Economic Resilience, Thinner Buffers, Emerging Risks Globally: Where Does India Stand?[1] – Address by Dr. Poonam Gupta, Deputy Governor, Reserve Bank of India, at the Business Standard BFSI Insight Summit
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Dated:- 29-10-2026
It is a pleasure to be back at the Business Standard BFSI Insight Summit. When I spoke here last year, my theme was the macroeconomic resilience of emerging markets (EMs), including India, which I attributed to the sound policy frameworks that these economies have adopted and adhered to.
A year on, the resilience of the world economy has held. In today's talk, I will reflect on the latest global outlook drawing on the recent publications of the IMF, how India is placed in this global context, and what policy priorities may be warranted for other EMs as well as India at this point in time.
My observations are in four parts, one each on growth, inflation, public finances and the financial sector.
1. Growth rates seem resilient across countri
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ojection has been raised by 1.4 percentage points, along with smaller upgrades in Europe, including Germany (0.6 percentage point). The projection for the United States is unchanged at 2.3 per cent.^3 Second, the projection for emerging market and developing economies (EMDEs) has been marginally lowered by 0.1 percentage point to 3.7 per cent (Chart 1).^4 Third, the projection for India in 2026-27 has been upgraded by 0.6 percentage point to 7.0 per cent.
What explains this resilience? WEO attributes it to “a combination of circumstantial and institutional factors as well as offsetting forces”.
The first set is circumstantial, starting with the financial cushions that households and firms built up in earlier years. The large fiscal support during the pandemic cushioned their finances, and many had shifted to longer-term borrowing at fixed rates while interest rates were low, which has shielded them from the recent rise in rates. In 2025, financial conditions were accommodative an
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d GDP has fallen by about a third over the past two decades. All this has reduced the impact of the near closure of the Strait of Hormuz. The IMF estimates that the closure will take 0.3 percentage point off global growth in 2026, against 0.9 percentage point had oil supply been less flexible and energy use less efficient.^5
Investment in AI has also supported growth. Large investments in data centres and computing equipment have boosted demand, well ahead of any visible gains in productivity. According to a recent IMF blog, AI could add about half a percentage point to annual world growth over the next decade.^6 These gains, however, may take time and are likely to be unevenly distributed across countries.
The risks to the outlook are seen as tilted to the downside. These include a prolonged or wider conflict in West Asia and Ukraine, which would push commodity prices higher; a reassessment of the expected gains from AI, whose supply chain is highly concentrated; extreme weather
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out, was registered at 7.8 per cent, and was higher than expected. Growth was driven mainly by private consumption and fixed investment, with the latter growing by 11.9 per cent, its highest in the new GDP series.^7 Exports of goods and services grew by 12.0 per cent in real terms, as merchandise exports picked up and services exports stayed strong. On the supply side, manufacturing grew by 9.2 per cent and services by 9.7 per cent. Growth is not just high but balanced as well.
The economic momentum seems to have carried into July-September. Gross goods and services tax (GST) collections rose by more than 14 per cent in each month of the quarter. Industrial output was up 8.0 per cent in August. Merchandise exports have grown at double-digit rates for six months running, by 23.0 per cent in September. Both the manufacturing and the services Purchasing Managers' Indices (PMIs) were above 55 in September. Bank credit grew by 19.4 per cent year on year as on September 30, and retail au
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ially broad-based, diversified and underpinned by rising productivity, and it draws on domestic consumption as well as exports.^9 As a result, even when particular sectors are hit by specific shocks, large parts of the economy remain relatively insulated. This stands in contrast to economies that rely on a narrower set of growth drivers, such as natural resources, agriculture, external demand rather than domestic markets, or remittances from outward migration, or that face unfavourable demographics.
Second, India's policy frameworks have improved, and so has their implementation, with a firm focus on macroeconomic and financial stability. The Fiscal Responsibility and Budget Management framework has anchored fiscal consolidation within a rules-based path; GST has unified the indirect tax system; flexible inflation targeting, adopted in 2016, has lowered both the level and the volatility of inflation; and banking regulation and supervision have been considerably strengthened.
Thir
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nsumption. At the same time, there was no attempt to stimulate demand beyond the economy's productive capacity, and fiscal consolidation has stayed on track.^10
2. Higher inflation across countries, resulting in tighter monetary policy
WEO projects global headline inflation at 4.7 per cent in 2026, up from 4.1 per cent in 2025, and expects it to ease back to 4.1 per cent in 2027. Inflation in 2026 is projected to be above its pre-pandemic (2000-19) average of 3.9 per cent, though below the 2022-25 average of 6.3 per cent.
