India’s 7.8% growth faces fresh test as inflation hits 23-month high of 5.54%: RBI Bulletin

India’s economic resilience is facing a fresh test as rising inflation, geopolitical tensions and supply-chain disruptions cloud the outlook, even as domestic demand and services activity continue to support growth, according to the Reserve Bank of India’s (RBI) October Bulletin.

India’s gross domestic product (GDP) grew 7.8% year-on-year in the April-June quarter of FY27, supported by domestic demand and services. The RBI’s assessment comes against a challenging global backdrop marked by renewed tensions in West Asia, elevated energy prices and volatility in international financial markets.

Inflation pressures mount as food and fuel prices rise

Headline consumer price index (CPI) inflation climbed to 5.54% in September, its highest level in 23 months, from 4.82% in August, according to the figures cited in the report. The increase reflected a broad-based rise in food, fuel and core components.

Weak monsoon conditions and the risk of El Niño-related weather disruptions have added to concerns over food supplies. Higher prices of cereals, pulses, edible oils, sugar and onions are putting pressure on household budgets, while rising crude oil prices amid tensions in West Asia have heightened the risk of imported inflation.

As India remains a net energy importer, a sustained increase in international oil prices could raise domestic input and transportation costs. Supply-chain disruptions and elevated commodity prices could further complicate efforts to contain inflation while sustaining economic momentum.

Double-digit exports help narrow trade deficit

Despite these headwinds, high-frequency indicators point to continued strength across industry and services. Merchandise exports recorded double-digit growth during the first six months of FY27, helping narrow the trade deficit, the RBI said in the October Bulletin.

Foreign direct investment (FDI), external commercial borrowing (ECB) and remittance inflows strengthened in August. Inflows through the foreign currency non-resident (FCNR(B)) swap window also augmented the country’s foreign exchange reserves, supporting its external position.

These inflows offer a cushion against global volatility, although prolonged geopolitical tensions, elevated commodity prices and disruptions to international trade remain risks to the outlook, according to the central bank.

Lending rates fall 93 basis points after repo rate cuts

A separate study in the October Bulletin found that the weighted average lending rate (WALR) on fresh loans declined by 93 basis points between February 2025 and March 2026, following a cumulative 125-basis-point reduction in the policy repo rate.

Of the 93-basis-point decline, 80 basis points came from changes in interest rates, while 13 basis points reflected shifts in the composition of credit across banks and sectors. The findings underline that monetary-policy transmission depends both on the repricing of loans and on changes in the mix of lending.