India’s sound macroeconomic fundamentals provide ample buffers to deal with external shocks, said the RBI’s Financial Stability Report (FSR).
“However, the Indian economy remains exposed to energy price shocks and supply-chain disruptions given its high dependence on imported oil and other key commodities,” said the half-yearly publication, with contributions from all financial sector regulators.
It also emphasised that, though headwinds from the West Asia conflict are receding with the signing of the interim peace deal, the Indian economy and financial system remain susceptible to geopolitical tensions and associated shocks.
“A sharp correction in global equity markets, particularly if driven by a reassessment of corporate earnings growth and elevated valuations in AI related stocks, could spill over to domestic markets,” said the FSR.
The report said the West Asia conflict and consequent increase in global uncertainty also impacted emerging market economies (EMEs) like India through the financial channel.
“The exchange rate came under sustained depreciation pressure due to weakening of capital inflows and higher hedging demand from importers and investors.”Notwithstanding sustained fiscal consolidation, government bond yields, especially at the longer end, came under pressure mainly reflecting geopolitical tensions and rising energy prices,” it said.
However, RBI said the pressure on the exchange rate and bond yields has eased post the measures taken by the Reserve Bank and the Government to attract capital flows, helping overall financial conditions to ease.
The report further said India’s macroeconomic fundamentals are stronger compared to many of its peers and, in comparison to previous crisis episodes,provide important buffers to withstand these shocks.
“A robust and resilient financial system, underpinned by strong bank and non-bank balance sheets with adequate capital and liquidity buffers, provides a strong foundation,” it said.
Accordingly, the RBI said even amid an uncertain global backdrop, the potential for external shocks to generate systemic financial stress and spill over to the real economy remains contained.
“Moreover, the balance of risks has shifted favourably, supported by the cessation of hostilities in the West Asia conflict and the recent policy measures by the Government and the Reserve Bank aimed at strengthening capital inflows,” it said.
The report also noted that capital account has remained under pressure due to moderating inflows.
While gross foreign direct investments (FDI) were robust in 2025-26 (USD 95 billion) on the back of strong growth prospects, net FDI flows were muted due to rising repatriation and higher outbound foreign direct investments.
Net FDI are showing signs of revival with USD 7.4 billion net flows in April 2026 compared to USD 1.6 billion in the same month last year.
“India’s net FDI is sensitive to global financial conditions. Consequently, the recent decline in net FDI may, in part, reflect the tightening of global financial conditions,” the report said.
Alongside, foreign portfolio flows to India have been under pressure in 2025-26, which intensified after the start of the West Asia conflict due to deteriorating investor sentiment.