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Informist, Saturday, Sept. 26, 2026

 

NEW DELHI – The recent escalation in the war in West Asia has resulted in a sharp increase in crude oil prices, reigniting concerns of further disruption in global supply chains and build-up of inflationary pressures, the Reserve Bank of India's staff said in a report Friday. Moreover, sovereign yields in some of the advanced economies have also risen, putting pressure on government finances, the 'State of the Economy' article in the RBI's September bulletin said. However, the paper noted that the Indian economy recorded a strong GDP growth in Apr-Jun despite such a challenging global environment.

 

The Central bank staff noted India's resilient growth despite tensions re-escalating in West Asia. India posted a 7.8% GDP growth in the Apr-Jun quarter of the ongoing financial year. "The economy also demonstrated resilience through August as evident from high-frequency indicators. Supported by strong export growth, the merchandise trade deficit narrowed," it said in the article. Meanwhile, the US Treasury bond yields jumped to their highest level in 20 years due to rising oil prices in the wake of energy crisis and supply chain disruption caused by the US-Iran war. A further rise in oil prices have revived concern about inflation and the possibility of further rate hikes by the Federal Reserve. Friday, the 10-year US Treasury yield closed near 5.16%.

 

"India's financial and external sectors are drawing strength from the real economy, although geopolitical tensions and weather-related uncertainties are acting as key downside risks," it said. The paper added that headline CPI inflation picked up in August. A broad-based sequential rise in food prices paired with a pickup in fuel and core components was seen driving inflation in August, leading to a surge in both headline and core inflation for the month, the article said. Within food items, inflation was broadly driven by cereals, oils and fats, sugar, confectionery and desserts. "Until September 21, high-frequency data suggest a broad-based sequential increase in food prices," it said.

 

Among cereals, prices of rice and wheat continued to rise, though the pace of on-month increase moderated for rice, staff of the Central Bank said in the 'State of the Economy' article. Prices of all major pulses--gram, tur and moong--rose in comparison to the previous month. Similarly, led by a surge in mustard and palm oil prices, edible oil also continued its upward trajectory. "Among key vegetables, onion prices increased sharply, and tomato prices inched up after two months of moderation, while potato prices recorded a month-on-month decline," it said, noting, "retail prices of petrol, diesel, and domestic LPG remained unchanged until September 21." 

 

Retail and fuel prices have been soaring in India since mid-March due to severe shipping and energy disruptions around the Strait of Hormuz caused by the US-Iran war which started late February. A weak south-west monsoon due to an El Nino weather pattern has further led to a surge in food prices. "Agriculture being a significant part of the economy, and sensitive to rainfall, El Nino is somewhat of a risk to the sector this year," RBI staff said.

 

According to the RBI staff, on a month-on-month basis, CPI indices for all sub-components of ‘food and beverages', except meat, fish and eggs rose in August. Fuel inflation also edged up in August with inflation moving up in both urban and rural areas last month, it said. The consumer price index retail inflation climbed to a 20-month high of 4.82% in August, up from 4.44% in July. 

 

The price of the Indian basket crude oil increased to US$ 114.6 per barrel by the third week of September, its highest level since April, the article noted. In August, wholesale price index inflation marginally rose to 9.9% from 9.8% in July, driven by "higher fuel and power, and manufactured products group inflation." "However," the Central Bank staff said, "inflation in primary articles moderated."

 

Industrial and farm input cost inflation also remained elevated last month, the article said. The output producer price index-based inflation, which inched up marginally to 9.8% in August from 9.6% in July, was led by manufacturing products, and mining and quarrying, the staff noted, adding, the purchasing managers' index and output prices for both manufacturing and services "remained in the expansionary zone."

 

According to the staff, input and output price indices for the services sector rose in August despite a moderating pace of expansion in manufacturing. "The gap between input and output price indices narrowed for both manufacturing and services sector firms," they said. 

 

The core inflation in August was seen up at 2.9% from 2.7% even after excluding precious metals, the article said. Within the core, inflation was seen elevated in personal care, social protection and miscellaneous goods and services and restaurant and accommodation services groups.

The staff further noted a liquidity surplus following foreign currency non-resident (banks) deposit flows. A moderate current account deficit in the June quarter and strong FDI flows, the highest in the last five years, supported the external sector, and foreign exchange reserves reached an all-time high, they said. "The resultant deposit growth could support ongoing credit growth. Foreign exchange reserves also reached record levels. Overall, the economy performed strongly despite external headwinds," the RBI staff concluded in the article.   End

 

US$1 = INR 95.81

 

Reported by Radhika Tiwari

Edited by Akul Nishant Akhoury

 

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