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 in its monthly economic review for May 2026.
“The near-term outlook for the Indian economy is one of cautious resilience. Domestic fundamentals remain broadly intact, manufacturing and services PMIs are in expansionary territory, the labour market is stable and foreign exchange reserves provide meaningful insulation against external shocks,” it added.
At the same time, the global environment had 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 could not fully insulate itself from, the Ministry noted.
With forecasts pointing to a below-normal monsoon and a likely moderation in economic activity, overall consumption demand might face headwinds in the coming months, it added.
The Finance Ministry pointed out that the duration of the Strait of Hormuz disruption remained the single most consequential variable for India’s external and price outlook.
Should normalisation occur soon, the conditions for a broader-based recovery, supported by strong services exports and sustained investment commitments, were in place, it said.
Policy would need to remain agile across monetary, fiscal, and structural dimensions to navigate this period of compounded uncertainty, external and climatic, while keeping medium-term growth objectives firmly in view, the Finance Ministry said.