It is my pleasure to be here at the SBI’s 13^th Banking and Economics conclave to share my views on the Indian economy and put them in the global context-- a context that is becoming increasingly more volatile and complex. In my brief comments, I will discuss the challenges that the global economic backdrop has posed for all emerging markets including India, how the Indian policymakers have addressed these challenges to both alleviate immediate pain and turn them into opportunities, and what the near future may look like for us.

I. The Global Context

2. The global economic context has become less conducive since the global financial crisis of 2008-09. Several structural shifts have impacted the growth and policy outlook for emerging market economies, including peaking of global trade, ageing societies, climate risks, and stretched public finances. While the COVID crisis of 2020-21 added an unprecedented layer of shock and complexity to the global backdrop, a fresh wave of shocks since 2022, has further aggravated it. These recent shocks include two back-to-back commodity and energy shocks amidst unending geopolitical conflicts, policy uncertainty and tariff-led disruptions in trade; an El Niño event; tech-related developments and disruptions - led by AI.

3. India has perhaps been among the most challenged emerging market economies over past year and a half. Whereas most other countries were subject to only a subset of these shocks, India has been subjected to each one of these shocks –simultaneously and cumulatively. On trade, it had faced among the highest tariffs rates the US had imposed on any partner country and an acute policy uncertainty. As a large net oil importer, it has been particularly exposed to the oil supply disruptions and price shocks. Agriculture being a significant part of the economy, and sensitive to rainfall, El Niño is somewhat of a risk to the sector this year. And finally, unlike in many other countries, AI has not yet been a boon. If anything, global AI exuberance has been somewhat of a vulnerability so far through the capital outflows channel.

II. Domestic Outcomes and Policymaking

4. Yet, the economy has emerged from these shocks largely unscathed, and perhaps even stronger structurally. This strength is manifested in India’s growth being the highest among peers, inflation anchored, fiscal outcome on a consolidation path and a financial sector that is more resilient than ever.

5. This brings us to how policymakers have handled the aforementioned shockwaves. What do the theory or best practices tell us about responding to external shocks of this kind, and did India’s policymakers measure up on that count?

6. As far as textbook advice goes, the following principles matter. First, policy makers need to communicate clearly, provide policy certainty, and stay committed to the long-term goals of prosperity and stability.

7. Second, policymakers ought to protect both financial-sector and macroeconomic stability – neither should be compromised in response to such shocks.

8. Third, they should make an efficient use of available tools and buffers to alleviate the immediate pain of the shocks.

9. Finally, they ought to steadfastly continue on the path of efficiency enhancing reforms, irrespective of the pace, for even gradual, incremental reforms cumulate over time.

10. This is precisely how the Indian policymakers have responded to the compounding shocks. They have remained composed, and communicative, while navigating the ship purposefully. They have been engaged with all stakeholders, through all available channels. They have maintained policy certainty while responding to the evolving circumstances.

11. Throughout, the emphasis has been on strengthening the long-term foundations of the economy, so that it becomes more resilient to future shocks. Multiple free trade agreements (FTAs) have been fast-tracked, export destinations have been diversified, and constructive discussions have continued with trading partners. Goods and Services Tax (GST) rationalization has given domestic consumption a boost, and a range of structural reforms have been front loaded.

12. As for the ongoing energy shock too, India has fared well—notwithstanding its dependence on energy imports. The policy response has unfolded in stages. Initially, in anticipation that the conflict would be relatively short-lived, the emphasis was on securing adequate supplies, rather than passing on the shock to economic agents through higher prices or constrained supply. Thus, unlike in many other economies, hardly any rationing took place. This prevented panic and ensured that the shock didn't incur disproportionate economic costs.

13. When it became clear that prices would remain elevated for longer than anticipated, part of the price impact was passed on to the final consumers in a calibrated manner. Instead of broad-based rationing of supplies, the approach was to verbally encourage households and firms to use a supply-constrained resources prudently.