Three factors are shaping the inflation outlook. The first is the re-escalation of the conflict in West Asia, which has pushed up the prices of energy and other commodities. The IMF now expects oil prices to average about US$96 a barrel in 2026, 16 per cent higher than it had assumed in April, and fertiliser prices to rise by 10 per cent. Higher costs of energy, fertilisers, transport and insurance are, in turn, projected to raise international food prices by
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elies on imported energy, the weight of food in its consumption basket, and the strength of its domestic demand.
In AEs, in particular, inflation has been above their target in every year since 2022 (Chart 3).^11 The IMF projects it at 3.1 per cent in 2026 and 2.7 per cent in 2027, returning close to 2 per cent only from 2028. In EMDEs too, inflation, at 5.7 per cent in 2026, is projected to be at the upper end of the 3-6 per cent range of their targets.
For India, the IMF projects inflation to rise from 2.0 per cent in 2025-26 to 5.0 per cent in 2026-27, before moderating to 4.4 per cent in 2027-28.
The current situation of external shocks and the resultant growth-inflation outlook raises the following questions about how countries may conduct their monetary policy.
How should monetary policy respond to supply shocks, and distinguish temporary external price shocks from more persistent second-round effects? Are inflation-targeting frameworks adequately equipped to deal wit
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ng diffusion indices that measure the breadth of price pressures, the trajectory of wages, and inflation expectations.
At the same time, policy makers may not always have the luxury of waiting for these effects to fully materialise and may instead take pre-emptive actions. The IMF has emphasised that monetary policy “should remain firmly focused on price stability”, with a policy stance restrictive enough to bring inflation back to target in a timely manner and prevent second-round effects.^12
The flexibility built into inflation-targeting frameworks, including the tolerance band or an explicit or implicit mandate of growth or employment, has helped central banks adapt their response to the specific challenges and contexts. Central banks are communicating more and better. This has helped anchor expectations and preserve credibility despite not meeting the inflation targets for multiple years. The question, however, remains whether they can continue to anchor expectations for a mu
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d overall macroeconomic stability.
As for AI, its overall implications for inflation and monetary policy are still being assessed. In the near term, the investment boom adds to demand, as noted earlier. Once AI raises productivity, it could lower costs and ease inflation, although inflation could pick up again later if higher demand comes to dominate. If it lifts investment demand and expected growth for a sustained period, it could also raise the neutral interest rate. And wider use of AI in pricing could allow firms to adjust prices more quickly, so that shocks pass through to inflation faster than in the past.^13
Central banks in emerging economies are generally guided by domestic growth and inflation conditions, and the specific monetary policy frameworks or inflation-targeting frameworks that they have put in place rather than by interest-rate differentials with AEs. There are hardly any central banks that incorporate external conditions or the exchange rate directly into th
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e, depending on the evolving circumstances and the outlook”.^16 Inflation data for September, released after the policy meeting, were along expected lines: headline inflation rose to 5.5 per cent and core inflation to 4.3 per cent, so that the average for July-September, at 4.9 per cent, was the same as the MPC's projection for the quarter.
Over a longer period, India's record on inflation has been rather strong. Since the adoption of flexible inflation targeting in 2016, annual inflation has declined from the previous years' average, has become more stable, and has remained within the tolerance band of 2 to 6 per cent in all but two years (Chart 4). Even in those two years of exceptional external circumstances (Covid and the Russia-Ukraine war), it did not deviate too much from the upper limit, at 6.2 and 6.7 per cent, and declined subsequently.
3. Thinner buffers globally, especially fiscal, to respond to the current shock if it persists, or to address a new shock
The fiscal
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nty years. This reflects several factors: the oil price shock, inflation that has proved persistent, stronger demand for investment, and expectations of faster growth from AI. Concerns about public finances have added to the pressure, given high debt, rising spending needs and the prospect of heavy bond issuance.^17
This brings us to the question of debt sustainability. Whether the debt ratios across countries rise or fall depends on two things: the primary deficit (non-interest expenditure in excess of revenue), and the gap between the interest rate a government pays on its debt and the growth rate of nominal GDP.
