Describing the country’s macroeconomic position as one that reflects “cautious resilience”, it, however, cautioned that any significant rainfall deficit, coupled with current geopolitical conditions, could aggravate food inflation, weakening both rural demand and aggregate growth. It also advised against interpreting the depreciating rupee as a sign of underlying macroeconomic weakness, calling for a more nuanced view.
“The duration of the Strait of Hormuz disruption remains the single most consequential variable for India’s external and price outlook,” the ministry said in the review for May.
About a fifth of the world’s energy passes through the strait, which has been targeted by Iran in response to the US-Israel strikes on it since February 28.
Should normalisation occur soon, the conditions for a broad-based recovery, supported by strong services exports and sustained investment commitments, are in place, according to the review. It noted that robust services exports, strong foreign exchange reserves and a stable labour market provide a firm economic foundation. The ministry said divergence between April retail and wholesale price inflation (3.48% and 8.3%, respectively) suggest upstream cost pressures are building.
The “passthrough to consumers, while limited so far, may not be far behind,” the ministry said.
The recent petrol and diesel price hikes may activate both direct and indirect transmission channels. Any further increase in energy prices could “narrow the existing cushion more quickly than anticipated,” according to the review.“A deficient monsoon could add food price pressures on top of energy-driven ones. However, second-round effects and their persistence must be evident in the data for policy responses to be triggered,” it said.
RUPEE FALL
The ministry said India’s real effective exchange rate, measured on a 40-currency trade-weighted basis, stood at 92.72 as of April, the lowest level in more than a decade and materially below the benchmark rate of 100.
This means Indian goods and services are priced more competitively in real terms than at any point in the past decade, the review said. This competitiveness gain can potentially spur an export improvement, subject to conditions, including global demand and composition and quality of the country’s export basket, it said.
Currency depreciation pressures have been acute in economies experiencing capital reallocation driven by the global surge in artificial intelligence and other strategic technology investments, according to the ministry.
“These investment trends are increasingly concentrating capital in a narrower set of sectors and countries, thereby reshaping the direction of global financial flows rather than reflecting weakening macroeconomic fundamentals in recipient economies,” the review said. “India’s adjustment is, moreover, occurring from a position of macroeconomic strength,” it added, pointing to the country’s more than 7% annual growth in the past five years.
The ministry also highlighted India’s robust foreign exchange reserves (enough to cover about 11 months of imports) and a record $94.5 billion foreign direct investment inflows in 2025-26, even as foreign portfolio investor outflows have been exerting some pressure on the rupee of late.
EXTERNAL PRESSURES
The review acknowledged that external pressures are “beginning to transmit, selectively but perceptibly, into domestic economic conditions.”
But it added that continued policy support through measures—including the Emergency Credit Line Guarantee Scheme, the Bharat Audyogik Vikas Yojana to develop 100 plug-and-play industrial parks during 2026-32, production-linked incentives, promotion of surface coal and lignite gasification projects and the semiconductor mission—would cushion external shocks and sustain growth momentum.
Labour market gauges, too, reflect “sustained hiring momentum across manufacturing and services,” the ministry said.