Union Ministry of Finance flagged risks of inflation, and weakening growth momentum among emerging economies due to the West Asia crisis. The ministry gave said its outlook was one of “cautious resilience” in its Monthly Economic Review for May.

While assuring that the domestic fundamentals were broadly intact, “the global environment has become materially more challenging since the onset of the West Asia conflict, with elevated crude prices, tightening financial conditions, and weakening growth momentum across major economies posing headwinds that India cannot fully insulate itself from,” the document read.

Besides the effects of the West Asian war, below-normal monsoon and a likely moderation in economic activity can lead to consumption slowdown. Wholesale inflation and retail inflation are moving in opposite direction and this means that the production cost is building and will soon be passed to customers. “The recent hike in petrol and diesel prices may activate both direct and indirect transmission channels, and any further escalation in energy prices could narrow the existing cushion more quickly than anticipated.

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,” the ministry said. 

Addressing the about 7% depreciation in the rupee against the dollar since January 2026, the Ministry said that the real effective exchange rate (REER) which is the rupee cost of a dollar after accounting for inflation, was at ₹92.72–much below the long term average of about ₹100  a dollar. While this may increase the export competitiveness of India with respect to its peers, the imported inflation can “partially offset” the potential trade gains. This can “erode the gain at the production end even as it improves the price signal at the market end,” the ministry noted. 

This elevated global prices, continuing uncertainties and persistent rupee depreciation will keep foreign investors cautious and thus keep foreign portfolio investment outflow volatile. 

Net FDI flows improved to $7.7 billion during FY26 even as outward FDI flow continues. 

Going by the review document for May, economic policymakers are constantly watching the duration of the closure of the Strait of Hormuz as the recovery from the current volatility hinges on that.