Indian Economy Showing Resilience Despite US Tariffs, Geopolitical Risks, Says RBI

Last Updated:August 26, 2026, 08:29 IST

RBI said momentum seen in first quarter of FY27 continued into July, with several high-frequency indicators pointing to sustained activity across manufacturing and services.

Despite the external risks, the RBI said India’s “robust macroeconomic fundamentals” continued to provide a cushion for the domestic economy.

India’s economy is showing resilience despite a fragile global environment marked by geopolitical tensions, renewed US tariffs and persistent trade uncertainties, according to the Reserve Bank of India’s (RBI) latest ‘State of the Economy’ article.

The RBI said robust domestic demand, a recovery in manufacturing and services activity, improving monsoon conditions and a rebound in foreign capital inflows were helping sustain India’s growth momentum despite external headwinds.

“The global economy is confronting a fragile geopolitical environment and continuing trade-related uncertainties. Nevertheless, the domestic economy has demonstrated notable resilience to the ongoing global headwinds,” the article, authored by RBI researchers and economists, said.

The RBI’s Monetary Policy Committee (MPC) kept the repo rate unchanged at 5.25% at its August 5 meeting. It marginally raised its FY27 growth forecast to 6.7% from 6.6%, while lowering its inflation projection to 5% from 5.1%.

However, MPC members flagged the possibility of tighter monetary policy later in the year, with minutes of the meeting indicating that a “case for a hike may emerge” as headline inflation is projected to peak at as high as 5.9% in the third quarter of FY27.

The RBI said the momentum seen in the first quarter of FY27 continued into July, with several high-frequency indicators pointing to sustained activity across manufacturing and services.

“Domestic demand remained buoyant,” it said, citing indicators including vehicle and tractor sales. Petroleum product consumption also returned to growth after contracting for three consecutive months.

Industrial production strengthened sharply in June, registering its strongest growth in nearly two years, driven by a broad-based acceleration in manufacturing.

The services sector also remained resilient, while merchandise exports and imports recorded strong growth in July. Merchandise exports reached a four-month high in FY27 so far. However, the trade deficit widened both sequentially and year-on-year, partly due to a larger deficit in electronic goods.

The monsoon provided another source of support. After a deficit in June, southwest monsoon activity picked up in July, bringing kharif sowing closer to normal acreage and helping mitigate some risks to the agriculture sector.

The RBI also pointed to comfortable liquidity conditions, strong credit growth and softening government bond yields, supported by a rebound in capital inflows.

Inflation, meanwhile, remained a concern. Headline CPI inflation edged higher, primarily due to supply-side pressures, while core inflation remained stable, suggesting limited pass-through of cost pressures.

On the global front, the RBI said the outlook continued to be clouded by geopolitical tensions in West Asia and fresh US tariffs, both of which pose risks to global trade and the growth-inflation outlook.

At the same time, it noted that global uncertainty had moderated for the fourth consecutive month, helped by a de-escalation in tensions between the US and Iran. The Geopolitical Risk Index also fell sharply.

Financial market volatility across emerging markets eased in August alongside lower crude oil prices, while volatility in advanced economies also moderated amid relatively stronger economic fundamentals. However, volatility picked up marginally in mid-August amid inflation concerns and uncertainty in West Asia.

Despite the external risks, the RBI said India’s “robust macroeconomic fundamentals” continued to provide a cushion for the domestic economy.

Key Questions Answered

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Will the RBI raise interest rates later this year?

The Reserve Bank of India (RBI) kept the benchmark repo rate unchanged at 5.25% in its August monetary policy review. While the RBI acknowledged that inflation has increased in recent months, it believes current pressures are largely driven by supply-side factors rather than broad-based demand pressures. The Monetary Policy Committee (MPC) retained its ‘neutral’ stance, stating it needed more clarity on the inflation trajectory amid various risks.

How do global tensions affect India’s economy?

Global tensions, particularly geopolitical uncertainties and conflicts in West Asia, have led to increased volatility in commodity and financial markets, supply chain disruptions, and higher energy prices, which can impact India’s growth and inflation.

What is the outlook for India’s inflation?

India’s inflation outlook is broadly comfortable, with the Reserve Bank of India (RBI) stating that inflation expectations are anchored and remain within its tolerance band. However, economists are watching factors such as food prices, higher input costs, and a gradual rise in core inflation. The RBI has also revised its inflation forecast upwards for the 2026-27 financial year to 5.1%, up from an earlier estimate of 4.6%.

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