Stock - India Economy - Rupee
The Indian rupee has fallen to its lowest on record against the dollar, losing over 10% against the greenback so far this year. Image Credit: Bloomberg

Mumbai: India’s economy faces risks from the external sector, the nation’s finance ministry said in its monthly report, flagging that foreign capital inflows could be hurt as the Federal Reserve tightens monetary policy and concerns about elevated global energy prices cloud the near-term outlook.

“On the one hand, the Federal Reserve continues to be aggressive in the fight against inflation, thereby signalling further interest rate hikes. This may lower capital inflows, increase pressure on the rupee to depreciate, and make imports of essential commodities costlier,” according to the report released Saturday.

“On the other hand, an unfavorable global economic outlook is bound to moderate the growth of exports, affecting the country’s trade balance,” the Indian finance ministry said.

Earlier this month, the International Monetary Fund flagged headwinds for India, and lowered its growth forecast by 0.6 percentage points to 6.8 per cent for the year to March 2023 - the biggest downgrade among major economies after the US.

The Indian rupee has fallen to its lowest on record against the dollar, losing over 10 per cent against the greenback so far this year. The weakness has triggered concerns about the rising costs to import commodities, including crude oil, a bulk of which India buys from abroad.

Inflation is hovering around 7 per cent, which is above the central bank’s target range of 2 per cent-6 per cent. The government report said there were signs that prices have peaked with food inflation expected to moderate as the harvesting and procurement seasons progresses. That should contribute to a declining headline retail inflation in the rest of the fiscal year, according to the report.