The Indian economy is facing an uncertain near-term outlook due to the war in West Asia and the blockade of the Strait of Hormuz, which is raising risks to inflation and the merchandise trade balance, according to the finance ministry's monthly economic review.
The review noted that net foreign direct investment (FDI) has remained negative for five consecutive months, with gross FDI inflows rising to $79.3 billion during April-January FY26, but not translating into higher net FDI.
Geopolitical uncertainty has also dampened global risk appetite, pushing portfolio flows into negative territory in March 2026, with around $12.5 billion leaving the country on the portfolio side.
Foreign exchange reserves remain comfortable, providing import cover for more than 11 months, but the rupee has depreciated to ₹93.88 per US dollar as of March 24 due to higher global prices and logistics costs.
The review warned that the evolving situation warrants close monitoring and calibrated policy responses, with the near-term outlook remaining uncertain due to external shocks posing downside risks to growth through higher input costs and supply constraints.
The government has taken steps to support the economy, including energy diversification, agricultural preparedness, inflation management, and external sector strength, but the recent oil price shock presents an upside risk to the inflation trajectory in the medium term.
A sustained rise in oil and gas prices could trigger broader second-round effects as input costs pass through across sectors, while elevated crude prices also pose risks to the merchandise trade balance and remittances.
