; anchoring expectations; and remaining committed to their policy frameworks that are becoming stronger and more credible with each passing year.⁵
Notes & Citations
* Special Address by Dr. Poonam Gupta, Deputy Governor, Reserve Bank of India at the 13th SBI Banking & Economics Conclave on September 23, 2026. Published in RBI Bulletin September 2026 (pp. 9–12). Inputs provided by Somnath Sharma, Asish Thomas George, GV Nadhanael and others are gratefully acknowledged.
¹ IMF's Fiscal Monitor (April 2026) estimates that India's gross debt to GDP ratio will decline from 83.4 per cent in 2026 to 77.7 per cent in 2031.
² What is causing the global bond sell-off? The Economist India hints at the answer, September 8, 2026. Link -
³ Forex markets were closed on March 29, 30, 31 and April 1, 2025.
⁴ Perspectives on India’s Growth: Last Four Decades to the Present - Speech by Dr. Poonam Gupta, Deputy Governor, Reserve Bank of India - delivered at the 14th Foundation Day Lecture of the Centre for Development Studies (CDS) on Friday February 20, 2026 at Centre for Development Studies, Thiruvananthapuram. Link -
⁵ See keynote address by Shri Sanjay Malhotra, Governor, Reserve Bank of India at the 25th FIMMDA-PDAI Annual Conference, May 1, 2026, Amsterdam "Indian Financial Markets - Resilience and Resurgence". Link -
ARTICLE: RBI Bulletin September 2026 — State of the Economy
State of the Economy
With geopolitical tensions re-escalating in West Asia, the global economy is again confronted with rising energy prices, and increased volatility across various segments of the financial markets
Introduction
The global economy continues to be marred by geopolitical tensions, trade fragmentation, disruptions in energy supplies, and generalised cost pressures, which are weighing on the financial markets and business confidence
Global equity markets revived in August on the back of strong corporate earnings, gains in technology stocks, and lower expectations of near-term monetary tightening
The US Federal Reserve’s policy rate hike exerted upward pressure on US Treasury yields in September so far (till 21st), despite the announcement of larger long-end buybacks intended to provide temporary relief
The Indian economy posted a robust growth of 7.8 per cent during Q1:2026-27—the first quarter after the outbreak of conflict in West Asia—driven by domestic consumption and investment
Headline consumer price index (CPI) inflation increased in August 2026, driven by the food and beverages group along with a pickup in fuel and core (CPI excluding food and fuel) inflation
System liquidity remained in surplus in August and surged further in the first half of September as banks tapped Reserve Bank's Foreign currency non-resident (Bank) [FCNR(B)] swap facility, before moderating later in the month on account of tax related outflows
Money supply growth accelerated in August on account of rapid increase in aggregate deposits
Merchandise export growth remained strong and trade deficit declined in August 2026
The remainder of the article is presented in four sections
II. Global Setting
Global uncertainty increased during August and September (till 21st) amidst renewed geopolitical tensions, heightened trade policy risks, and concerns over global economic prospects
With no let-up in the West Asia tensions, daily transit calls and crude volumes through the Strait of Hormuz continued to remain low and below the pre-conflict levels in September
Global economic activity, as reflected in the composite PMI, accelerated to a 27-month high in August
The business activity expanded generally at a faster pace in August in AEs than in EMEs
Commodity prices broadly increased in August and September (till 21st)
After easing in late August, aluminium prices firmed in early September over heightened supply disruption risks amidst the re-escalation of West Asia hostilities and seasonal demand
Inflation across most major AEs and EMEs remained above target in August
Global equity markets revived in August, supported by strong corporate earnings, gains in technology stocks and reduced expectations of near-term monetary tightening
US Treasury yields rose in September (till 21st), despite the announcement of larger long-end buybacks aiming to provide temporary relief, as the Fed’s policy rate hike exerted upward pressure
