The near-term outlook for the economy is “somewhat clouded by supply side pressures” even as domestic demand continues to be the main driver of economic growth, the Reserve Bank of India said in its State of the Economy article. The central bank noted that while headline inflation remains comfortably within its tolerance band, the pass-through of underlying cost pressures to domestic prices requires close and ongoing monitoring.

“The financial conditions, crude oil prices and capital flows continue to pose challenges to the external sector outlook,” the report authored by RBI researchers and economists said.

“Views expressed in this article are those of the authors and do not represent the views of the Reserve Bank of India,” it said.

It said global economic conditions remained fragile, shaped by heightened geopolitical tensions, elevated energy costs and persistent uncertainty surrounding the growth and inflation outlook.

“The conflict in West Asia continued to exert pressure on commodity markets, global trade flows and supply chains, contributing to the volatility in financial markets,” the article, published in the RBI Bulletin, said.

“India has entered this phase from a position of macroeconomic strength. Nevertheless, robust services exports, positive net FDI flows, foreign exchange reserve buffers and a number of proactive policy measures undertaken by the government and the Reserve Bank of India are likely to cushion the Indian economy against external headwinds,” it said.

It said the global economy continued to be shadowed by uncertainties in West Asia. Domestic economic activity exhibited resilience in April, with industrial and services sectors maintaining strength across several segments, the article said.

In agriculture, summer sowing progressed well, supported by above normal pre-monsoon rainfall and comfortable reservoir levels. CPI inflation rose to 3.5% in April, driven mainly by food inflation, while core inflation remained steady.

“In March, net foreign direct investment remained positive for the second consecutive month. Foreign portfolio investors continued to remain net sellers in April and May, though the pace of outflows moderated,” the article said.

It said India is witnessing a trade reconfiguration amidst the emerging geopolitical situation. Its trade through Strait of Hormuz, which had declined sequentially in March, went up in April 2026.

India’s exports to China continued to grow in double digits (y-o-y) since April 2025.

The country’s exports to the US grew in April 2026, reversing the contractionary trend witnessed since September 2025 (except in November), it said.

India’s foreign exchange reserves remain comfortable, extending cover for goods imports for around 11 months and about 90% of the external debt outstanding by the end-December 2025.

High-frequency food prices data up to May 19 point towards a marginal uptick in both wheat and rice prices, the article said.

Reflecting price pressures from West Asian conflict, Wholesale Price Index (WPI) inflation rose to 8.3% in April from 3.9% in March, recording a 42-month high.

The sharp increase in WPI inflation in April was largely driven by fuel and power, though other groups also witnessed a price rise, it said.