India’s October macroeconomic landscape reflects an economy increasingly shaped by shifts in global capital flows and widening trade imbalances, even as domestic fundamentals remain broadly stable. The latest Monthly Economic Review shows that while India’s internal growth engines continue to hold firm, the external environment is exerting far greater pressure on financial markets and the current account than earlier in FY26.

The clearest signal comes from the widening gap between foreign direct investment and foreign portfolio flows. Net FDI inflows hit $24 billion (about ₹2 lakh crore) in April–September, rising from $15.6 billion (₹1.3 lakh crore) a year earlier — a 54% jump that underscores long-term investor confidence in India’s structural growth. In contrast, FPIs remained highly volatile: after net buying of around $3 billion (₹25,000 crore) in October, foreign portfolio investors turned sellers in November, pulling out over $1.5 billion (₹12,500 crore) in just two weeks as global rates hardened and risk appetite weakened across emerging markets.

Yet equity markets remained surprisingly resilient. Domestic institutional investors — now holding a larger share of Indian equities than foreign investors for the first time in more than a decade — absorbed the outflows with ease. Mutual funds alone mobilized ₹19,000–₹20,000 crore ($2.3–$2.4 billion) in October, while retail SIP inflows clocked a record ₹21,000 crore ($2.5 billion). This deepening domestic liquidity base has significantly reduced the Indian market’s dependence on foreign flows and muted the transmission of global volatility.

The external sector, however, remains India’s most vulnerable point. Merchandise exports fell 11.8% to $33.6 billion (₹2.8 lakh crore) in October, even as imports surged 16.6% to $75.3 billion (₹6.3 lakh crore). The resulting $41.7 billion (₹3.5 lakh crore) merchandise trade deficit is one of the highest monthly gaps on record. The spike was driven almost entirely by precious metals: gold imports shot up 199% and silver imports surged 528%, adding an estimated $10–12 billion (₹83,000–₹1 lakh crore) to the import bill.

This sharp rise reflects global safe-haven buying of gold and silver as financial markets react to geopolitical uncertainty and fluctuating US yields. The World Trade Policy Uncertainty Index, though lower than its April peak, remains 188% higher than a year earlier — a sign of persistent fragmentation in global trade. As a result, India’s major export categories — engineering goods, chemicals, textiles and electronics — continue to face simultaneous weakness across Europe, China and the United States.

The counterbalance remains the services sector. Services exports hit an all-time high of $38.5 billion (₹3.2 lakh crore) in October, growing nearly 10% year-on-year and offsetting about 45% of the merchandise deficit. For April–October, India generated a $85 billion (₹7.1 lakh crore) net services surplus, substantially cushioning the current account pressure created by the ballooning goods deficit. IT services, engineering design, global capability centers and professional outsourcing continue to show resilience despite global headwinds.

These trade patterns feed directly into India’s external buffers. Foreign exchange reserves stood at $687 billion (₹56.8 lakh crore) in early November — an increase of $68 billion (₹5.6 lakh crore) over the past year — and offer roughly 11 months of import cover. The Review notes that the RBI intervened selectively to smooth rupee volatility triggered by FPI outflows and heavy gold-linked import demand. Even after such interventions, India’s reserves remain among the world’s top five, bolstering confidence in the country’s external financing position.

Domestic demand indicators, though strong, play a secondary role in the near-term narrative. E-way bills grew 14.4%, GST receipts expanded 9%, and the manufacturing PMI reached 59.2, a 19-month high. Fuel consumption also remained robust, with petrol demand rising 7.4% and diesel consumption touching a four-month peak. While these indicators signal a durable consumption base, they are overshadowed by the speed and scale of external shocks.

Inflation delivered a rare upside surprise, falling to 0.25% in October — the lowest ever in the current CPI series — as food inflation dropped 5%. Core inflation settled at 4.3%, suggesting stable domestic demand without overheating. Lower inflation has supported household purchasing power and boosted real financial returns, aiding the steady shift of savings into market-linked instruments.

Corporate earnings mirrored the domestic stability. Listed companies posted 6.1% growth in net sales and 12.3% growth in profits in Q2 FY26, reflecting healthy margins and stable input costs. But the Review notes that export-linked sectors are beginning to feel the drag from weakening global demand and prolonged supply-chain uncertainty.

Taken together, the data paints a picture of an economy with strong internal fundamentals, but one increasingly exposed to developments beyond its borders. Capital-market stability is now heavily reliant on domestic inflows; FPIs remain highly sensitive to global liquidity swings; and India’s import bill is being shaped by global commodity movements rather than domestic consumption trends. With the trade deficit widening even as FDI strengthens, India enters the second half of FY26 with solid buffers but rising external risks.

Most independent forecasts peg Q2 FY26 GDP growth at 7–7.5%, but the Review makes clear that sustaining this momentum will depend on how global financial conditions, commodity markets and trade flows evolve in the coming months. Domestic demand can support growth, but capital inflows and export resilience will ultimately determine the economy’s margin of safety.

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