RBI Stresses Domestic Resilience as Global Volatility Mounts

India’s central bank has sounded a cautiously confident note on the country’s economic trajectory, arguing that resilient domestic fundamentals will allow Asia’s third-largest economy to retain its growth leadership even as global conditions deteriorate. In its latest bulletin, the Reserve Bank of India acknowledged the rising complexity of the global backdrop from mounting geopolitical risks in the Middle East and Eastern Europe to uncertainty around trade and capital flows but maintained that India is well-positioned to absorb external shocks.

At the heart of this assessment is the continued strength of domestic demand. The RBI highlighted robust private consumption, steady investment activity and rising credit to the commercial sector as key pillars supporting growth. Financing to the commercial sector surged by nearly 45% yr/yr to INR 30.8tn through December 2025, with both bank credit and non-bank sources expanding sharply. Corporate bond issuances have picked up pace, and foreign direct investment despite a drop in net inflows remains solid in gross terms, particularly from Japan, Singapore and the US. The bulletin also underscored India's efforts to reduce external sector vulnerabilities. Trade talks now span nearly 50 economies, with recent deals concluded with Oman and New Zealand. The RBI framed these moves as part of a broader strategy to rebalance India’s exposure to global demand shifts, supply chain risks and geopolitical realignments. 

On currency markets, the RBI acknowledged that the Indian rupee (INR) has come under pressure, depreciating modestly in both nominal and real effective terms amid foreign portfolio outflows. However, it noted that India’s relatively low inflation has softened the impact of real depreciation, and currency volatility remains lower than in other emerging markets. The INR slid recorded a fresh low on January 23, 2026 (falling to 91.95 INR/ USD), extending its weakness as equity markets continued to bleed due to withdrawal of foreign institutional investors, and persistent dollar demand weighed on the currency. The INR depreciated 1% in the last week alone and about 2% so far in January. Policymakers are now watching capital flows closely, especially after portfolio equity outflows reached a record of US$ 19bn in 2025. 

Structurally, the bulletin pointed to reforms introduced over 2025 including tax simplification, labour code rollouts, and financial deregulation as tailwinds for productivity. The central bank reiterated that its policy stance would remain focused on balancing innovation with stability, with a continued emphasis on consumer protection and financial market resilience. Still, the tone of the bulletin stops short of complacency. The RBI acknowledged that India’s growth outlook is now more tightly coupled to global conditions than in the past, and that sustaining investor confidence will depend on credible macro management, stable capital inflows and targeted export competitiveness. 

From our lens, the RBI’s optimism is justified but not without caveats. India’s domestic demand is clearly holding up, and the system is better capitalised than in previous cycles. However, the economy is entering a phase where its structural ambition—sustained high growth, global capital absorption, and industrial scaling—collides with a world of retreating globalisation, re-pricing of geopolitical risk, and more fragmented liquidity. The RBI’s bet on resilience is supported by buffers, but not immune to erosion. Net FDI outflows and portfolio volatility are early warning signs of stress points building beneath headline stability. Importantly, while rupee volatility has been contained, continued capital outflows could constrain monetary policy space, particularly if inflation surprises to the upside. That said, India’s multi-channel growth model combining public capex, private investment, financial deepening, and services expansion remains a powerful buffer, in our view.