India's economy could see risks to growth and inflation due to challenges in the country's external sector and weather-related uncertainties, but domestic demand remains strong, the finance ministry said on Monday. "Going forward, several factors, such as weaker-than-expected oil supply, higher-than-anticipated demand from China, intensification of geo-political tension and unfavourable weather conditions," may pose an upside risk to India's inflation forecasts, the ministry said in its monthly economic review.

The Reserve Bank of India (RBI) sees inflation at 5.2% in 2023-24, and GDP growth at 6.5% in the financial year beginning April 1.

Retail inflation fell to an 18-month low of 4.7% in April, from 5.66% in March, largely due to softening food prices.

The RBI targets inflation at 4%, with a tolerance level stretching up to two percentage points on either side.

Softening international prices have resulted in easing domestic inflationary pressures, the report said.

"Sticky" core inflation has moderated "significantly" to an almost three-year low in April, signalling a pass-through of lower input costs by producers, it said.

Despite an uncertainty in rainfall, the growth of crops is unlikely to suffer, according to the report. Prices of all commodities, barring precious metals, are also likely to moderate in the current year, though they will remain well above pre-pandemic levels, it said.

Still, prices of commodities sensitive to El Nino weather effects, such as coffee, rice, palm oil, and natural rubber, need to be continuously monitored, the ministry said.

As inflation eases further, demand will become stronger and lay the foundation for a virtuous capex upcycle, it added.

The report, however, said outcomes in April are too early to predict the forecast for the entire year.

"Consumption has shown steady and broad-based growth, while investment in capacity creation and real estate is finding traction," the ministry said. (Reporting by Siddhi Nayak; Editing by Sonia Cheema)