US Trade Uncertainty, Higher Crude Prices Weigh on India’s Capital Flow Prospects: Finance Ministry

New Delhi, Oct 1 (KNN) India faces challenges in attracting capital flows amid uncertainty over trade relations with the US, volatile crude oil prices and limited participation in global artificial intelligence (AI)-driven investment, the Finance Ministry said in its September Monthly Economic Review.

The report said high-frequency indicators for July-August 2026 point to some moderation in economic activity after 7.8 per cent GDP growth in Q1 FY27. It also flagged renewed global headwinds, including the September oil price spike and near-term pressure on the Indian rupee.

“Geopolitical and geoeconomic uncertainty means that India cannot afford to rest on its post-Covid growth laurels. It has to be earned every quarter,” PTI reported, citing the report.

Investor Interest Remains Cautious

The ministry noted that unsettled US trade relations, tariff pressures, uncertainty over crude oil supplies and prices, and the absence of an India-specific component in global AI developments are weighing on the country's attractiveness as an investment destination.

Developed economies are also competing for investment to support renewed manufacturing ambitions, while the increasing use of supply chains as a strategic tool is creating additional challenges for developing countries.

“India, as do other developing nations, faces a stiff challenge to attract capital flows,” the report said, while noting that net foreign direct investment inflows are expected to perform better in the current financial year than in the previous year.

The report highlighted that India's resilient domestic economy remains a key strength, although investor interest is currently “not low but cautious”.

Focus On Competition And Jobs

The ministry called for policies to make the economy more competition-friendly rather than merely business-friendly, arguing that greater competition is important for innovation and manufacturing.

It also highlighted the need to strengthen near-term job creation through better access to employment, demand-linked skilling and improved job-matching mechanisms.

Supply Shocks Pose Inflation Risks

The report cautioned that geopolitical polarisation and supply-chain disruptions could intensify, with potential shocks emerging across energy, metals, electronics, food and semiconductors.

It also flagged upside risks to inflation from climate, geopolitical and monetary pressures, noting that supply-driven inflation could constrain economic growth.

Higher interest rates in developed economies could spill over into domestic bond yields and slow cross-border capital flows as investors favour domestic markets amid heightened global uncertainty.

The ministry said sustained, high-quality and timely policy decisions, along with improved governance and greater state capacity, would be important to reassure investors and strengthen India's competitiveness.

(KNN Bureau)