India's economy enters the second quarter of FY27 from a position of strength, but it cannot afford to take its growth for granted as global risks build and investors stay cautious on the country, the Finance Ministry's Monthly Economic Review for September 2026 has warned.
The report, prepared by the Department of Economic Affairs, said the domestic economy continues to show resilience in a challenging global environment. It also made clear that this resilience has to be earned every quarter.
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The Review noted that India's real GDP grew 7.8 per cent in the first quarter of FY27, the highest first-quarter growth in the current series. Its nowcasting measure expects growth of 7.3 per cent in the second quarter.
The Outlook and Conclusion section said investors will, over time, appreciate the resilience and the sustained high growth of the post-Covid years. For now, it described investor interest in India as "not low but cautious".
It said near-term uncertainties are casting a shadow on India as an investment destination. These include the state of the trade relationship with the United States, tariff pressures, uncertainty over crude oil prices and supply, and the absence of an India angle to global AI-related developments.
The Review expects these clouds to clear over time, after which India's intrinsic growth potential will earn the attention it deserves.
Rating upgrade and early Q2 signals
The Review pointed to the recent sovereign rating upgrade as proof of strengthening fundamentals. Japan Credit Rating Agency raised India's rating from BBB+ to A- in September 2026.
Most high-frequency indicators point to continued activity in the early part of Q2, it said. Industrial activity remained resilient, backed by strong manufacturing GVA growth, rising industrial production and stronger bank credit to industry.
The Review said monsoon conditions have been more favourable than earlier anticipated. It added that kharif progress will depend on how rainfall is distributed over the rest of the season. Reservoir storage and largely stable groundwater conditions support irrigation and farm activity, though rabi prospects will need monitoring.
Global risks
The Review warned that external risks persist. Renewed geopolitical tensions and the growing weaponisation of supply chains are keeping energy prices volatile, tightening global financial conditions and disrupting trade routes.
It said geopolitical polarisation may be worsening "amidst apparent bonhomie". Supply shocks in energy, metals, electronics, food and semiconductors are beginning to emerge, and inflation from such shocks will also restrain growth.
Interest rates in the developed world are rising sharply, the Review noted, and this will spill over into domestic bond yields. It also expects cross-border capital flows to slow, as higher rates persuade investors to stay in their home markets amid rising global uncertainty.
Inflation and jobs
On prices, the Review flagged some upside inflation risks from climate, geopolitical and monetary headwinds. A strong El Niño could hurt the rabi crop through heat stress and lower soil moisture, though a positive Indian Ocean Dipole may partly offset this.
Elevated crude prices could add to imported inflation, particularly after the US Federal Reserve's 25 basis point rate hike in September. Festive demand and higher input costs could add near-term pressure too.
The Review said the RBI's recent open market operations to absorb excess liquidity could help keep financial conditions balanced and contain demand-side overheating. It added that proactive supply-side and market measures by the government could cushion temporary price pressures.
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On jobs, it said the labour market has held up despite the rapid adoption of AI. However, the RBI's latest Consumer Confidence Survey shows households in both rural and urban areas remain pessimistic about immediate job availability, even as expectations for the year ahead are optimistic. This gap, the Review said, shows the need to strengthen near-term job creation through better access to employment opportunities, demand-linked skilling and improved job matching.
The external sector remains resilient, it said, supported by strong services exports, robust remittance inflows, comfortable foreign exchange reserves and sustained capital inflows.
Competition, not just ease of business
The Review said sustained, high-quality, consistent and reasonably swift decision-making will reassure investors. It then made a pointed policy argument.
"More importantly, India must work on ensuring that the economy is more competition-friendly rather than business-friendly," it said. Only a competitive economy will become a successful, innovative and manufacturing economy, it added.
Improved governance and stronger state capacity at all levels of government hold the key to a competitive Indian economy, the Review said.
The Review's abstract said global conditions have turned unfavourable again, with oil prices spiking in September and global bond yields moving sharply higher. It said trade relations with the US remain unsettled after the Graham Bill passed Congress and received Presidential assent. The law lets the US President impose tariffs of up to 100 per cent on countries that buy Russian crude oil.
Portfolio flows have turned volatile. Net FPI outflows stood at USD 3.3 billion as of September 25, after inflows from June to August. The rupee moved from 93.2 per USD on April 2 to 95.9 on September 24.
There were bright spots too. India's total exports in April-August FY27 rose 15.5 per cent to USD 399.3 billion. Net FDI inflows were USD 13.4 billion in April-July, and foreign exchange reserves stood at USD 765.9 billion as of September 18, enough for about 11.1 months of imports.
