Page 37 - Policy Economic Report -August 2026

POLICY AND ECONOMIC
OIL & GAS MARKET

The improvement in equity flows was accompanied by relatively limited foreign participation in the debt
market. During August, foreign investors invested ?627 crore through the Fully Accessible Route
(FAR) and ?289 crore through the Voluntary Retention Route (VRR), while withdrawing ?2,318 crore
through the general route. This indicates that the improvement in foreign investor sentiment has been
more pronounced in equities than in debt instruments.

Despite the recent turnaround, risks to the sustainability of foreign inflows remain. Crude oil prices,
developments in West Asia, elevated US bond yields and global trade tensions could continue to influence
portfolio allocation decisions. Markets are also closely watching upcoming US inflation data and the
Federal Reserve's September policy meeting, while India's first-quarter GDP and domestic inflation data
are expected to provide further signals regarding the country's growth and monetary-policy outlook.

Overall, the return of FPI buying for a second consecutive month represents a positive development for
India's capital markets and external financing conditions, particularly after the substantial outflows
witnessed earlier in 2026. However, the large cumulative outflow for the year suggests that the August
inflow should currently be viewed as an early sign of stabilization rather than a confirmed structural
reversal. Sustained improvement in corporate earnings, macroeconomic resilience, currency stability and
global risk sentiment will be important in determining whether foreign investors continue to increase their
exposure to Indian equities in the coming months.

9. India needs a credible carbon market to protect exporters as EU CBAM takes effect

India needs to strengthen its domestic carbon-pricing and emissions-monitoring framework as
the European Union's Carbon Border Adjustment Mechanism (CBAM) enters its definitive phase. A joint
report by the Confederation of Indian Industry (CII) and IIM Ahmedabad highlights the need for a credible
and transparent domestic carbon market to help Indian exporters remain competitive as climate-linked
trade measures increasingly influence international commerce. The issue is particularly important for
carbon-intensive sectors such as steel, cement and aluminium, which face greater exposure to the EU's
carbon-pricing requirements.

Under the definitive CBAM regime, exporters to the European Union will face carbon-related costs linked
to the embedded emissions of covered products. This makes accurate measurement, reporting and
verification (MRV) of emissions increasingly important for Indian companies. A robust domestic
framework could enable exporters to demonstrate the carbon content of their products more effectively
while ensuring that carbon costs are recognised within India's own policy framework rather than being
borne entirely through the EU system.

The CII-IIM Ahmedabad report recommends establishing a more credible carbon-pricing mechanism
covering major emissions-intensive industries. One of its proposals is an initial carbon-price reference
range of US$22–60 per tonne of CO2 equivalent, which could provide greater predictability to businesses
while allowing the domestic carbon market to develop gradually. The report also recommends initially
using an emissions-intensity-based system, with a potential transition towards absolute emissions caps as
India's carbon market matures.

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