India’s finance ministry has warned that rising oil prices, higher global borrowing costs and uncertainty over trade relations with the US are threatening the country’s economic outlook, even as domestic demand and investment continue to support growth.

In its Monthly Economic Review for September, released on Thursday, 1 October, the ministry said the external environment had deteriorated as geopolitical tensions disrupted supply chains and developed economies competed more aggressively for international capital.

The assessment comes after India’s economy expanded 7.8% in the April-June quarter, supported by manufacturing, construction, services and investment. The ministry’s nowcasting model projects growth of 7.3% in July-September, although official GDP data for the quarter have yet to be released.

“India cannot afford to rest on its post-Covid growth laurels. It has to be earned every quarter,” the review said.

The ministry identified several external risks that could complicate India’s efforts to sustain economic growth, including volatile energy prices, rising bond yields, trade restrictions and changes in international investment patterns.

Higher oil prices threaten inflation outlook

One immediate concern is the sharp increase in global crude oil prices. India imports most of the crude oil it consumes, leaving the economy exposed to changes in international energy prices and shipping costs.

Higher oil prices increase the country’s import bill, add pressure on the rupee and raise production and transportation costs for businesses.

The ministry said geopolitical tensions and disruptions to energy supplies had increased the risk of imported inflation, potentially complicating monetary policy and affecting household purchasing power.

Retail inflation reached 4.82% in August, while wholesale inflation rose to 9.92%, partly reflecting higher fuel and power prices. Fuel and power inflation approached 23% during the month, while inflation in crude petroleum and natural gas was around 34%, according to figures cited in the review.

The ministry also identified weather-related risks to food prices. A strong El Niño could affect winter crop yields, potentially adding to inflationary pressures from imported commodities. Taken together, these developments could make it more difficult to contain inflation without affecting consumption and investment.

Global bond selloff adds pressure on rupee

The review also warned that the sharp increase in international bond yields was making global financial conditions less favorable for India. US Treasury yields have risen as investors reassess the outlook for inflation and interest rates. Higher yields in developed economies can encourage international investors to shift capital away from emerging markets.

India faces an additional problem because its domestic bond yields have increased by less than those in major developed economies. The narrowing difference between Indian and overseas yields reduces the additional return available to foreign investors for holding rupee-denominated assets.

“India’s bond yield has gone up by less but the lower risk premium pressures the Indian rupee,” the review said. The rupee fell 0.5% to 96.3150 against the dollar on Thursday, its weakest level in two months, as higher US bond yields and crude prices weighed on emerging-market currencies.

The benchmark 10-year US Treasury yield reached 5.34%, its highest level since 2002, while Brent crude stayed above $100 a barrel. Indian government bond yields also rose as investors adjusted to the prospect of tighter global financial conditions.

The ministry warned that elevated borrowing costs in developed economies could reduce cross-border capital flows as investors find increasingly attractive returns in their domestic markets. Such a shift would pose challenges for emerging economies seeking foreign investment to finance infrastructure, manufacturing and technological development.

India’s foreign exchange reserves provide some protection against those pressures. Reserves stood at $765.9 billion as of 18 September, equivalent to about 11.1 months of import cover, according to figures cited in the review.

US trade uncertainty remains unresolved

The ministry also flagged uncertainty surrounding India’s trade relationship with the US following Washington’s enactment of new Russia sanctions legislation. The Lindsey O. Graham Sanctioning Russia and Iran Act of 2026, signed into law by President Donald Trump on 18 September, gives the US administration additional powers to impose trade restrictions on countries purchasing Russian crude oil.

The legislation permits tariffs of up to 100% on goods imported from countries identified under its provisions governing major purchases of Russian oil and natural gas or the facilitation of sanctions evasion. India could face additional trade restrictions because of its continued purchases of Russian crude, although the law’s enactment does not itself establish that the maximum tariff has been imposed.

The finance ministry nevertheless considers the legislation an additional source of uncertainty for a bilateral trade relationship already affected by tariff disputes and geopolitical tensions.

New Delhi and Washington are continuing negotiations toward an interim trade agreement under their proposed bilateral trade pact.

Commerce and industry minister Piyush Goyal is visiting the US from September 29 to October 5, including for the G20 Trade Ministers’ Meeting in Milwaukee on September 30 and October 1. His visit includes planned talks with US Trade Representative Jamieson Greer.

The ministry’s assessment suggests that progress in the negotiations has yet to remove the broader uncertainty surrounding India’s access to the US market.

AI investment boom intensifies competition for capital

Beyond trade and energy prices, the ministry identified the global artificial intelligence investment boom as another challenge for emerging economies. Technology companies are committing substantial capital to data centers, computing infrastructure and related facilities, while developed economies are seeking investment to rebuild domestic manufacturing capacity.

These developments are changing how international capital is allocated. The ministry noted that global AI investment continued to attract substantial spending and cross-border capital flows, even as questions persisted about the sustainability of the industry’s valuations.

At the same time, governments are increasingly using industrial policy, trade restrictions and supply-chain controls to secure investment in strategically important sectors. The result is more competition for the capital that developing economies need to expand manufacturing and infrastructure.

“India, as do other developing nations, faces a stiff challenge to attract capital flows,” the review said.

The ministry noted that India’s limited participation in the global AI investment boom was among the factors weighing on its attractiveness to international investors. It nevertheless expects net foreign direct investment inflows to improve during the current financial year compared with the previous year.

Exports remain a source of resilience

Despite the difficult external environment, India’s latest trade figures provide some support to the economic outlook. Total exports increased 25.4% from a year ago to $82.7 billion in August, while imports rose 18.8% to $92.1 billion.

The combined merchandise and services trade deficit narrowed to $9.4 billion from $11.6 billion a year earlier. Merchandise exports increased 26.1% to $43.8 billion, while services exports rose 24.6% to $38.9 billion.

The services trade surplus of $17.5 billion offset about 65% of the merchandise trade deficit, limiting the pressure on the country’s external accounts.

Strong services exports, remittances and foreign exchange reserves have helped the economy withstand external shocks. However, the ministry cautioned that resilient domestic activity could not entirely insulate India from higher energy costs, slower capital flows and uncertainty over international trade.

Government calls for more competitive economy

The review also turned its attention to domestic policy, arguing that India needs to improve the conditions for competition and investment rather than rely exclusively on measures supporting individual businesses. The ministry called for more consistent decision-making, improvements in governance and stronger administrative capacity.

“India must work on ensuring that the economy is more competition-friendly rather than business-friendly,” the review said.

It linked stronger competition to improvements in innovation, manufacturing performance and the country’s ability to attract international investment. The ministry also emphasized the need to strengthen near-term job creation through better access to employment opportunities, demand-linked skills training and improved matching between workers and available jobs.

The review said investor interest in India remained intact but cautious. Trade uncertainty, tariff pressures, crude oil prices and the country’s limited participation in global AI investment were among the factors restraining investment sentiment.

The ministry expects India’s underlying growth potential to attract greater investor attention as those uncertainties ease, but warned that sustaining the economy’s post-pandemic performance would require continued policy efforts.

“Only a competitive economy will become a successful, innovative, and manufacturing economy,” the review said.