Safeguarding price stability will be a focus for policymakers in the second half of 2026-27 (FY27), amid elevated crude oil prices, higher food inflation, and an uncertain outlook for the kharif crop, the finance ministry said in its latest Monthly Economic Review released on Thursday.
“Proactive supply-side measures and direct liquidity interventions by policymakers further serve to mitigate imported inflationary risks and preserve exchange rate stability,” it said.
In its October meeting, the Reserve Bank of India’s Monetary Policy Committee unanimously raised the policy repo rate by 25 basis points to 5.5 per cent and changed its policy stance to ‘calibrated tightening’ to manage evolving inflationary pressures. It projected headline retail inflation to peak at 6 per cent in the third quarter of FY27 before moderating to 5.7 per cent in Q4FY27.
“Going forward, the efficacy of the recent rate hike in containing secondary inflation effects will depend on the central bank’s active liquidity management,” it added.
The report cautioned that global price shocks can distort the relationship between nominal and real gross domestic product growth, with the effects varying across economies depending on their trade and production structures.
The finance ministry said the Indian economy remains well-positioned to sustain its expansionary trajectory through the rest of FY27, even as persistent geopolitical frictions, energy price volatility, and global financial tightening remain key headwinds.
“Strong industrial dynamics, resilient services activity, and robust domestic credit growth — complemented by structural and tax reforms — continue to reinforce domestic demand and private investment. Supported by a comfortable foreign exchange (forex) reserve buffer and steady upgrades to national growth projections, India’s economic fundamentals provide a solid foundation to navigate uncertainties while driving long-term, sustainable growth,” the report said.
The finance ministry said business activity moderated in the second quarter (July-September/Q2) but showed signs of strengthening towards the end of the quarter. “The recovery in Purchasing Managers’ Index readings, alongside improved business sentiment, points to a cautiously favourable outlook for the coming months,” it added.
The report said high-frequency indicators point to sustained growth momentum in Q2FY27 and projected the economy to expand by 7.35 per cent in the quarter, following growth of 7.8 per cent in the first quarter (April-June/Q1) of FY27.
“Domestic demand, investment activity and structural reforms are expected to support growth through the remainder of the year. Recent goods and services tax process reforms will further ease compliance and working capital constraints for businesses. Healthy credit growth and recent trade agreements are expected to provide additional support to consumption, investment, and exports,” it added.
The report said the near-term industrial outlook remains supported by firm production, strengthening order flows, improved manufacturing sentiment, and robust industrial credit. “Sustaining industrial momentum while translating policy support into greater production at scale, higher domestic value addition, and stronger export competitiveness will remain important,” it said.
Highlighting the rupee’s depreciation, the report said the Indian currency had depreciated against both the dollar and the broader currency basket, supporting exporters’ price competitiveness. “The extent to which nominal depreciation translates into improved price competitiveness depends on whether domestic inflation remains contained relative to that of trading partners,” it added.
The rupee’s real effective exchange rate declined by 9.1 per cent in 2025-26, indicating an improvement in relative price competitiveness.
The report said that although external pressures on the rupee persist, India’s forex reserves are currently adequate by standard reserve adequacy metrics, providing import cover of 10.3 months.