14. In response to such shocks, one mistake countries often make is that they try to pump-prime their economies beyond their productive capacities while stretching their fiscal envelopes beyond sustainable levels. Such endeavors end up compromising macroeconomic stability and thereby leading to growth sacrifice for a much longer period subsequently.

15. Instead, for the past decade, India has prioritized fiscal prudence. In the latest edition of its Fiscal Monitor, the IMF (2026) projected that, in contrast to most other countries, India’s public debt, as a proportion of GDP, would decline between now and 2031 by 5.7 percentage points.² This consolidation is attributed both to fiscal prudence as well as high GDP growth (both real and nominal).

16. Such measures ensured that the Indian economy, led by its engines of consumption, exports, and investments, proved to be as resilient as ever. Growth was at 7.8 percent in 2025-26; and a similar dynamism has continued into Q1 of 2026-27, with growth estimated at 7.8 percent.

17. In addition, the financial sector has not only proven to be stable and resilient, it is also growing through a virtuous cycle of faster and higher quality growth. Regulators have actively pursued the ease of financial intermediation. On its part, the RBI has worked on improving the quality and efficiency of financial intermediation and ensuring that liquidity needs of all productive uses of the economy are met. All stress tests, published in the latest Financial Stability Report in June 2026, indicate that the financial sector is extremely resilient and will remain so under the harshest of conditions.

18. This brings us to a relevant but confounding issue of whether our financial markets are currently fully reflecting this economic reality? Perhaps, only partly so. At one level, there seems to be a bit of disconnect between some parts of the financial markets and the underlying near- and medium-term promise of the real economy. What is causing this disconnect?

19. Among the markets, the bond market has performed well, both compared to its own past as well as in comparison to most other countries. The relative strength of the market is due to the fiscal commitment of the government; and the projected sustained high economic growth rates that would make the fiscal outcomes even better going forward. Credibility of monetary policy, declining structural pressures on inflation have contributed as well. So much so, that for its orderly bond markets, the Economist has remarked that, “India’s experience shows the importance of cleaning up public finances and letting central bankers fight inflation in peace.”³

20. The equity markets, on the other hand, have not tracked the same optimism. This is plausibly because of a relatively more promising AI-led story in certain other economies. While the Indian equity market witnessed an exceptional run of its own, roughly from June 2022 to September 2024, some other economies are having a better run now. Eventually, the promise of the underlying real economy would reassert itself. Going by the past experiences, it is only a matter of time before Indian equities look relatively more attractive again.

21. This brings us to the issue of India’s balance of payments (BOP) and the direction of rupee. The question often asked is whether the BOP and the exchange rate are reflecting the underlying economic strengths.

22. India has traditionally run a small current account deficit (CAD) and a larger capital account surplus, resulting in a net positive BOP. Its CAD as percent of GDP has declined over time, bringing resilience to the BOP. Furthermore, the CAD levels have remained far below the levels generally considered to be prudent for emerging market economies. Net services exports and remittances remain its great structural strengths. Together, they are large and resilient enough to absorb the merchandise trade deficit and keep the CAD contained at below 1 percent of GDP.

23. The recent oil price and gold price shocks have pushed CAD temporarily higher. In addition, in the last two years, capital account surplus has fallen short of CAD, resulting in a negative BOP of about US$ 5.0 billion in 2024-25 and US$ 23.6 billion in 2025-26.

24. Against these developments, the rupee has cumulatively depreciated by 13.0 percent (on a point-to-point basis) from March 31, 2025 to September 17, 2026.⁴ The questions then arise: How long may the BOP stay in deficit? Will it self-correct? What do history and cross-country experiences tell us about where the direction of BOP and the exchange rate; especially in an economy positioned to grow at 7-8 percent in real terms, and 11-12 percent in nominal terms, for years and decades, to come?

25. One plausible assessment is as follows. First, the CAD should shrink further in coming years, with the traditional strengths persisting and the new ones emerging, including the growing success in merchandise exports.

