Forbes India
In its monthly economic review for May, the Finance Ministry has sounded a note of caution, warning that global headwinds from the West Asia conflict are beginning to filter into domestic conditions despite continued growth momentum.“For India, these external pressures are beginning to transmit, selectively but perceptibly, into domestic economic conditions,” the report notes.The report underscores that high-frequency indicators, including e-way bill generation, PMI indices, and electricity consumption, remained in expansionary territory through April.However, the Core Industries Index grew only 1.7 percent year-on-year, with the hydrocarbon sector continuing to weigh on overall performance. Crude oil output contracted by 3.9 percent, natural gas by 4.3 percent, and fertiliser production fell by 8.6 percent. Cement, steel, and electricity generation provided a partial offset, supported by sustained infrastructure and construction activity.Wholesale Inflation Hits a HighThe most pronounced sign of external stress is the divergence between retail and wholesale prices. The report pointed out that while retail inflation rose only marginally to 3.48 percent in April, wholesale price inflation jumped to 8.3 percent—a 42-month high—driven by the “combined effects of the global oil price shock, a weakening domestic currency, and a statistical push from a low base.” The Ministry noted that upstream cost pressures are building, though pass-through to consumers has so far remained limited. Recent increases in fuel prices suggest that this may begin to change in the coming months.Also Read: India’s forex reserves fall for second straight week, to $681 billionOn the RupeeThe rupee has weakened approximately 4.9 percent against the US dollar since the onset of the West Asia conflict, settling at Rs95.7 per dollar as of May 26, due to a rising crude oil import bill and consistent outflows from foreign portfolio investors. The report noted that while the instinct to read this as a signal of underlying economic weakness is “understandable”, it “warrants scrutiny”. It highlights that the RBI has intervened periodically in foreign exchange markets to contain volatility and maintain orderly market conditions.The Ministry also notes that India’s Real Effective Exchange Rate (REER), a 40-currency trade-weighted measure, had fallen to its lowest level in over a decade in April 2026, which could improve export competitiveness over time, though import costs rise more immediately.However, the Ministry cautioned that converting this competitiveness into actual export gains depends on three conditions. First, export volumes take time to respond to price signals, while import bills rise immediately. Second, historical evidence shows that weak global growth can more than offset any currency-driven price advantage, as seen when merchandise exports declined despite a sharp rupee depreciation in FY14-16. Third, the composition of India’s export basket matters. The greater the share of high-value, differentiated goods, the more durable the competitiveness gains.At present, medium- and high-technology goods account for around 41 percent of manufacturing value added as of January.On Bond YieldsThe rise in bond yields reflects global and domestic pressures. The 10-year government bond yield climbed 43 basis points between February 27 and May 19, reaching 7.1 percent, levels last seen in May 2024. Elevated oil prices, expectations of prolonged restrictive monetary policy in advanced economies, and risk aversion in global financial markets have “contributed to tighter external financial conditions for emerging market economies and have reinforced downward pressure on their currencies.”Also Read: IMD Lowers Rainfall Forecast; El Niño Could Weaken Monsoon FurtherMonsoon Outlook Adds UncertaintyThe India Meteorological Department (IMD) projected overall monsoon rainfall at around 92 percent of the long-period average in April, which was revised downwards to 90 percent last week, primarily due to the expected El Niño phenomenon this year. The Ministry flagged pulses and oilseeds, concentrated in rain-fed regions, as the most vulnerable crops. Buffer stocks of rice and wheat held by government agencies stood at 817.53 lakh tonnes as of the end of April, and reservoir storage was at 123.86 percent of the decadal average, providing some cushion.Nevertheless, a significant rainfall deficit could translate into food inflation, weaken rural demand, and slow aggregate growth, the report noted.Policy Support and External BuffersThe monthly report highlights that, on the policy front, the Union Cabinet approved the Emergency Credit Line Guarantee Scheme (ECLGS) 5.0, providing 100 percent guarantee coverage for MSMEs and facilitating an additional credit flow of Rs 2.55 lakh crore to businesses “affected by conflict-related disruptions.”A separate Rs37,500 crore scheme for coal and lignite gasification was also approved, aimed at reducing dependence on imports for energy inputs.The report also notes that while India’s macroeconomic position reflects “cautious resilience”, 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.”
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