For the median advanced and emerging market economies, this gap was negative in every year from 2016 to 2025, except 2020. While remaining negative, it is projected to narrow over the next few years (Chart 6). As the gap narrows, governments will need to run smaller primary deficits to stabilise their debt ratios. Instead, the primary deficit is projected to rise from
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solidation than currently envisaged under existing policies.” Indeed, among the nine emerging market economies with GDP above US$1 trillion, India is the only one whose debt ratio is projected to decline between 2025 and 2031.^19
So how sustainable is India's public debt? Sustainability can be assessed in different ways. One could assess the rollover risk, that is, whether the government may find it difficult or costly to refinance its maturing debt. Another is runaway risk, that is, whether the debt ratio may keep rising on its own momentum, because the interest rate on debt exceeds the growth rate of the economy. India has neither. Most of the public debt is long term, is denominated in local currency, and is held domestically (a large part of which is held by institutional investors), which limits rollover risk. And a favourable growth and interest-rate differential, along with fiscal consolidation, has put the debt ratio on a declining path.
Fiscal consolidation has also been
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l per cent over time.
4. Financial sector has held up well globally, but could face shocks
With the changing global order and rapid transformation of the financial systems, safeguarding financial stability has become an ever more compelling priority. The Global Financial Crisis (GFC) of 2007-09 showed that financial instability can cost dearly in terms of economic growth, fiscal backstop, and rebuilding trust. The reforms that followed have strengthened bank regulation, supervision and risk management, and the capacity of banks to absorb shocks. As a result, the banking sector has become much more resilient. For the largest internationally active banks, the average common equity Tier 1 capital ratio nearly doubled, from 7.1 per cent in June 2011 to 13.3 per cent at the end of 2021. According to the Basel Committee's evaluation, systemic risk declined after the reforms, with no considerable evidence of adverse effects on bank lending.^21
The post-GFC reforms have strengthened t
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ee topical risks: a fall in the prices of AI-related assets, if investment and profits in AI prove weaker or less durable than expected; a sharp increase in sovereign bond yields, from renewed inflation or concerns about public finances; and cyber threats, which are becoming a systemic risk as financial services grow more digital and interconnected.
GFSR notes, these “could be near-term catalysts for a sharp tightening of financial conditions and market turmoil”. Their impact could be amplified by leverage, concentrated exposures and liquidity mismatches, particularly among non-bank financial institutions. This could test the resilience of the global financial system at a time when policy space is narrowing. The overall assessment is that while financial markets have been resilient, risks to financial stability remain elevated.^22
The GFSR therefore calls for containing excessive leverage, bringing public debt onto a sustainable path, preserving the capital and liquidity buffers
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ion, through a revised Prompt Corrective Action framework and scale-based regulation of non-banking financial companies (NBFCs).^23 Countercyclical measures were undertaken too, as warranted (e.g. in November 2023, when regulatory measures on consumer credit and bank credit to NBFCs were implemented).
The resilience of the Indian financial system is now amply evident: capital adequacy is 17.7 per cent, the common equity Tier 1 ratio is 15.3 per cent, and the liquidity coverage ratio is about 124 per cent. The gross non-performing asset (NPA) ratio of scheduled commercial banks has declined from 11.6 per cent in March 2018 to 1.8 per cent in March 2026, a multi-decadal low.
RBI's stress tests reinforce this assessment. The June 2026 Financial Stability Report included adverse scenarios built around a prolonged and wider geopolitical conflict. Even under the most severe scenario, the capital adequacy of the 46 major banks would remain at about 13 per cent by March 2028, well above
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beyond the central bank and requires coordinated action by all financial regulators and the government. India's inter-agency framework serves this purpose. The Financial Stability and Development Council, chaired by the Finance Minister, and its Sub-Committee, chaired by the RBI Governor, provide an institutional platform for the government, the RBI and all financial sector regulators to exchange information, assess systemic risks and coordinate policy responses to safeguard financial stability.
India's financial resilience thus rests on several factors: healthy balance sheets, a strong regulatory framework that balances risk management with economic growth, supervision that is risk-based and makes good use of technology, countercyclical policies to prevent vulnerabilities from building up during periods of rapid growth, a broad regulatory perimeter that helps limit regulatory arbitrage, stress tests to assess the vulnerability to envisaged shocks, and all-encompassing forums to di
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wing costs. Global public debt is heading above 100 per cent of GDP, bond yields have risen sharply, and EMDEs face costlier funding and more volatile capital flows.