The renewed geopolitical tensions in West Asia continued to weigh on the growth-inflation trade-off faced by central banks across AEs and EMEs
III. Domestic Developments
Aggregate Demand
Despite geopolitical uncertainties, Indian economy clocked a growth of 7.8 per cent in Q1:2026-27 driven by domestic consumption and investment
High-frequency indicators remained healthy in August
Both rural and urban demand remained firm in August as reflected by robust two-wheeler sales and continued growth in passenger vehicle sales
The employment outlook remained robust in August
Government Finances
During April-July: 2026-27, the gross fiscal deficit of the Union government as a per cent of the full year budget estimates was lower than the corresponding period of the previous year
The key deficit indicators of states during April-July: 2026-27, as a proportion of budget estimates, were also lower than those recorded during the corresponding period a year earlier
Trade
Merchandise trade deficit narrowed to its lowest level in 2026-27 so far in August
Both merchandise exports and imports recorded double-digit growth (y-o-y) for the fifth consecutive month in August 2026
Import growth, albeit at a lower rate during the last four months, was driven mainly by electronic goods, and petroleum, crude and products
Net services exports continued to grow at a robust pace in July 2026, supported by strong growth in exports, while imports rose at a faster pace
Aggregate Supply
The real gross value added (GVA) grew by 8.2 per cent in Q1:2026-27 supported by strong manufacturing and services activity
Agriculture
After a pick-up in July, the south-west monsoon rainfall got subdued in August
A good harvest in the previous year has, however, resulted in robust procurement of rice and wheat, leading to comfortable public foodgrain stocks
Industry and Services
Monthly Indicators of Industrial Activity
Based on high-frequency indicators, industrial activity remained resilient despite the geopolitical tensions in West Asia
Reflecting the continued efforts for broad based transition towards clean energy, the Electric Vehicle (EV) penetration rate crossed the 10 per cent mark in 2026 (up to September 21)
Monthly Indicators of Services Activity
Services sector activity remained robust in August
Inflation
Headline CPI inflation increased to 4.8 per cent (y-o-y) in August from 4.5 per cent in July 2026, driven by food and beverages and a pickup in fuel and core components (CPI inflation excluding food and fuel)
The increase in food and beverages inflation was broad-based driven by cereals, oils and fats, sugar, confectionery and desserts
Inflation moved up in both urban and rural areas in August
Core inflation rose to 4.2 per cent in August after remaining steady at 3.9 per cent for three consecutive months
Until September 21, high-frequency data suggest a broad-based sequential increase in food prices
Retail prices of petrol, diesel, and domestic LPG remained unchanged until September 21
The price of the Indian basket crude oils increased to US$ 114.6 per barrel in September (till 18th), its highest level since April 2026
Wholesale Price Index (WPI) inflation marginally rose to 9.9 per cent in August from 9.8 per cent in July, led by higher fuel and power, and manufactured products group inflation
The PMI input and output prices for both manufacturing and services remained in the expansionary zone
IV. Financial Conditions
System liquidity remained in surplus in August and surged further in September (till 21st), amidst strong inflows under the FCNR(B) swap facility
Money Market
The weighted average call rate (WACR) largely traded in the lower half of the policy corridor during August and September (till 21st)
Government Securities (G-Sec) Market
G-sec yields hardened through mid-August till September (till 21st) amidst renewed geopolitical tensions in West Asia, volatility in crude oil prices and a rise in US Treasury yields
Corporate Bond Market
Corporate bond issuances moderated in July and also on a cumulative basis in the current financial year as compared to the same period in the previous year
Money and Credit
