'Steady as she goes': How the economy looks and feels

Economic Times

28-07-2025

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India's economy enters the second quarter of FY26 on a relatively firm footing, as the first quarter of FY26 presents a picture of resilient domestic supply and demand fundamentals with inflation remaining within the target range and monsoon progress on track, said a Finance Ministry report on Monday.The economy has the look and feel of 'steady as she goes' as far as FY26 is concerned, the Finance Ministry's Monthly Economic Review for June said, even though it pointed out downside risks.
"The Indian economy in mid-2025 presents a picture of cautious optimism," the review said. "Despite global headwinds marked by trade tensions, geopolitical volatility, and external uncertainties, India's macroeconomic fundamentals have remained resilient. Aided by robust domestic demand, fiscal prudence and monetary support, India appears poised to continue as one of the fastest-growing major economies, with various forecasters, including S&P, ICRA, and the RBI's Survey of Professional Forecasters, projecting GDP growth rates for FY26 in the range of 6.2 per cent and 6.5 per cent."
In the review for the previous month of May, the ministry had said India's broader economic health is in a "relative goldilocks situation", with no major imbalances in the macro aggregates, a subdued inflation rate, and a growth-supportive monetary policy stance. These could be "nervous but exciting times" for the Indian economy, it said. Geopolitical shifts may present India with opportunities that appeared remote earlier. But it's "up to us to be flexible enough to ride the tide".
More room for the easing cycleThe Finance Ministry report indicates room for further rate cuts for the RBI. "Core inflation remains subdued, and overall inflation is comfortably below the RBI's 4 per cent target, affording room for the easing cycle to be sustained," it said.
"The Reserve Bank of India has projected headline inflation at 3.4 per cent for the Q2 of FY26, while in Q1, actual inflation came below the Q1 target of the RBI. It appears likely that the full fiscal year inflation rate would undershoot the central bank's expectation of 3.7 per cent. Also, global crude oil prices are expected to remain subdued, following a larger-than-anticipated production hike by OPEC and its allies, who raised output by 548,000 barrels per day in August, on top of the production increases announced for the previous months," the monthly review said.Since February, the RBI has lowered the repo rate by 100 basis points, or a percentage point, to 5.5%. It has also announced lowering cash reserve ratio by 100 bps in a phased manner beginning September 2025, which is estimated to release Rs 2.5 lakh crore in the banking system. When the central bank's six-member Monetary Policy Committee (MPC) meeting from August 4 to 6, it is expected to deliberate on the policy repo rate using two key data points: the June quarter GDP projections and the latest retail inflation figures.Economists are divided on the trajectory of interest rate cuts, ET has reported today. While some cite six-year low inflation as grounds for another rate cut in the upcoming August policy, the majority advocate for maintaining the status quo. Those calling for a pause argue that it is prudent to wait and assess inflation trends in the coming quarter and monitor developments around the US trade deal. ET reported that economists shared these perspectives with the Reserve Bank of India governor Sanjay Malhotra, deputy governor Poonam Gupta and her team during customary pre-policy consultative meetings held last week.
Downside risksA global slowdown could further dampen demand for Indian exports and continued uncertainty on US tariffs may weigh on the country's trade performance in coming quarters, the finance ministry review said. India's goods exports fell to $35.14 billion in June, down 9% from May, and remained nearly flat from a year earlier. The figure was the lowest since November's $32.11 billion, according to LSEG data.The monthly review has also underlined slow credit growth and private investment as risks to growth. "Despite monetary easing and a strong bank balance sheet, credit growth has slowed, reflecting cautious borrower sentiment and possibly risk-averse lender behaviour," it said. However, the trend can also be explained by a growing preference for bond markets, particularly commercial papers among corporates due to lower borrowing costs, it added."Despite the broadly positive outlook, downside risks remain," the review said. "While geopolitical tensions have not elevated further, the global slowdown, particularly in the US (which shrank by 0.5 per cent in Q1 2025), could dampen further demand for Indian exports. Continued uncertainty on the US tariff front may weigh on India's trade performance in the coming quarters. Slow credit growth and private investment appetite may restrict acceleration in economic momentum. Further, given the deflationary trend in the wholesale price index, one has to observe economic momentum in nominal quantities. Measured in constant prices, economic activity may appear healthier than it is."