The finance ministry’s economic assessment said domestic fundamentals remain supportive even as the external environment has turned more challenging. Manufacturing and services activity stayed in expansion mode, labour market conditions remained stable and foreign exchange reserves continued to provide a buffer against global shocks.
“The near-term outlook for the Indian economy is one of cautious resilience,” the Department of Economic Affairs said in the report. “Domestic fundamentals remain broadly intact, manufacturing and services PMIs are in expansionary territory, the labour market is stable, and foreign exchange reserves provide meaningful insulation against external shocks.”
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However, the report said the global backdrop has become “materially more challenging” since the escalation of the West Asia conflict. It warned that elevated crude oil prices and slowing growth across major economies are creating headwinds that India “cannot fully insulate itself from.”
The assessment comes at a time when policymakers and economists are closely tracking the impact of geopolitical tensions on oil markets. The Reserve Bank of India has also flagged the conflict as a downside risk to growth, warning that higher energy prices could affect inflation and the external sector.
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The DEA said inflation trends require close monitoring despite retail inflation remaining below the RBI’s target band. “The current divergence between retail inflation and wholesale prices signals that upstream cost pressures are building, and the passthrough to consumers, while limited so far, may not be far behind,” the report said.
Retail inflation rose marginally to 3.48% in April 2026, while wholesale inflation accelerated to 8.3%, driven by higher global energy prices, currency depreciation and a favourable base effect. According to the report, the recent increase in petrol and diesel prices “may activate both direct and indirect transmission channels,” adding to inflationary pressures.
The ministry also expressed concern over weather-related risks. The India Meteorological Department has projected monsoon rainfall at around 92% of the long-period average, while a separate forecast has warned of below-normal rainfall amid developing El Niño conditions.
“Any significant rainfall deficit coupled with current geopolitical conditions could translate into food inflation, weakening rural demand and aggregate growth,” the DEA said.
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The report highlighted mixed trends in industrial activity during April. It said infrastructure-linked sectors continued to support growth momentum.
“Resilience in cement, steel, and electricity generation continued to support overall momentum, reflecting sustained domestic demand from infrastructure and construction activity,” the department noted.
The HSBC India Manufacturing PMI remained in expansion territory despite higher input costs. Export orders, employment generation and fresh investment commitments across automobiles, semiconductors, electronics and defence manufacturing also indicated continued economic strength.
The report pointed to strong foreign investor confidence, noting that gross foreign direct investment inflows touched a record $94.5 billion in FY26. “Indicating continued long-term investor interest,” the report said. RBI data released earlier this month also showed a rise in net FDI inflows during the fiscal year.
On the external front, the DEA said developments around the Strait of Hormuz remain critical for India’s outlook because of the country’s dependence on imported crude oil.
“The duration of the Strait of Hormuz disruption remains the single most consequential variable for India’s external and price outlook,” the report said.
The review concluded that policymakers would need to balance growth and inflation concerns carefully in FY27.
“Navigating FY27 will require agility across monetary, fiscal and structural dimensions to safeguard growth momentum and keep inflation durably anchored, even as the global environment remains uncertain,” it said.