Exchange rate volatility may rise if oil prices increase due to the delayed normalisation of supply chain disruptions and additional demand to replenish inventory, it said.
A sharp correction in global equity markets, particularly if driven by a reassessment of corporate earnings growth and elevated valuations in AI related stocks, could spill over to domestic markets, the report noted.
India’s macroeconomic fundamentals are stronger compared to many of its peers and in comparison, to previous crisis episodes, which provide important buffers to withstand these shocks, RBI said.
A robust and resilient financial system, underpinned by strong bank and non-bank balance sheets with adequate capital and liquidity buffers, provides a strong foundation, it said.
Accordingly, even amid an uncertain global backdrop, the potential for external shocks to generate systemic financial stress and spill over to the real economy remains contained, the report said.
Moreover, the balance of risks has shifted favourably, supported by the cessation of hostilities in the West Asia conflict and the recent policy measures by the Government and the Reserve Bank aimed at strengthening capital inflows, it added.
India’s sound macroeconomic fundamentals provide ample buffers to deal with external shocks, RBI said.
However, the Indian economy remains exposed to energy price shocks and supply-chain disruptions given its high dependence on imported oil and other key commodities, it added.
The West Asia conflict and consequent increase in global uncertainty also impacted emerging market economies (EMEs) like India through the financial channel, RBI said.
The exchange rate came under sustained depreciation pressure due to weakening of capital inflows and higher hedging demand from importers and investors, it noted.
Notwithstanding sustained fiscal consolidation, government bond yields, especially at the longer end, came under pressure mainly reflecting geopolitical tensions and rising energy prices, the report said.
However, the pressure on exchange rate and bond yields has eased post the measures taken by the Reserve Bank and the Government to attract capital flows, helping overall financial conditions to ease, it said.
Globally, India is still the fastest growing major economy supported by domestic demand, even as inflation remains within target. The balance sheet of banks and non-banks remain robust with adequate capital and liquidity buffers, limiting the risk of financial shocks spilling over to the real economy, RBI said.