The finance ministry on Monday said it’s closely tracking the rise in sovereign bond yields worldwide and the movement of investment capital, as developed economies seek to fund their fiscal spending and refinance debt.
“The rise in (global) 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,” the ministry said in its economic review for August.
Elevated US Treasury yields can potentially reduce the appeal of Indian securities to foreign investors unless domestic yields rise in tandem. The yield on the 30-year US treasury bond hit a 19-year high of 5.33% earlier this month.
Foreign capital inflows are key to maintaining the current account deficit in developing countries, including India, at sustainable levels.
The finance ministry said it’s also closely monitoring the potential rise in global inflation, driven by higher prices for electronic goods and food commodities, as it may influence central bank responses across key economies.
“These will have implications for our monetary policy, domestic interest rates and the financing of the current account deficit,” the ministry said.
Reserve Bank of India governor Sanjay Malhotra had earlier this month underscored the need to be watchful of risks of higher food, fuel and other input prices translating into a broad-based increase in inflation. “Any evidence of these risks materialising may need policy tightening,” he had said.
The central bank’s monetary policy committee this month kept the benchmark repo rate unchanged for a fourth straight meeting at 5.25%. Retail inflation in July scaled a 19-month peak of 4.45%, driven mainly by elevated price pressure in food but still remaining within the RBI’s 2-6% range.
Amid the external headwinds, the finance ministry highlighted that the domestic economy retained its vigour in August, with demand remaining strong and the external sector displaying stability.
But it also called for close monitoring of food prices, dry weather conditions and global uncertainties in the coming months.
India's external position, too, continued to be supported by comfortable foreign exchange reserves of $707 billion as of 7 August, it said.
“The global economy entered the second half of 2026 on a resilient, though uneven, footing,” it said, adding that external developments will continue to shape the domestic economic outlook.
Economic growth remained broadly steady, even as the pace of global disinflation moderated and the West Asia war continued to impact energy markets, it said.
While domestic economic activity remained resilient through July, the pace of expansion moderated in some high-frequency indicators, including manufacturing and services PMI and e-way bill generation.
But domestic demand remained firm, with consumption and mobility indicators continuing to record robust growth and freight activity staying resilient.
