NEW DELHI: India’s resilience to external shocks is being tested by a tougher global fight for capital, with unsettled trade ties with the US, the investment boom around artificial intelligence (AI) and a manufacturing push in developed economies all threatening to weigh on inflows, the finance ministry said on Thursday.
The country faces a “stiff challenge” in drawing capital flows amid external turmoil, like other developing economies, while short-term pressure on the rupee remains. The economy has shown it can absorb shocks, the ministry said, but the country cannot afford to lower its guard or rest on its post-pandemic growth laurels.
, therefore, has to be “earned every quarter”, the ministry said in its economic review for September, highlighting the challenge for policymakers.
India has remained the world’s fastest-growing major economy since fiscal year 2022 (FY22), and most analysts expect it to expand 6.8-7% this fiscal year after a stronger-than-expected 7.8% growth in the June quarter.
The June quarter’s growth momentum has extended into the second quarter of FY27, “though at a more measured pace”.
“Our nowcasting measure, unveiled in the Economic Survey earlier this year, anticipates a real GDP growth rate of 7.3% in the fiscal second quarter,” the ministry said.
The ministry expects net foreign direct investment (FDI) inflows to rebound this fiscal year through March 2027, while stressing the economy’s resilience to external shocks. Between April and July, net FDI rose 38% from a year earlier to $13.4 billion, while gross inflows stood at $43.9 billion.
Fight for capital
The report pointed to a global headwinds. Oil prices surged in September following a fresh flare-up in the , while global bond yields have also risen.
India’s bond yield has risen at a much slower pace, the ministry said, but the resulting lower risk premium is putting pressure on the rupee. Still, “there is every possibility that, over the medium term, investors would appreciate the fundamental reasons behind the lower risk premium on Indian debt”.
The yield on the 10-year US treasury papers has jumped 52 basis points in the past one month to 5.32%, while that on the Indian government securities of the same tenor has risen 25 bps to 7.21%.
The ministry identified three short-term pressures on India’s ability to attract capital.
First, trade relations with the US remain unsettled after Washington adopted a law in late September empowering the President to impose tariffs of up to 100% on countries buying Russian crude oil.
Second, the global AI investment cycle continues to channel capital across borders. “At the same time, the has not begun its inevitable meaningful deflation. The AI story continues to drive capital investment and capital flows across borders,” the report said.
Third, developed economies are competing to secure investments for renewed manufacturing ambitions amid the increasing weaponization of global supply chains.
Resilience is holding
The ministry pointed to several signs that domestic growth remains resilient. Merchandise and services exports may reach a record $1 trillion this fiscal year, as they have already crossed $400 billion in the first five months of FY27.
“That is a very strong confirmation that India’s trade agreements are providing impetus to India’s exports. It can only get better from here, with more trade agreements on the anvil,” it said.
Both the merchandise and overall trade deficits narrowed in August, helped by a 26.1% jump in goods exports.
Domestic demand remained supportive, while investment emerged as a key driver of expansion, with the investment rate reaching its highest level in the current series.
“Timely government measures to secure energy supplies and critical inputs, together with the limited pass-through of global energy prices to domestic fuel prices, helped insulate domestic activity from the external shock,” the ministry said.
High-frequency indicators offer a mixed picture. E-way bill generation and manufacturing PMI growth have slowed, while services activity gained traction in August, driven by stronger new business and employment. Electricity and fuel consumption continued to grow at a decent pace, and bank credit sustained its strong expansion.
Domestic price pressures have intensified because of renewed global oil market pressures and weather-related volatility. Still, the overall “inflation landscape remains predominantly anchored”, with about 69% of items in the retail price gauge continuing to see inflation well below the 4% medium-term target.
The ministry flagged emerging pressure in some food commodities and consumer electronics amid El Niño-related risks and global chip price pressures. Despite deficient monsoon rains, available water reserves continued to support farm activity, it said.
Strong capital inflows, supported by increased banking capital and higher net FDI inflows, have helped the overall balance of payments. Foreign exchange reserves of $765.9 billion as of 18 September provide a “substantial buffer against external sector vulnerabilities and enhance the resilience of India’s external sector”, the ministry said.
The labour market also remained robust, with rising labour force participation, a moderating unemployment rate and improved hiring.
In education, meanwhile, the growing use of AI is reshaping pedagogy, curricula and assessment practices. But evidence suggests its impact on learning is mixed and depends on how it is used, the ministry said.