Economy Stable Despite Global Turbulence; El Nino Risks Loom: Finance Ministry report

New Delhi: India's economic activity, inflation and external position have remained "relatively stable" despite external risks, and the external sector remains well-positioned to absorb the pressures arising from the changing global trade dynamics and volatile global financial conditions, the finance ministry said Monday in its Monthly Economic Review (MER) report for August.

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Going ahead, easing cost pressures and firm demand conditions are expected to support activity, although the external environment remains a key source of uncertainty. It cautioned that an intensifying El Nino, expected to peak late 2026, could pose downside risks to food inflation and certain crop yields including the upcoming Rabi crops such as wheat and mustard, and highlighted the global tightening of exportable supplies of vegetable oils having affected India as the country is dependent on imports of crude palm, soybean and sunflower oils. It also said that protein-rich items, processed foods and edible oils are emerging as major contributors to price pressures. "The global economy remains uncertain because of growth, oil prices and different interest-rate policies.

Despite these external risks, India's economic activity, inflation and external position have remained relatively stable," the department of economic affairs said in the MER. Domestic economic activity remains steady, with resilient domestic demand providing support amid some moderation in the pace of expansion, it added.

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"Kharif sowing has gained momentum following the intensification of monsoon rains across large parts of the country, although acreage remains below last year's level," it said, adding that elevated food inflation, by absorbing a larger share of household disposable income, could constrain spending on non-food discretionary items, thereby limiting the extent to which cost-side pressures are passed through to final consumer prices, it added. The finance ministry said it is closely tracking key global developments. First, development in sovereign bond markets worldwide as "the rise in yield can cut both ways. Our bond yields can rise in tandem. Or, if they don't, the spread compression can put pressure on the domestic currency".

Second, the quest for investment capital from across the world, including by developed countries, as they seek to finance their fiscal spending and refinance their debts. "This matters for the sustainable level of the current account deficit in developing countries with respect to the ease of financing," it said.