Policy measures will likely cushion Indian economy against external headwinds: RBI bulletin

An article in the Reserve Bank of India’s May Bulletin, released on Wednesday, said robust services exports, positive net FDI flows, forex reserve buffers and several proactive measures by the government and the RBI are "likely to cushion the Indian economy against external headwinds."

The article titled 'State of the Economy' warned that global economic conditions remained fragile, shaped by heightened geopolitical tensions, elevated energy costs and persistent uncertainty surrounding the growth and inflation outlook.

 "The financial conditions, crude oil prices and capital flows continue to pose challenges to the external sector outlook," the article said. 

The RBI said the views expressed in the article are those of the authors and do not represent the views of the central bank.

In recent days, the government has been taking fiscal measures to reduce financial losses by hiking fuel prices—twice in May—and the RBI has announced that it will conduct a $5 billion USD/ INR buy/sell swap auction on May 26, to boost more liquidity into the system.

The auction was announced to keep liquidity conditions comfortable in light of the drag on rupee liquidity from continued forex intervention over the last few days. 

All eyes are on how the government and central bank will stem the slide of the depreciating rupee. It is the worst performing Asian currency against the dollar, having fallen 12.5%  to the dollar since FY25 and nearly 7% in CY2026.

The article in the RBI bulletin, warned that global economic conditions remained fragile, shaped by heightened geopolitical tensions, elevated energy costs and persistent uncertainty surrounding the growth and inflation outlook.

 "The financial conditions, crude oil prices and capital flows continue to pose challenges to the external sector outlook," the article said. 

"The conflict in West Asia continued to exert pressure on commodity markets, global trade flows and supply chains, contributing to the volatility in financial markets," the article added.

It also said that, "India has entered this phase from a position of macro-economic strength. Domestic demand continues to be the key driver of growth. However, the near-term outlook is somewhat clouded by supply side pressures."

Although headline inflation remains firmly within the tolerance band, the pass through to domestic prices needs to be monitored.

CPI inflation rose to 3.5% in April, driven mainly by food inflation, while core inflation remained steady. In March, net foreign direct investment remained positive for the second consecutive month.