Finmin pegs Q2 expansion at 7.35%,flags capital pressure over US yield

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In its Monthly Economic Report (MER) for October released Thursday, the ministry said the recent divergence between Indian and other Asian equity markets amid concerns over AI-related valuations suggested that global risk appetite might affect markets differently going forward.

Gross domestic product data for the second quarter of fiscal 2027 will be released on November 30. India reported real GDP growth of 7.8% for the first quarter.

According to the MER, India stayed comparatively insulated from the forces raising yields elsewhere, but cautioned that rising US 10-year Treasury yield had "consequent negative implications for capital inflows".

ET Bureau

External Strain on Rupee

It emphasised that policymakers would focus on safeguarding price stability in the second half of the financial year.

Underlining "considerable uncertainties", the ministry said robust domestic demand, sustained investment activity, a resilient financial sector and supply-side management underpinned the country's growth resilience so far and were expected to support growth through the remainder of the year.

"Sustaining economic activity while safeguarding price stability" will be the focus of policymakers in the second half of the financial year amid elevated crude oil prices, higher food inflation and an uncertain outlook for the kharif crop, it said.

The International Monetary Fund had increased India's FY27 growth projection to 7.0% from 6.4% in July. The Reserve Bank of India also raised its estimate, to 7.1% from 6.7%.

Citing industrial output data and manufacturing growth, the ministry said recent policy, investment, and firm-level developments pointed to continued efforts to scale up manufacturing, localisation and technological capabilities.

Referring to a private survey, the ministry said companies and employers could support employees by providing a safe environment to discuss mental health challenges and setting clear after-work boundaries.

Energy, inflation, depreciation

The report cautioned that the uncertainty around energy prices, supply-chain pressures and geopolitical developments remained relevant for manufacturing costs and investment decisions. Therefore, sustaining industrial momentum while translating policy support into greater production at scale, higher domestic value addition and stronger export competitiveness will remain important, it said.

Near-term inflation dynamics will be shaped by a combination of domestic food supply management, global energy volatility and systemic liquidity conditions, the ministry said. The rupee's depreciation has improved the price competitiveness of Indian exporters but higher domestic inflation relative to trading partners has partly eroded these gains, according to the MER.

"Although external strain on the rupee persists, India's foreign exchange reserves position is currently adequate by standard reserve adequacy metrics, providing an import cover of 10.3 months," it said.

While higher energy prices renewed inflationary pressures and prompted monetary tightening in several major economies, the global economy weathered the conflict in West Asia better than expected in the second quarter.