Global headwinds pose fresh risks to Indian assets, rupee: Monthly Economic Review

India’s growth momentum remains firm, but a renewed deterioration in global conditions is creating short-term pressure on Indian assets and the rupee, the Department of Economic Affairs’ Monthly Economic Review for September 2026 said, flagging higher oil prices, rising global bond yields, US trade uncertainty and intensifying competition for global capital.

“At the same time, global conditions have turned unfavourable again,” the report said, noting that oil prices spiked in September while global bond yields “have moved sharply higher and continue to climb.”

The report said Indian bond yields have risen by less than global yields, narrowing the risk premium and putting pressure on the rupee. However, it said investors could eventually recognise the underlying strength of Indian debt.

“India’s bond yield has gone up by less but the lower risk premium pressures the Indian rupee,” the report said, adding that “over the medium term, investors would appreciate the fundamental reasons behind the lower risk premium on Indian debt.”

US trade risks

Trade relations with the US remain another source of uncertainty. The review highlighted the passage of the Graham Bill through Congress and its Presidential assent, saying it empowers the US President to impose tariffs of up to 100% on countries purchasing Russian crude oil.
The report also pointed to the continuing investment boom around artificial intelligence, saying the “AI story continues to drive capital investment and capital flows across borders.” It added that the AI bubble had not yet begun what it described as its “inevitable meaningful deflation.”

At the same time, developed economies are competing to attract investments to finance renewed manufacturing ambitions amid what the report called the increasing “weaponisation of global supply chains.” This creates a stiff challenge for India and other developing economies seeking to attract foreign capital.

FDI offers some support

Despite the external pressures, the review expects net FDI inflows to perform better this financial year than last year. It said strong capital inflows, higher banking capital and increased net FDI had supported India’s balance of payments.

Foreign exchange reserves stood at $765.9 billion as of September 18, 2026, providing a substantial buffer against external-sector vulnerabilities.
India’s domestic growth also provides some cushion. Real GDP expanded 7.8% in Q1 FY27, the strongest first-quarter growth in the current series, while investment emerged as an increasingly important growth driver.

Yet the review cautioned that strong domestic growth cannot be taken for granted amid geopolitical and geoeconomic uncertainty.
“India cannot afford to rest on its post-Covid growth laurels. It has to be earned every quarter. That is the challenge for policymakers,” the report said.