Risk Radar: India’s Economy Faces Crosswinds

Following a robust 7.4% growth in Q4 FY25, India’s economic engine appears to be running strong. But under the surface, several evolving global and domestic risks threaten to test the country’s strength. In this edition of our newsletter, we explore the most pressing threats and what they mean for Indian investors, policymakers, and financial advisors.

Escalating Geopolitical Tensions and Financial Market Volatility

Rising global tensions, particularly the Israel-Iran conflict, have disrupted energy trade routes, pushing up freight and insurance costs for crude oil. This inflates India’s import bill and stokes inflation concerns. Meanwhile, the U.S. Fed’s June 2025 signal of fewer rate cuts has triggered capital outflows and market volatility. While the RBI has intervened, persistent volatility could challenge India’s ability to attract capital and manage borrowing costs.

Manufacturing Slowdown and Delay in Private Capex

India’s manufacturing sector, while still expanding, is showing clear signs of a slowdown in 2025. Growth rates have moderated across key indicators, and private capital expenditure (capex) remains subdued, raising concerns about the sustainability of the recovery and the sector’s ability to drive broader economic growth.

You can explore the Industrial Sector Performance Index by 1 Finance here.

Core Inflation: Quiet but Persistent

May’s CPI eased to 2.8% on the back of softer food prices, but core inflation remains sticky, above 4%. Rising global gold prices and geopolitical tensions are adding to inflation risks. The RBI must strike a balance between inflation control and growth support—cutting rates too soon risks capital flight, while remaining too hawkish could hinder the recovery.

Our Risk Outlook

India’s macro fundamentals remain strong, but the economy is not immune to global shocks. As external risks mount, it is crucial for financial advisors and investors to monitor these developments actively. Below is a snapshot of key risks shaping the outlook as of June 2025:

A Health Check on India’s Macro Fundamentals

What India's Key Indices Reveal Amid Global Uncertainty
To complement our Risk Radar, we turn to the 1 Finance Sub-Indices, which track real-time economic momentum across key sectors. These offer a ground-level view of how India’s economy is holding up under pressure.

Here's how the economy is tracking across major dimensions as of May 2025:

*Data as of May 2025, hence growth comparisons are for May 2024 for Y-o-Y and April 2025 for M-o-M growth comparison.

Despite geopolitical shocks and policy uncertainty, the services sector, agriculture, and financial system are showing notable strength. However, global headwinds and sticky core inflation continue to weigh on industrial sentiment and investor confidence.

India’s economy continues to show steady growth, backed by strong domestic demand and a stable financial sector. However, emerging risks—from geopolitical tensions to trade disruptions and volatile global markets- pose real challenges that investors and advisors must closely monitor. As the global landscape shifts, a nuanced understanding of these dynamics will be essential for making informed financial decisions in the months ahead.