Navigating global turmoil: How India’s economy holds steady

International uncertainties have been on rise. Heightened geopolitical tensions, driven by deepening global rifts, frequent tariff changes, and shifting trade policies, have led to increased economic volatility. The Russia–Ukraine war, despite ongoing efforts to find a peaceful resolution, continues unabated. Sanctions imposed by the US and Europe on Russia are impacting global supply chains.

Further, US tariff actions, especially those affecting countries purchasing Russian oil, including India, could influence oil prices and restrict the availability of cheaper crude for such buyers. India, however, has proactively diversified its sources of oil supply.

Recent tensions in the Middle East, particularly domestic protests and violence in Iran and the subsequent threat of US military action. currently appearing unlikely, pose risks to oil supply for countries dependent on Iranian crude. Similarly, recent US military action in Venezuela and the arrest of the Venezuelan President reflect continuing political unrest, notwithstanding the justifications cited by the US.

In recent days, discussions around the possible takeover of Greenland from Denmark by the US have also surfaced. While US President Donald Trump strongly advocated for Greenland, military action appears unlikely at present. Nonetheless, these developments are contributing to elevated geopolitical risks and energy and security-related volatility.

Additional instability arises from tensions in Central Asia and disruptions in the Red Sea corridor. Persistent threats of enhanced US tariff hikes and unpredictable US–China trade policies continue to hinder global trade. The much-anticipated India–US trade deal has yet to materialise, and this uncertainty has also weighed on Indian equity markets.

As per RBI latest Bulletin January 2026, “The year 2026 began with an escalation of geopolitical tensions, marked by developments such as US intervention in Venezuela, the simmering conflict in the Middle East, ambiguity surrounding the Russia–Ukraine peace deal and escalation of the row over Greenland, all of which point to still elevated geoeconomic risks and policy uncertainty ahead.”

These uncertainties have resulted in global GDP growth projections remaining below potential. The IMF projects global growth of 3.3 per cent for 2026 and 3.2 per cent for 2027, compared with the World Bank’s estimates of 2.6 per cent and 2.7 per cent respectively. For advanced economies such as the US, UK, Euro area, and Japan, the IMF estimates growth at 1.8 per cent in 2026 and 1.7 per cent in 2027, versus the World Bank’s projection of 1.6 per cent for both years.

Emerging and developing Asia, led by India and China, is projected by the IMF to grow at 6.4 per cent in 2026 and 6.3 per cent in 2027. China’s growth is estimated at 4.5 per cent in 2026 and 4.0 per cent in 2027. Together, India and China contribute to emerging and developing Asia’s growth of 5.0 per cent in 2026 and 4.8 per cent in 2027.

The IMF released its latest updated World Economic Outlook on January 19, 2026. Despite persistent global uncertainties, growth projections have been marginally revised upward from the October 2025 outlook. According to the report, investments in technology, including artificial intelligence (AI), fiscal and monetary support, accommodative financial conditions, and private-sector adaptability have helped offset the adverse effects of trade policy shifts. Global headline inflation is expected to decline from an estimated 4.1 per cent in 2025 to 3.8 per cent in 2026 and further to 3.4 per cent in 2027.

Nevertheless, risks to the outlook remain tilted to the downside. A re-evaluation of AI-related productivity expectations could dampen investment and trigger abrupt financial market corrections, eroding household wealth beyond the technology sector. Trade tensions could intensify, prolonging uncertainty and weighing on economic activity. New domestic or geopolitical conflicts could erupt, further disrupting financial markets, supply chains, and commodity prices. High fiscal deficits and elevated public debt levels may also place upward pressure on long-term interest rates and financial conditions.

There are, however, potential upside scenarios if these risks do not materialise. Prudent fiscal management, creation of fiscal buffers, effective control of commodity prices, and coordinated monetary and supply-side interventions remain critical. Structural reforms must be pursued without delay to ensure financial stability and reduce uncertainty.

Against this backdrop, it is heartening that the Indian economy has demonstrated marked resilience. Growth for 2025–26 is estimated at 7.4 per cent, with the first half recording growth close to 8 per cent, up from 6.5 per cent a year earlier. Growth in private final consumption expenditure (PFCE), the mainstay of aggregate demand, remained steady, while fixed investment improved compared to the previous year. Government final consumption expenditure also accelerated, supporting overall momentum. According to the RBI’s January 2026 Bulletin, PFCE growth was underpinned by sustained rural demand and a gradual recovery in urban demand, partly aided by rationalisation of the Goods and Services Tax (GST).

Exports face downside risks due to global trade uncertainties, with import growth outpacing exports, potentially acting as a drag on growth. However, high-frequency indicators of economic activity remained upbeat in December.

From a macroeconomic perspective, India continues to maintain strong growth momentum at 7.4% for 2025-26, supported by robust manufacturing and services sectors. There is a need to further strengthen manufacturing and enhance the global competitiveness of services. India presents a “Goldilocks” scenario of high growth, controlled inflation, and resilient domestic demand, positioning it among the fastest-growing major economies.

India’s foreign exchange reserves stand at around USD 700 billion, providing a strong buffer equivalent to nearly 11 months of imports. The government has set a fiscal deficit target of 4.4 per cent of GDP for FY26, which appears achievable, with a medium-term goal of reducing it to 3 per cent. Public debt remains elevated at over 80 per cent of GDP and needs to be gradually brought down to the desired level of around 50 per cent, which is a significant challenge.

India’s banking and financial sector remains healthy, with strong capital buffers and low net non-performing asset ratios. However, the Indian rupee has weakened, hitting a record low of ₹91.64 per US dollar. A widening trade deficit, higher domestic inflation relative to the US, foreign portfolio outflows, and delays in the India–US trade deal have all contributed to currency depreciation. While exporters benefit from higher rupee realisations, importers face increased costs, and external debt servicing becomes more expensive.

Although gross FDI inflows were strong in 2025, high profit repatriation and increased outward investments resulted in low net FDI. There is a clear need to attract greater FDI, particularly to support large-scale infrastructure and expansion projects that can supplement domestic resources.

Greater clarity on these issues is expected with the presentation of the Union Budget 2026–27 on February 1. With favourable economic fundamentals, positive policy direction, and sustained structural reforms, India is well-positioned to attract substantial foreign investment and provide a further boost to economic growth.