'Elevated Stock Market A Big Risk?' Finance Ministry Lists FY 25-26 Challenges

India’s economic outlook for FY26 is clouded by growing uncertainties, according to the latest Monthly Economic Report by the Finance Ministry. While the economy is expected to pick up pace in the second half of FY25, emerging challenges in the world could pose significant risks to growth in the next fiscal year. The report highlights that global trade growth is increasingly uncertain, with elevated stock markets and a strong US dollar continuing to exert pressure on emerging market currencies, complicating the policy decisions for monetary authorities in these nations.

Global Risks Weigh on Economic Stability

The report underscores the complexities arising from the strength of the US dollar and shifting policy rates in the United States. These factors have led to a challenging environment for emerging markets, including India, which may face tighter monetary conditions. Exchange rate movements are expected to limit the policy flexibility of central banks in developing economies, potentially complicating efforts to manage inflation and sustain growth.

Positive Momentum for Q3 FY25, Despite Headwinds

Domestically, the outlook for Q3 of FY25 appears more optimistic, with positive indicators from key economic sectors. The report points to a strong performance in industrial activity, bolstered by robust PMI readings for October and November 2024. The increase in Minimum Support Prices (MSP) for rabi crops and favorable agricultural conditions are expected to support the farm sector, while the end of the monsoon season and a likely increase in government capital expenditure will boost sectors like cement, steel, and electricity.

Resilient Rural and Urban Demand

On the demand side, rural consumption remains resilient, driven by strong sales in two-wheelers and tractors, while urban demand is showing signs of recovery, particularly in passenger vehicles and air travel. The Reserve Bank of India’s consumer confidence survey suggests growing optimism among consumers regarding economic conditions, employment, and prices in the year ahead.

Inflation Projections and Central Bank Actions

On inflation, the RBI has projected CPI inflation at 4.8 per cent for FY25, with a higher rate of 5.7% in Q3, followed by a moderation to 4.5 per cent in Q4. The report points to a positive outlook for the agricultural sector, which is expected to alleviate food price pressures. Additionally, the RBI’s recent decision to lower the cash reserve ratio from 4.5 per cent to 4 per cent is expected to help boost credit growth, which had slowed in FY25, supporting overall economic activity.
 

Looking ahead to FY26, the Finance Ministry stresses that sustaining growth will require a collective effort from all economic stakeholders. Despite the potential for a stronger second half of FY25, the uncertainties in the global economy and the complexities posed by domestic challenges mean that India’s growth trajectory in FY26 remains highly contingent on the stability of global trade, currency movements, and domestic policy decisions.