Indian Economy Shows 'Cautious Resilience', But Risks From Inflation, Crude, Monsoon Remain: Finance Ministry

The finance ministry has described the near-term outlook for the Indian economy as one of “cautious resilience”, saying policymakers will need to carefully navigate inflationary risks, global uncertainties and weather-related challenges to sustain growth momentum in FY27.

In its Monthly Economic Review for May 2026, the ministry said India continues to draw strength from robust services exports, comfortable foreign exchange reserves and a stable labour market, but warned that several emerging risks warrant close monitoring.

“Strong services exports, adequate foreign exchange reserves and a stable labour market provide a firm foundation (to the economy). However, the confluence of elevated global energy prices, a depreciating rupee, rising upstream

cost pressures and the prospect of a below-normal monsoon calls for sustained policy vigilance,” the report said.

Inflation Risks Need Close Watch

The ministry flagged concerns over inflation, noting that the gap between retail and wholesale inflation suggests cost pressures are building in the economy.

“The current divergence between retail inflation and wholesale prices signals that upstream cost pressures are building, and the pass-through to consumers, while limited so far, may not be far behind,” the report said.

According to the ministry, recent increases in petrol and diesel prices could lead to both direct and indirect inflationary effects. Any further rise in global energy prices could erode the current inflation cushion faster than expected.

The report also warned that an inadequate monsoon could aggravate food inflation.

“However, second-round effects and their persistence must be evident in the data for policy responses to be triggered.”

West Asia Conflict Adding To Global Concerns

The review said the ongoing conflict in West Asia has increased energy, transportation and logistics costs globally, reviving inflationary pressures and concerns about slower economic growth.

“The West Asia conflict has led to elevated energy, transportation and logistics costs, which have revived inflationary pressures and renewed stagflation concerns across major economies.”

As a result, major central banks are expected to keep interest rates higher for longer.

“Confronted with these pressures, major central banks are expected to maintain restrictive monetary policy stances for longer than previously anticipated, pushing sovereign bond yields in advanced economies to multi-year highs,” the report said.

The ministry noted that energy-importing emerging economies are facing pressure from higher import bills, capital outflows and currency weakness, while commodity-exporting countries remain relatively better placed.

“In response, several countries have adopted energy-conservation and demand-management measures. However, prolonged disruptions to Gulf energy supplies could further weaken global growth and intensify macroeconomic vulnerabilities across economies,” the report said.

Exports Provide Support

Despite global headwinds, India’s external sector showed resilience in April 2026.

Total exports rose 13.6 per cent year-on-year to $80.8 billion, supported by strong services exports. The country’s trade deficit narrowed sharply to $7.8 billion in April from $11.2 billion in the corresponding month last year.

“India also continued to advance its diversified trade strategy through bilateral and strategic economic partnerships, while policy measures were undertaken to manage non-essential imports,” said the report.

FDI Remains Strong, FPI Outflows Intensify

The ministry said foreign portfolio investment (FPI) flows have turned volatile amid rising geopolitical tensions, putting pressure on the rupee.

However, long-term foreign investment remains robust. Gross foreign direct investment (FDI) inflows touched a record $94.5 billion in FY26, reflecting sustained investor confidence in India’s growth prospects.

“Nevertheless, gross FDI inflows remained resilient, reaching a historical peak of $94.5 billion in FY26, indicating continued long-term investor interest in the Indian economy. Foreign exchange reserves, too, remained at comfortable levels, providing an important buffer against global volatility,” the report added.

The review highlighted that foreign investors have pulled out significant funds from Indian markets since the escalation of the West Asia conflict.

After registering net inflows in February 2026, FPIs withdrew a cumulative $23.6 billion from Indian markets between the start of the conflict and May 21, 2026.

“The bulk of these outflows was concentrated in the equity segment, reflecting heightened global risk aversion and portfolio rebalancing away from emerging-market assets,” the report said.

In contrast, debt markets witnessed a turnaround in May, with net inflows of around $455 million till May 21.

Outlook

The finance ministry said uncertainty in global markets is likely to keep investors cautious in the coming months.

“Looking ahead, persistent global uncertainties, elevated crude oil prices, tighter global financial conditions and pressures on the Indian rupee are likely to keep investor sentiment cautious and contribute to continued volatility in portfolio flows,” the report added.

The ministry concluded that maintaining growth while keeping inflation under control would require continued coordination across monetary, fiscal and structural policy measures in FY27.