RBI Flags External Risks to Capital Flows and Rupee Stability

The Reserve Bank of India (RBI) has warned that outside uncertainties could lead to capital outflows and increase volatility in the foreign exchange (FX) market. In its latest monetary policy update, the central bank pointed out how global shocks might affect India's financial markets. It advised caution because of changing international conditions. 

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The RBI's December 2025 bulletin highlighted rising geopolitical tensions and possible policy changes abroad as important triggers. The report mentioned that external uncertainties could lead to outflows. Sudden changes in foreign investor sentiment have often put pressure on emerging markets like India. As per reports, officials noted that FX rate volatility might increase if these risks occur, affecting the rupee's path. 

Global Headwinds Weigh on Inflows

Recent data shows that the RBI has concerns. Foreign portfolio investments in Indian stocks fell by 2.5% in the third quarter of 2025, according to RBI figures. Investors were cautious because the U.S. Federal Reserve indicated a stricter policy. The rupee weakened to 84.75 against the dollar by late December, reflecting bouts of volatility driven by oil price spikes and trade frictions. 

The central bank report detailed how elevated global interest rates continue to draw capital away from high-growth economies. FX rate volatility is a constant issue. In November, rupee fluctuations increased to 1.2% intra-day, compared to 0.8% earlier in the year. RBI data showed that forex reserves stayed steady at $650 billion, which offers some protection. However, it also emphasised the need for proactive measures. 

Policy Stance Remains Steady Amid Risks

Governor Shaktikanta Das reiterated the RBI's commitment to stability during the policy review. The repo rate remained at 5.25%. The Monetary Policy Committee mentioned balanced inflation at 4.8% as a supportive factor. However, the bulletin cautioned that external shocks could complicate this outlook. Such shocks could raise imported inflation due to a weaker rupee. 

On the trade front, India's current account deficit narrowed to 1.1% of GDP in Q3, aided by robust services exports. Yet, the RBI flagged merchandise import pressures from volatile commodity prices. "Sustained vigilance on external sector developments is essential," the report concluded, signaling close monitoring of global cues. 

Market Reactions and Forward Outlook

Indian bond yields edged up 5 basis points post-bulletin, while equity benchmarks like the Nifty 50 shed 0.3% in early trade. Traders noted the RBI's tone as measured but firm, avoiding panic while preparing for turbulence. As 2026 unfolds, the central bank will track U.S. elections and Middle East developments closely, ready to deploy tools like dollar swaps if outflows accelerate. The RBI's update arrives as India navigates a resilient yet exposed economy, with external uncertainties testing its macroeconomic defenses.