Let me bring these threads together for India. On growth, India stands out. It is the fastest-growing large economy, and unlike the EMDE aggregate, its growth projection has been revised up over the past year. That growth has rested more on domestic sources lately, particularly private consumption and public investment, but new drivers have emerged, including private investment and merchandise exports. The ballpark estimate that most agencies have for the next few years is 7 per cent or thereabouts. With some of the conditions normalising, and with continued policy attention, one could envisage growth moving up from 7 per cent towards 8 per cent.
India's track record on inflation over the last ten years has been equally credible. Since the adoption of flexible inflation targeting, inflation has declined structurally,
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ed, public debt is on a declining path and the financial system is sound.
References
Bank for International Settlements (2024), “Artificial Intelligence and the Economy: Implications for Central Banks”, Chapter III, Annual Economic Report 2024, June.
Bank Indonesia (n.d.), “Monetary Policy”, Bank Indonesia website.
Basel Committee on Banking Supervision (2012), Results of the Basel III Monitoring Exercise as of 30 June 2011, April.
Basel Committee on Banking Supervision (2022a), Basel III Monitoring Report, September.
Basel Committee on Banking Supervision (2022b), Evaluation of the Impact and Efficacy of the Basel III Reforms, December.
Basel Committee on Banking Supervision (2026), Regulatory Consistency Assessment Programme: Basel III Adoption Progress Summary, September.
Bolhuis, M., A. Roy, P. Schneider and Z. Zhang (2025), “Good Policies (and Good Luck) Helped Emerging Economies Better Resist Shocks”, IMF Blog, October 6.
Dabla-Norris, E. and R. Vald&ea
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3.
International Monetary Fund (2025), World Economic Outlook, October.
International Monetary Fund (2026a), “Taxing Better to Boost Growth”, Chapter 1, Fiscal Monitor, October.
International Monetary Fund (2026b), Fiscal Monitor Database, October.
International Monetary Fund (2026c), Global Financial Stability Report, October.
International Monetary Fund (2026d), World Economic Outlook, April and October; World Economic Outlook Update, January and July; and World Economic Outlook and Historical Forecasts Database.
Malhotra, S. (2026), “Preserving Financial Stability in an Evolving World”, Special Address at the Fifth Kautilya Economic Conclave, October 3.
Ministry of Statistics and Programme Implementation (2026), “Press Note on New Series of Gross Domestic Product (GDP) Estimates with Base Year 2022-23”, Government of India, February 27.
Reserve Bank of India (2025), Review of Monetary Policy Framework: A Discussion Paper, August.
Reserve Bank of India (202
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ermany, Italy, Japan, the United Kingdom and the United States) and the euro area countries. The group includes Korea, Taiwan Province of China, Australia, Singapore, Switzerland, Sweden and Hong Kong SAR, among others.
^4 There are other regional variations too. Compared with July, the IMF has raised its 2026 projections for emerging and developing Asia, to 5.1 per cent, and sub-Saharan Africa, to 4.5 per cent; lowered them for emerging and developing Europe, to 1.7 per cent, Latin America and the Caribbean, to 2.3 per cent, and, most sharply, for the Middle East and Central Asia, where output is now projected to contract by 0.3 per cent.
^5 Some of these adjustments are likely to be more durable than others. Investment in alternative sources of energy and gains in energy efficiency will make economies less vulnerable to similar shocks in future. Others, such as drawing down inventories or sourcing energy from more distant suppliers, offer only temporary relief, and at a higher
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ilience Is Under Strain, Demanding Decisive Policy Action”.
^13 IMF (2026), World Economic Outlook, October; Bank for International Settlements (2024), Annual Economic Report, Chapter III, “Artificial Intelligence and the Economy: Implications for Central Banks”.
^14 Indonesia is a notable exception. Bank Indonesia is mandated to achieve rupiah stability, which covers both the prices of goods and services and the exchange rate of the rupiah. Bank Indonesia, “Monetary Policy”, website.
^15 Reserve Bank of India (2026), Resolution of the Monetary Policy Committee, October 5 to 7.
^16 Statement by Shri Sanjay Malhotra, Governor (2026), October 5 to 7, released October 21.
^17 Dabla-Norris and Valdés (2026), “Rising Sovereign Yields Raise the Fiscal Stakes”.
^18 India's general-government deficit narrowed from 9.2 per cent of GDP in 2022-23 to 7.4 per cent in 2025-26. In AEs and EMDEs, by contrast, fiscal deficits have widened since 2022, after declining from their
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