India's FY27 Outlook Is 'Cautiously Resilient', But Inflation Risks Need Vigilance: FinMin

India's near-term economic outlook remains one of "cautious resilience", but policymakers will need to remain vigilant against rising inflationary pressures stemming from elevated energy prices, a weakening rupee and the possibility of a below-normal monsoon, the Finance Ministry said in its Monthly Economic Review for May.

The report said India continues to draw support from strong services exports, comfortable foreign exchange reserves and a stable labour market. However, it cautioned that a combination of higher global energy prices, rising input costs and weather-related risks could pose challenges to sustaining growth momentum in FY27.

"Strong services exports, adequate foreign exchange reserves and a stable labour market provide a firm foundation," the report noted. "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."

Inflation Risks Emerge

The ministry said the inflation outlook warrants close monitoring as wholesale price pressures are beginning to build even though retail inflation remains relatively contained.

According to the report, the divergence between retail and wholesale inflation suggests that upstream cost pressures could eventually be passed on to consumers.

The recent increases in petrol and diesel prices may accelerate both direct and indirect inflationary transmission channels. The report warned that any further escalation in energy prices could erode the current inflation cushion faster than anticipated.

It also highlighted the risk of a deficient monsoon adding food inflation pressures on top of energy-driven price increases.

However, the ministry noted that policy intervention would depend on whether second-round inflation effects become visible and persistent in economic data.

Global Challenges Persist

The report said the ongoing conflict in West Asia has increased energy, transportation and logistics costs globally, reviving inflation concerns and raising fears of stagflation across major economies.

As a result, leading central banks are expected to keep monetary policy restrictive for longer than previously anticipated, pushing sovereign bond yields in advanced economies to multi-year highs.

The impact on emerging economies has been uneven. While commodity-exporting countries have benefited from higher prices, energy-importing economies have faced growing pressures from rising import bills, currency depreciation and capital outflows.

Several countries have already introduced energy-conservation and demand-management measures, the report noted. It warned that prolonged disruptions to Gulf energy supplies could further weaken global growth and increase macroeconomic vulnerabilities.

Exports Stay Strong

On the external front, India's exports recorded healthy growth in April 2026, supported by strong performance in the services sector.

According to Commerce Ministry data cited in the report, total exports rose 13.6% year-on-year to $80.8 billion in April. The trade deficit narrowed sharply to $7.8 billion from $11.2 billion in the same month last year.

The ministry said India continued to strengthen its diversified trade strategy through bilateral partnerships while taking measures to manage non-essential imports.

Foreign direct investment remained a key bright spot. Gross FDI inflows touched a record $94.5 billion in FY26, indicating sustained long-term investor confidence despite global uncertainties.

FPI Outflows Increase

The report highlighted that foreign portfolio investor (FPI) outflows intensified following the escalation of the West Asia conflict.

After registering net inflows in February, FPIs pulled out a cumulative $23.6 billion from Indian markets between the onset of the conflict and May 21, 2026. Most of the outflows were concentrated in equities as investors reduced exposure to emerging markets amid heightened global uncertainty.

The debt segment, however, witnessed a reversal in May, with net inflows of around $455 million up to May 21.

Looking ahead, the ministry said elevated crude oil prices, tighter global financial conditions, persistent geopolitical tensions and pressure on the rupee are likely to keep investor sentiment cautious and contribute to continued volatility in capital flows.