Finance ministry’s monthly economic review flags uncertainty ahead

THe amerindic economic system faces an unsure near-term outlook, with the state of war in westward Asia and the blockade of the Strait of Hormuz raising risk to inflation in medium term, the finance ministry’s monthly economic review said on Saturday.The Indian economy faces an uncertain near-term outlook, with the war in West Asia and the blockade of the Strait of Hormuz raising risks to inflation and the merchandise trade balance, the finance ministry’s monthly economic review said on Saturday.The review flagged “subdued” net foreign direct investment (FDI), which has remained negative for five consecutive months. Gross FDI inflows rose to $79.3 billion during April-January FY26, up from $69.2 billion in the same period of FY25. “However, this momentum in gross inflows did not translate into higher net FDI, which remained subdued at USD 1.7 billion during the period,” it said. The weak net position reflects persistently elevated repatriation by foreign investors ($49.5 billion) and increased outward investment by Indian firms ($28.1 billion).Geopolitical uncertainty has also dampened global risk appetite, pushing portfolio flows into negative territory in March 2026. Around $12.5 billion left on the portfolio side in March alone. Foreign exchange reserves, however, remain comfortable, providing import cover for more than 11 months.Beyond portfolio outflows, higher global prices and logistics costs have weighed on the rupee, which depreciated to ₹93.88 per US dollar as of March 24, reflecting trade-related pressures and heightened risk aversion in global markets.The geopolitical developments have introduced a complex, multi-layered set of risks for India, given its position as a major energy importer with strong trade, investment, and remittance linkages with the West Asia region.“While India’s relatively robust macroeconomic fundamentals and sustained policy efforts provide resilience, the evolving situation warrants close monitoring and calibrated policy responses,” the review said. The near-term outlook remains uncertain, with external shocks posing downside risks to growth through higher input costs and supply constraints, even as domestic demand may help cushion the impact.Government interventions across energy diversification, agricultural preparedness, inflation management, external sector strength, and broader policy measures were cited as supporting the economy’s ability to absorb near-term disruptions, with ongoing monitoring called for as conditions evolve.“The recent oil price shock presents an upside risk to the inflation trajectory in the medium term, as higher energy costs are gradually transmitted into domestic prices, particularly in fuel-intensive sectors,” it said. Supply disruptions have added to cost pressures, while selective price corrections in perishables — amid export-related dislocations — point to localised demand-supply imbalances.A sustained rise in oil and gas prices could trigger broader second-round effects as input costs pass through across sectors. The government remains vigilant, with measures underway to ensure adequate domestic energy availability and contain inflationary pressures.Elevated crude prices also pose risks to the merchandise trade balance. The outlook for remittances is similarly under pressure: GCC economies accounted for about 38% of India’s total remittances in FY24 and host nearly half of India’s migrants worldwide.“In an increasingly uncertain global environment, the resilience of the Indian economy will depend on the strengthening of domestic fundamentals. This will require sustained focus on structural reforms to enhance competitiveness, achieve efficiency gains, and drive investment,” it said.