Consumption demand in India may face headwinds in the coming months with economic conditions beginning to show the impact of the conflict in West Asia, the Ministry of Finance said on Saturday, warning that while the near-term outlook is one of “cautious resilience”, policy will need to “remain agile across monetary, fiscal, and structural dimensions” to tackle the ongoing uncertainty and that inflation developments warrant “vigilance”.

“For India, these external pressures are beginning to transmit, selectively but perceptibly, into domestic economic conditions,” the finance ministry said in its Monthly Economic Review report for May, adding that the moderation in core sector growth and fuel consumption “signals that global headwinds are gradually finding their way into select segments of domestic activity.”

“With forecasts pointing to a below-normal monsoon and a likely moderation in economic activity, overall consumption demand may face headwinds in the coming months,” it further said. It separately said a significant rainfall deficit along with the current geopolitical conditions could translate into food inflation, weakening rural demand and aggregate growth.

According to data released on May 20, growth of India’s eight core industries – namely coal, crude oil, natural gas, refinery products, fertilisers, steel, cement, and electricity – fell to 1.2% in March and 1.7% in April. Meanwhile, the India Meteorological Department on Friday cut its monsoon forecast to 90% of the Long Period Average from 92% projected in April. The latest forecast is the lowest by IMD in the last 20 years.

The comments by the finance ministry that policy will need to be “agile” and the inflation outlook warrants vigilance come days before the Reserve Bank of India’s Monetary Policy Committee announces its interest rate decision on June 5. After having cut the policy repo rate by 125 basis points (bps) to 5.25% in 2025, the MPC has left it unchanged so far in 2026 amid sharply higher global energy prices due to the war in West Asia, which has led to foreign investors pulling money out from Indian financial markets to the tune of $24.2 billion since the conflict began in late February. This has exerted tremendous pressure on the Indian rupee’s exchange rate, pushing it down to multiple all-time lows. Earlier this month, it nearly breached the 97-per-dollar mark, before it was propped up by sustained RBI intervention in the foreign exchange market. On Friday, the rupee ended at 95. It has fallen 4.2% since the war started.

While the rupee has recovered some ground in recent days, economists warn that the MPC may have to increase interest rates as early as next week. According to Standard Chartered Bank economists, the RBI may raise the repo rate by 50 bps over its June and August meetings. And they see a risk of additional 25-50 bps of hikes in 2026-27 if inflation turns out to be higher than expected due to continued pressure from commodity prices and a weak rupee.

In its report on Saturday, the finance ministry took note of the divergence between India’s retail and wholesale inflation in April: 3.48% and 8.3%, respectively. This wedge, it said, is a sign that upstream cost pressures are building and the passthrough to consumers may not be far behind.

“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 finance ministry said.

After holding retail fuel prices at for over two-and-a-half months amid the surge in global rates due to the West Asia crisis, public sector oil marketing companies have raised pump prices of petrol and diesel by over Rs 7 per litre in less than two weeks.

The RBI, in early April, forecast that headline retail inflation as measured by the Consumer Price Index (CPI) may average 4.6% in 2026-27, up from less than 2% in 2025-26. However, economists from outside the central bank see CPI inflation averaging more than 5%. Central banks in Asia have already begun raising interest rates, including Indonesia by 50 bps and Sri Lanka by 100 bps – both in one go – in the last 10 days.