Trade relations with the US remain unsettled following the passage of the Graham Bill through Congress and its Presidential assent, adding to the external challenges facing India amid a spike in oil prices, rising global bond yields and heightened geopolitical uncertainty, according to the Finance Ministry's latest Monthly Economic Review.
The Graham Bill empowers the US President to impose tariffs of up to 100% on countries that purchase Russian crude oil.
The development comes at a time when global conditions have turned unfavourable again. Oil prices have spiked in September, while global bond yields have moved sharply higher. India's bond yield has risen by less, but the lower risk premium is putting pressure on the rupee, the review said.
The sharp rise in oil prices is another concern because of its impact on India's import bill, inflation and the rupee. Petroleum crude and products accounted for a significant share of the increase in merchandise imports in August.
Fuel and power inflation also rebounded to nearly 23% in August, with inflation in crude petroleum and natural gas at around 34%.
The review said India faces a stiff challenge in attracting capital flows as countries compete for investment and global supply chains become increasingly weaponised. Foreign exchange reserves, however, provide a substantial buffer. India's reserves stood at $765.9 billion as of September 18, 2026.
The review also flags another global development that could have implications for capital flows — the continuing AI investment boom.
It said the AI bubble has not yet begun its “inevitable meaningful deflation”. Instead, the AI story continues to drive capital investment and capital flows across borders. At the same time, developed countries are competing to secure investments to finance their renewed manufacturing ambitions.
For India and other developing economies, this creates a tougher environment for attracting capital, particularly as countries compete for investment amid increasingly fragmented global supply chains.
The review, however, expects net foreign direct investment inflows into India to do better in the current financial year than last year.
Despite these challenges, India's trade performance remains strong. Total exports rose 25.4% year-on-year to a record $82.7 billion in August, while imports grew 18.8% to $92.1 billion. The overall trade deficit consequently narrowed to $9.4 billion from $11.6 billion a year earlier.
Merchandise exports grew 26.1% to $43.8 billion, while services exports rose 24.6% to $38.9 billion. The $17.5-billion services surplus offset 65% of the merchandise trade deficit.
The review said investor interest in India is not low but remains cautious. Uncertainty over the US trade relationship, tariff pressures, crude oil prices and the absence of an India angle to global AI-related developments are casting a shadow over India's attractiveness as an investment destination.
Over time, the report expects some of these uncertainties to ease, allowing India's underlying growth potential to regain investor attention. In the near term, however, geopolitical and geoeconomic uncertainty means India cannot take its post-Covid growth performance for granted.