Reserve money [adjusted for cash reserve ratio (CRR)] expanded at a robust pace with growth in currency in circulation recording the highest print in past five years as on September 15, 2026
Key Indicator Data Tables
Table II.1: Global Purchasing Managers' Index
: PMI Composite: 52.5 (Jul-25) to 53.5 (Aug-26)
PMI Manufacturing: 49.7 (Jul-25) to 52.3 (Aug-26)
PMI Services: 53.5 (Jul-25) to 53.7 (Aug-26)
PMI Export Orders: 48.5 (Jul-25) to 51.1 (Aug-26)
Table III.1: Healthy Overall Economic Activity
: GST E-way bills (Volume y-o-y growth): 8.1% in Aug-26
GST revenue (y-o-y growth): 14.8% in Aug-26
Toll collection (Volume y-o-y growth): 15.5% in Aug-26
Electricity demand (Volume y-o-y growth): 9.8% in Aug-26
Digital Payments - Volume Growth: 16.7% in Aug-26
Digital Payments - Value Growth: 17.8% in Aug-26
Table III.2: High Frequency Indicators - Resilient Demand Conditions
: Domestic air passenger traffic y-o-y growth: -6.0% in Aug-26
Retail passenger vehicle sales y-o-y growth: 16.1% in Aug-26
Retail automobile sales y-o-y growth: 17.5% in Aug-26
Retail two-wheeler sales y-o-y growth: 19.7% in Aug-26
Table III.3: Robustness in High Frequency Indicators for Employment
: Unemployment rate (PLFS: All-India): 5.0% in Aug-26
Unemployment rate (PLFS: Rural): 4.1% in Aug-26
Unemployment rate (PLFS: Urban): 6.8% in Aug-26
Naukri JobSpeak Index y-o-y growth: 13.7% in Aug-26
PMI Employment Manufacturing: 49.8 in Aug-26
PMI Employment Services: 55.8 in Aug-26
Table III.4: High Frequency Indicators for Industry Remained Resilient
: PMI Manufacturing: 52.8 in Aug-26
Index of Core Industries y-o-y growth: 4.8% in Aug-26
Automobile Production y-o-y growth: 16.9% in Aug-26
Import of capital goods y-o-y growth: 23.7% in Aug-26
Table III.5: High Frequency Indicators for Services Remained Robust
: PMI Services: 54.1 in Aug-26
Port cargo traffic y-o-y growth: 8.4% in Aug-26
Retail commercial vehicle sales y-o-y growth: 14.5% in Aug-26
Cement production y-o-y growth: 12.5% in Aug-26
Table III.6: Petroleum Product Prices Remained Unchanged in August and September
: Petrol: ₹108.7/litre (0.0% m-o-m change)
Diesel: ₹98.1/litre (0.0% m-o-m change)
Kerosene (subsidised): ₹46.8/litre (0.0% m-o-m change)
Domestic LPG (non-subsidised): ₹952.3/cylinder (0.0% m-o-m change)
| Industry Type | Outstanding Balance as of Jul. 31, 2026 (₹ Crore) | YoY Growth (%) |
| 2. Industries (2.1 to 2.19) | 4,800,777 | 20.0% |
| 2.1 Mining & Quarrying (incl. Coal) | 63,876 | 16.5% |
| 2.2 Food Processing | 264,611 | 22.3% |
| 2.2.1 Sugar | 19,342 | 4.1% |
| 2.2.2 Edible Oils & Vanaspati | 32,328 | 53.6% |
| 2.2.3 Tea | 5,767 | 17.1% |
| 2.2.4 Others | 207,174 | 21.7% |
| 2.3 Beverage & Tobacco | 38,377 | 10.5% |
| 2.4 Textiles | 311,349 | 15.1% |
| 2.4.1 Cotton Textiles | 108,655 | 10.3% |
| 2.4.2 Jute Textiles | 5,374 | 24.1% |
| 2.4.3 Man-Made Textiles | 54,664 | 11.8% |
| 2.4.4 Other Textiles | 142,656 | 20.1% |
| 2.5 Leather & Leather Products | 14,570 | 8.9% |
| 2.6 Wood & Wood Products | 33,331 | 18.8% |
| 2.7 Paper & Paper Products | 62,081 | 17.2% |
| 2.8 Petroleum, Coal Products & Nuclear Fuels | 212,120 | 34.0% |
| 2.9 Chemicals & Chemical Products | 333,498 | 24.0% |
| 2.9.1 Fertiliser | 38,635 | 30.0% |
| 2.9.2 Drugs & Pharmaceuticals | 107,714 | 24.4% |
| 2.9.3 Petro Chemicals | 40,229 | 24.0% |
| 2.9.4 Others | 146,919 | 22.2% |
| 2.10 Rubber, Plastic & Their Products | 118,487 | 15.6% |
| 2.11 Glass & Glassware | 16,534 | 28.0% |
| 2.12 Cement & Cement Products | 69,420 | 16.3% |
| 2.13 Basic Metal & Metal Product | 537,666 | 21.9% |
| 2.13.1 Iron & Steel | 371,484 | 24.5% |
| 2.13.2 Other Metal & Metal Product | 166,182 | 16.6% |
| 2.14 All Engineering | 343,226 | 36.2% |
| 2.14.1 Electronics | 70,550 | 22.8% |
| 2.14.2 Others | 272,676 | 40.1% |
| 2.15 Vehicles, Vehicle Parts & Transport Equipment | 160,649 | 32.2% |
| 2.16 Gems & Jewellery | 124,292 | 35.7% |
| 2.17 Construction | 194,386 | 24.4% |
| 2.18 Infrastructure | 1,512,808 | 10.2% |
| 2.18.1 Power | 869,333 | 21.6% |
| 2.18.2 Telecommunications | 96,039 | -13.2% |
| 2.18.3 Roads | 341,610 | -0.8% |
| 2.18.4 Airports | 8,933 | 7.7% |
| 2.18.5 Ports | 8,719 | 58.4% |
| 2.18.6 Railways | 7,677 | -31.6% |
| 2.18.7 Other Infrastructure | 180,497 | 1.7% |
| 2.19 Other Industries | 389,497 | 32.3% |
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