Geopolitical tensions, elevated crude oil prices and tighter global financial conditions could increase India's imported inflation and put pressure on the rupee and capital flows, the finance ministry said in its September Monthly Economic Review.
The ministry also flagged the risk that a strong El Niño could affect winter crops, adding to the challenges facing the economy despite strong domestic activity, exports, capital inflows and foreign-exchange reserves as India entered the second quarter of 2026-27.
The assessment comes against a backdrop of rising global energy prices and heightened uncertainty. India imports nearly 90% of its crude oil requirements, making the economy particularly sensitive to sharp movements in international oil prices.
Inflation risks from oil and global uncertainty
The report said supply disruptions, volatile energy prices and uncertainty in the global economy could create near-term risks for inflation, the rupee and capital flows.
"Geopolitical tensions and elevated crude oil prices could also add to imported inflation pressures," it said, while highlighting the impact of the US Federal Reserve's 25-basis-point rate hike in September.
Festive-season demand and higher input costs could add to price pressures in the near term, according to the report. However, it said proactive supply-side measures and government interventions in markets could contain upside risks and cushion the impact of temporary price shocks.
India's retail inflation rose to 4.82% in August, while food inflation reached 5.95%. Wholesale inflation also accelerated to 9.92%, partly because of renewed pressure from fuel and power prices.
RBI steps in to absorb surplus liquidity
The report said recent open market operations by the Reserve Bank of India to absorb surplus liquidity could help maintain balanced financial conditions and prevent "undue demand-side overheating".
The RBI announced a ₹1 trillion open-market sale of government bonds in September as it sought to drain excess liquidity from the banking system. The move followed a sharp increase in liquidity after a special foreign-exchange mobilisation scheme brought substantial dollar inflows into the country.
The central bank has also used foreign-exchange swaps, spot dollar sales and other liquidity-management measures. Its operations have significantly reduced the banking system's liquidity surplus in recent weeks.
External sector remains resilient
Despite the global risks, the finance ministry said India's external sector remained resilient, supported by services exports, remittances, capital inflows and a sizeable foreign-exchange reserve buffer.
Foreign-exchange reserves stood at $765.9 billion as of September 18, equivalent to around 11.1 months of import cover.
However, the report warned that Indian assets, including the rupee, could remain under short-term pressure because of unsettled US trade relations, volatile portfolio flows and increased competition for global capital.
The rupee has faced renewed pressure from elevated oil prices and global bond yields. It fell 0.7% in September and 1.2% during the July-September quarter, although RBI intervention helped limit the decline.
El Niño adds agricultural risk
The government's concerns extend beyond financial markets. The report warned that a strong El Niño could damage winter crops, creating another potential source of pressure on food prices and the wider economy.
The warning follows India's weakest monsoon season in more than a decade. Rainfall during June-September 2026 was 12.6% below the long-period average, with the El Niño weather pattern contributing to drier conditions.
Taken together, the finance ministry's assessment points to a mixed near-term outlook: domestic activity, exports, capital inflows and foreign-exchange reserves provide support, while energy prices, global monetary conditions, geopolitical tensions, currency movements and weather-related risks could complicate the inflation outlook.