26. India’s dependence on imported oil is set to decline, through alternative sources of energy and the quest to find its own oil reserves, both of which will further bolster the trend reduction in the demand for oil as percent of GDP.⁵ This would be in addition to oil prices themselves stabilizing as soon as the conflict resolves. Meanwhile, the rest of the trade basket is responding well to the new trade opportunities that are being leveraged, a strength that will continue with the positive impact of recent FTAs materializing, and a conducive exchange rate.

27. Second, capital account too should turn more favourable, plausibly from later this financial year and then remain so. Several factors point towards this: stretched valuations elsewhere; the AI-mania saturating; strong domestic macroeconomic fundamentals; a high real and nominal GDP growth helping improve the earnings guidance; a domestic investment cycle gathering pace; healthy balance sheets of banks and corporates; continuing measures to attract variety of capital into the country; trend increase in FDI; and, in due course, the inevitable inclusion of Indian bonds in more global indices. The AI story is, in effect, an “unspent force” for us. Just as India has leveraged the potential of digital innovation thus far, it will leverage the potential of AI equally well going forward, while avoiding the risks.

28. For now, we have leveraged our special capital flow measures implemented in June this year, resulting in a meaningful BOP surplus for the year. This reflects India’s unique ability to attract large inflows at a very small country premium.

29. Put together, these arguments indicate that one may think of the cumulative depreciation of the INR (or shall one say its overcorrection) in the past year and a half to be a temporary phenomenon. With the RBI remaining committed to ensuring orderly conditions in the foreign exchange market, and having the wherewithal to meet decades worth of CAD, or the net BOP deficit, the current market dynamics do not appear especially well-founded.⁶ If anything, there seems to be a fair case for the rupee to not just stabilize but perhaps even appreciate from the current levels, as was being anticipated by the market analysts when the capital flow measures were first announced.

III. Conclusion

30. All in all, the Indian economy has done exceptionally well, notwithstanding the multiple shocks it has faced. It is advancing ahead on a resilient growth equilibrium of 7 percent plus, that is spatially broad-based; sectorally diversified; and underpinned by rising productivity, while steadily working to break into a 8 percent plus equilibrium. This is quite a feat for a large emerging market, and makes India stand out in its asset class.

31. There does remain some disconnect between this real economy narrative and parts of the financial markets, attributable in good measure to the pull of short-term returns in competing markets. This should however correct soon: as the shocks dissipate, for no oil price shock has lasted forever; and as the relative valuations turn competitive again. While it is hard to predict, how long it may take, but the longer the disconnect persists, the higher the odds that the course correction is on its way.

32. Policymakers, for their part, will continue to hold the fort until then and beyond, working to secure faster and more stable growth; ensuring orderly conditions across markets; anchoring expectations; and remaining committed to their policy frameworks that are becoming stronger and more credible with each passing year.

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¹ Inputs provided by Somnath Sharma, Asish Thomas George, GV Nadhanael and others are gratefully acknowledged.

² IMF’s Fiscal Monitor (April 2026) estimates that India’s gross debt to GDP ratio will decline from 83.4 per cent in 2026 to 77.7 per cent in 2031.

³ What is causing the global bond sell-off? The Economist India hints at the answer, September 8, 2026. Link - https://www.economist.com/finance-and-economics/2026/09/08/what-is-causing-the-global-bond-sell-off

⁴ Forex markets were closed on March 29, 30, 31 and April 1, 2025.

⁵ Perspectives on India’s Growth: Last Four Decades to the Present - Speech by Dr. Poonam Gupta, Deputy Governor, Reserve Bank of India - delivered at the 14th Foundation Day Lecture of the Centre for Development Studies (CDS) on Friday February 20, 2026 at Centre for Development Studies, Thiruvananthapuram. Link- https://rbi.org.in/Scripts/BS_SpeechesView.aspx?Id=1547

⁶ See keynote address by Shri Sanjay Malhotra, Governor, Reserve Bank of India at the 25^th FIMMDA-PDAI Annual Conference, May 1, 2026, Amsterdam “Indian Financial Markets – Resilience and Resurgence". Link- https://www.rbi.org.in/Scripts/BS_SpeechesView.aspx?Id=1555.